REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. THE PHILIPPINE BANK OF COMMERCE, DEFENDANT-APPELLEE.

Appeal on purely questions of law taken by the State from the decision
of the Court of First Instance of Manila rendered on October 8, 1962 in Civil Case No. 32137,
ordering the Philippine Bank of Commerce – a domestic banking corporation,
hereinafter referred to as the Bank – to pay the State the sum of P5,814.70 as 5% surcharge on the amount of P116,394.00, and the further sum of P6,977.64 representing
1% monthly interest thereon for a period of six months, or a total of P12,792.34, with costs.

It appears that the Bank
filed on February 27, 1951 its income tax return for the taxable
year 1950 showing on its face no taxable income.  However, following verification thereof, on February 14, 1956 the State, thru the
Collector of Internal Revenue, issued and served Income Tax Assessment Notice
No. ACR-120114- 55/50 on the Bank requiring it to pay on February 29, 1956 the
sum of P116,294.00 as income tax on its
income of P726,840.17 for the taxable year ending December 31,
1950.  As the Bank refused to pay the
assessment the State instituted the present action in the lower court on March
21, 1957 to recover from it the aforesaid sum of P116,294.00
as tax due on the Bank’s income for the taxable year ending December 31, 1950,
and in addition 5% surcharge, 1% monthly interest and penalty from March 1,
1956 to the date of payment, and the costs of suit.

The Bank contested the assessment, but before filing its answer,
it paid on April 8, 1957 the
income tax assessed (P116,294.00) but not the
surcharge and interests demanded.  Its
answer filed on May 9, 1957 alleged payment of the sum of P116,294.00 and
denied its liability for the 5% surcharge and the 1% monthly interest, on the
ground that its war losses in the amount of P1,770,160.36 had already been
allowed as lawful deduction from its income tax return for 1950 by the Collector
of Internal Revenue pursuant to the ruling of the Secretary of Finance dated
September 11, 1951, albeit this was subsequently reversed by the same office on
account of another ruling of the Secretary of Finance of September 3, 1952.  The Bank pleaded further that the mistake or
error of the government – left uncorrected for a number of years – in allow­ing
war losses as lawful deduction on income tax until such policy was reversed,
should not prejudice taxpayers by requiring them to pay interest and other
surcharges.

On May 24, 1962
the parties submitted the case for decision on the basis of the following
stipulation of facts:

“COME NOW the parties in the above-entitled case thru their
respective counsel, and to this Honorable Court, respectfully submit the
following stipulation of facts:

“1.  That plaintiff is a
political entity with the judicial capacity to sue and may be served with legal
processes at the Office of the Solicitor General, Department of Justice
Building, Manila; while defendant is a domestic corporation, organized and
existing under the laws of the Republic of the Philippines and having its
principal office at Plaza Sta. Cruz, Manila;

“2.  That on February 27,
1951, the defendant filed with the plaintiff, thru the Bureau of Internal-Revenue,
its corporate income tax return for the year 1950, showing on the face thereof
no taxable income, a copy of said return is hereby attached and submitted as
Exhibit ‘A’ for plaintiff;

“3.  That
the said return of the defendant was verified by an examiner of the Bureau of
Internal Revenue, who, in a report dated January 20, 1956 recommended the imposition
of a deficiency tax in the sum of P116,294.00, a copy of which report is hereto
attached and submitted as Exhibit ‘B’ for plaintiff (composed of six pages
annexed to the complaint);

“4.  That
based on the report of the examiner mentioned in the preceding paragraph, the
plaintiff, thru the Bureau of Internal Revenue, issued Income Tax Assessment
Notice No. ACR-120114-55/50 dated February 14, 1956 requiring the defendant to
pay not later than February 29, 1956 the sum of P116,294.00 as its income tax
for 1950, a copy of which income tax assessment is hereby attached and
submitted as Exhibit ‘C’ for plaintiff;

