COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ESSO STANDARD EASTERN, INC. AND THE COURT OF TAX APPEALS, RESPONDENTS.

In two (2) cases appealed to it1 by the private respondent,
hereafter simply referred to as ESSO, the Court of Tax Appeals rendered
judgment,2
sustaining the decisions of the Commissioner of Internal Revenue excepted to,
save “the refund-claim ** in the amount of P39,787.94 as overpaid interest”
which it ordered refunded to ESSO.

Reversal of this decision is sought by the Commissioner by a
petition for review on certiorari filed with this Court.  He ascribes to the Tax Court one sole
error:  “of applying the tax credit
for overpayment of the 1959 income tax of ** ESSO, granted by the petitioner
(Commissioner), to ** (ESSO’S) basic 1960 deficiency income tax liability** and
imposing the 1-1/2% monthly interest3 only on the remaining balance
thereof in the sum of P146,961.00″4 (instead of the full amount of the
1960 deficiency liability in the amount of P367,994.00).1 Reversal of the same judgment of
the Court of Tax Appeals is also sought by ESSO in its own appeal (docketed as
G.R. Nos. L-28508-09); but in the brief filed by it in this case, it indicates
that it will not press its appeal in the event that “the instant petition
for review be denied and that judgment be rendered affirming the decision of
the Court of Tax Appeals.”

The facts are simple enough and are quite quickly recounted.

ESSO overpaid its 1959 income tax by P221,033.00.  It was accordingly granted a tax credit in
this amount by the Commissioner on August
5, 1964.  However, ESSO’s payment of its income tax for 1960 was found to be
short by P367,994.00.  So, on July 10, 1964, the Commissioner wrote
to ESSO demanding payment of the deficiency tax, together with interest thereon
for the period from April 18, 1961
to April 18, 1964.  On August
10, 1964, ESSO paid under protest the amount alleged to be due,
including the interest as reckoned by the Commissioner.  It protested the computation of interest,
contending it was more than that properly due. 
It claimed that it should not have been required to pay interest on the
total amount of the deficiency tax, P367,994.00, but only on the amount of
P146,961.00 — representing the difference between said deficiency,
P367,994.00, and ESSO’s earlier overpayment of
P221,033.00 (for which it had been granted a tax credit).  ESSO thus asked for a refund.

The Internal Revenue Commissioner denied the claim for
refund.  ESSO appealed to the Court of
Tax Appeals.  As aforestated,
that Court ordered payment to ESSO of its “refund-claim ** in the amount
of P39,787.94 as overpaid interest. 
Hence, this appeal by the Commissioner.

The CTA justified its award of the refund as follows:

” ** In the letter of August
5, 1964, ** (the Commissioner) admitted that ** (ESSO) had overpaid
its 1959 income tax by P221,033.00. 
Accordingly ** (the Commissioner) granted to ** (ESSO) a tax credit of
P221,033.00.  In short, the said sum of
P221,033.00 of (ESSO’s) money was in the Government’s
hands at the latest on July 15, 1960
when it (ESSO) paid in full its second 
installment of income tax for 1959. 
On July 10, 1964 **
(the Commissioner) claimed that for 1960, ** (ESSO) underpaid its income tax by
P367,994.00.  However, instead of
deducting from P367,994.00 the tax credit of P221,033.00 which ** (the
Commissioner) had already admitted was due ** (ESSO), ** (the Commissioner) still
insists in collecting the interest on the full amount of P367,994.00 for the
period April 18, 1961 to April 18, 1964 when the Government had already in its
hands the sum of P221,033.00 of ** (ESSO’S) money even before the latter’s
income tax for 1960 was due and payable. 
If the imposition of interest does not amount to a penalty but merely a
just compensation to the State for the delay in paying the tax, and for the
concomitant use by the taxpayer of funds that rightfully should be in the
Government’s hand (Castro v. Collector, G.R. No. L-1274, Dec. 28, 1962), the
collection of the interest on the full amount of P367,994.00 without deducting
first the tax credit of P221,033.00, which has long been in the hands of the
Government, becomes erroneous, illegal and arbitrary.

” ** (ESSO) could hardly be charged of delinquency in paying
P221,033.00 out of the deficiency income tax of P367,994.00, for which the
State should be compensated by the payment of interest, because the said amount
of P221,033.00 was already in the coffers of the Government.  Neither could ** (ESSO) be charged for the
concomitant use of funds that rightfully belong to the Government because as
early as July 15, 1960, it
was the Government that was using ** (ESSO’s) funds
of P221,033.00.  In the circumstances, we
find it unfair and unjust for ** (the Commissioner) to exact the interest on
the said sum of P221,033.00 which, after all, was paid to and received by the
Government even before the incidence of the deficiency income tax of
P367,994.00.  (ltogon-Suyoc
Mines, Inc. v. Commissioner, C.T.A. Case No. 1327, Sept. 30, 1965). 
On the contrary, the Government should be the first to blaze the trail
and set the example of fairness and honest dealing in the administration of tax
laws.