“5.  That in a letter dated
February 17, 1955 (should be 1956) the defendant, thru its Chief Accountant,
acknowledged the receipt of the assessment notice above stated and requested
the Collector of Internal Revenue for a copy of the examiner’s report in this
case, the original of said letter is hereby attached and submitted as Exhibit
‘D’ for plaintiff;

“6.  That on February 17,
1956, the defendant, thru its Executive Vice-President, likewise sent a letter
to the Collector of Internal Revenue acknowledging the receipt of the income
tax assessment and requested for the basis of said assessment, the original of
said letter is attached hereto and submitted as Exhibit ‘E’ for plaintiff;

“7.  That
on February 20, 1956, the
defendant, thru its Chief Accountant, sent another letter to the Collector of
Internal Revenue, which letter
is attached hereto and submitted as Exhibit ‘F’ for plaintiff;

“8.  That
on February 20, 1956, the
Deputy Collector of Internal Revenue sent a letter to the defendant stating the basis
of the assessment in this case, copy of which letter is hereto attached and
submit­ted as Exhibit ‘G’ for plaintiff;

“9.  That
on February 29, 1956, defendant, thru its Head of the Legal Department, sent a
letter to the Deputy Collector of Internal Revenue requesting reconsideration
of the disallowance of the deduction claimed in its income tax return, and that
a reinvestigation of the case be conducted, a copy of said letter is hereto
attached and submitted as Exhibit ‘H’ for plaintiff;

“10.  That
on March 8, 1956, the Deputy Collector of Internal Revenue
sent a reply to the defendant’s letter of February 29, 1956, a copy of which is hereto attached and
submit­ted as Exhibit ‘I’ for plaintiff;

“11.  That on April 3, 1956,
defendant, thru its Head of the Legal Department, sent a letter to the Deputy Collector
of Internal Revenue requesting that action on the case be held in abeyance
pending studies being made by the defendant on the same, copy of which letter
is hereto attached and submitted as Exhibit: 
‘1’ for defendant;

“12.  That on April 14, 1956,
defendant, thru counsel, sent a letter to the Collector of Internal Revenue, a
copy of which is hereto attached
and submitted as Exhibit ‘2’ for defendant;

“13.  That
in a letter dated Septem­ber 18, 1956,
plaintiff, thru the Collector of Internal Revenue, reiterated its demand for
the taxes herein, a copy of which is hereto attached and submitted as Exhibit ‘J’ for plaintiff;

“14.  That
on March 21, 1957, the com­plaint
for the collection of the tax herein involved was filed by the plaintiff;

“15.  That on April 8, 1957,
defendant paid the sum of P116,294.00, the basic income tax sought to be
collected in this case, under Official Receipt No. 764075 issued on the same
date;

“16.  That
on May 9, 1957, defendant filed its answer in this case, alleging pay­ment of
the sum of P116,294.00, but denying that it is liable for the 5% surcharge and
1% monthly interest for late payment inasmuch as war losses were already
allowed as lawful deductions from defendant’s income tax return for 1950 by the
Collector of Internal Revenue pursuant to, the ruling of the Secretary of Finance dated September 11, 1951;

“17.  That
on September 5, 1960, defendant, thru counsel, wrote a letter to the Com­missioner
of Internal Revenue reiterating that it is not liable for the 5% surcharge and 1% monthly
interest on the basic income tax assessed against it and requesting that the
same be disregarded, copy of which letter
is hereto attached and submitted as Exhibit ‘3‘ for defendant;

“18.  That in a letter
dated October 6, 1960, a copy of which is hereto attached and submitted as
Exhibit ‘K’ for plaintiff, the
Commissioner of Internal Revenue denied the aforestated
request of the defendant;

“19. 
That under the provisions
of BIR General Circular No. V-123 dated September 18, 1951, copy of
which is hereto attached and submitted as Exhibit ‘4’ for defendant, war losses
suffered by property owners may be included as deductions from income tax
returns for the year 1950;