“Accordingly, we hold that the tax credit of P221,033.00 for
1959 should first be deducted from the basic deficiency tax of P367,994.00 for
1960 and the resulting difference of P146,961.00 would be subject to the 18%
interest prescribed by Section 51(d) of the Revenue Code.  According to the prayer of ** (ESSO) **, (the
Commissioner) is hereby ordered to refund to ** (ESSO) the amount of P39,787.94
as overpaid interest in the settlement of its 1960 income tax liability.  However, as the collection of the tax was not
attended with arbitrariness because ** (ESSO) itself followed ** (the
Commissioner’s) manner of computing the tax in paying the sum of P213,189.93 on
August 10, 1964, the prayer of ** (ESSO) that it be granted the legal rate of
interest on its overpayment of P39,787.94 from August 10, 1964 to the time it
is actually refunded is denied.  (See
Collector of Internal Revenue v. Binalbagan Estate,
Inc., G.R. No. L-12752, Jan. 30, 1965).”

The Commissioner’s position is that income taxes are determined
and paid on an annual basis, and that such determination and payment of annual
taxes are separate and independent transactions; and that a tax credit could
not be so considered until it has been finally approved and the taxpayer duly
notified thereof.  Since in this case, he
argues, the tax credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in
reduction of ESSO’s earlier tax deficiency for the
year 1960; as of that year, 1960, there was as yet no tax credit to speak of,
which would reduce the deficiency tax liability for 1960.  In support of his position, the Commissioner
invokes the provisions of Section 51 of the Tax Code pertinently reading as
follows:

“(c) Definition of deficiency As used in this Chapter in
respect of tax imposed by this Title, the term ‘deficiency’ means:

(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the amount so
shown on the return shall first be increased by the amounts previously assessed
(or collected without assessment) as a deficiency, and decreased by the amount
previously abated, credited, returned, or otherwise in respect of such tax; * *

* * *

(d) Interest on deficiency – Interest upon the amount determined as
deficiency shall be assessed at the same time as the deficiency and shall be
paid upon notice and demand from the Commissioner of Internal Revenue; and
shall be collected as a part of the tax, at the rate of six per centum per
annum from the date prescribed for the payment of the tax (or, if the tax is
paid in installments, from the date prescribed for the payment of the first
installment) to the date the deficiency is assessed; Provided, That the
amount that may be collected as interest on deficiency shall in no case exceed
the amount corresponding to a period of three years, the prevent provision
regarding prescription to the contrary notwithstanding.”

The fact is that, as respondent Court of Tax Appeals has
stressed, as early as July 15, 1960,
the Government already had in its hands the sum of P221,033.00 representing
excess payment.  Having been paid and
received by mistake, as petitioner Commissioner subsequently acknowledged, that
sum unquestionably belonged to ESSO, and the Government had the obligation to
return it to ESSO.  That acknowledgment
of the erroneous payment came some four (4) years afterwards in nowise negates
or detracts from its actuality.  The
obligation to return money mistakenly paid arises from the moment that payment
is made, and not from the time that the payee admits the obligation to
reimburse.  The obligation of the payee
to reimburse an amount paid to him results from the mistake, not from the
payee’s confession of the mistake or recognition of the obligation to
reimburse.  In other words, since the
amount of P221,033.00 belonging to ESSO was already in the hands of the
Government as of July, 1960, although the latter had no right whatever to the
amount and indeed was bound to return it to ESSO, it was neither legally nor
logically possible for ESSO thereafter to be considered a debtor of the
Government in that amount of P221,033.00; and whatever other obligation ESSO
might subsequently incur in favor of the Government would have to be reduced by
that sum, in respect of which no interest could be charged.  To interpret the words of the statute in such
a manner as to subvert these truisms simply can not and should not be
countenanced.  “Nothing is better
settled than that courts are not to give words a meaning which would lead to
absurd or unreasonable consequences. 
That is a principle that goes back to In re Allen (2 Phil. 630)
decided on October 29, 1903, where it was held that a literal interpretation is
to be rejected if it would be unjust or lead to absurd results.”1
“Statutes should receive a sensible construction, such as will give effect
to the legislative intention and so as to avoid an unjust or absurd
conclusion.”2

WHEREFORE, the petition for review is DENIED, and the
Decision of the Court of Tax Appeals dated October 28, 1967 subject of the petition is AFFIRMED,
without pronouncement as to costs.

Cruz, Gancayco, Griño-Aquino,
and Medialdea,
JJ., concur.

1
The appeals were docketed as C.T.A. Cases Numbered 1251 and 1558

2
Under date of October 28, 1967

3
18% p.a., according to Sec. 51(d) of the Internal Revenue Code

4
Par. 9, petition

1
Pp. 23-24, petitioner’s brief:  Rollo, p. 74 et seq

1
Automotive Paints & Equipment Co., Inc. v. Lingad,
30 SCRA 255 [1969]

2
Peo. v. Rivera, 59 Phil. 242 [1933]