“20. 
That the provisions of BIR General Circular No. V-123 were later revoked by
the Secretary of Finance under BIR General Circular No. 139 dated August 30,
1952, a copy of which is hereby attached and submitted as Exhibit ‘5’ for
defendant;

“21. That the amount sought to be collected
by the plaintiff, for which defendant claims it is not liable, is:

“(a) 5% surcharge……………………… P
5,814.70

“(b)
1% monthly interest for

13 months………………….    15,118.22

P20,932.92

88888888888888888888888888888888888888888888888888888888888888888888888888

“22. 
That the parties further agree to submit such other evidences or
proofs as this Honorable Court may require or which may be deemed necessary to substantiate their res­pective
positions.”

Thereafter the lower court rendered the appealed judgment.  The State moved in due time for its reconsideration
in so far as it reduced the 1% monthly interest due from the Bank from P15,118.22 (interests due for a period of 13 months) to only
P6,977.64 (idem for a period of 6 months) under Section 51(e) of the National
Internal Revenue Code, on the ground that mere good faith in delaying the
payment of taxes does not exempt the taxpayer from paying surcharges and
interest from the date tax is due.  On January 12, 1963-the lower court
denied said motion.

As the present appeal is only from that portion of the decision
of the lower court which limited the 1% monthly interest on the deficiency
income tax liability of the Bank for 1950 to a period of six (6) months, the only issue before
Us is whether
or not, on its taxable income of P116,294.00, the Bank must pay 1% monthly interest for
a period of 13 months (March
1, 1956 to April 8, 1957) amounting to P15,118.22.

The contested ruling of
the lower court on the above issue is as follows:

“The joint stipulation of facts shows that from the time the
assessment notice was received by the defendant on February 14, 1956, requiring it to pay the amount
of P116,294.00 the
defendant contested the assessment. 
In an exchange of communications between the parties (pars. 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16, 17 and
18, complaint) the arguments were so spirited
and enthusiastic that even
after the P116,­294.00 was already paid they continued de­bating up to October
6, 1960 (pars. 15 and 18, stipulation). 
The arguments centered on BIR General Circular No. V-123 dated September
18, 1951 (Exh. 4) which permitted property owners to
include war losses suffered by them as deduction in income tax returns for the
year 1950, and BIR General Circular No. 139 dated August 30, 1952, which
revoked it (Exh. 5; pars. 19, 28, stipulation).  While the defendant claimed that it should
not be taxed for its war losses in the amount of P1,770,160.38
by virtue of BIR General Circular No. V-123, the plaintiff insisted that the
defendant was liable because that circular was revoked by BIR General Circular
No. 139 and the defendant did not claim the war losses as deduction from its
income tax in the 1950 income tax return, and deductions not made on the date
when they should be de­ducted could not be deducted in another year.

“The arguments on the matter should have ended with the
promulgation of the Supreme Court decisions in the cases of Cu Unjieng Sons. Inc. vs. B.T.A. (G. R. No.
L-6292, Sept. 29, 1956) and Hilado vs. Collector of Internal Revenue (G. R. No. L-9408, Oct. 31, 1956; 53 O. G. 2480), where it was held that war losses were
deductible only in the year in which they were sustained. 
Decisions of the Supreme Court have the force and effect of law, and the
defendant is bound by and under obligation to comply with them.

“Taking into
consideration that there was a long contest and argument between the plaintiff
and the defendant during the pe­riod of time extending from the date latter was
required to make payment on February 29, 1956, of the deficiency income tax in
the sum of P116,294.00, it should not be charged
interest thereon during such period because it acted in good faith, according
to American authorities and the case of Insular Lumber Co. vs. Collector of
Internal Revenue (G. R. No. L-7190, Apr. 28, 1956) cited by
the de­fendant in its memorandum. 
However, said defendant became liable for the interest after the
promulgation of the decisions of the Supreme Court in the cases of Cu Unjieng Sons vs. B.T.A. and Hilado
vs. Collector of Internal Revenue above cited on September 29, 1956, and October 31, 1956, respectively.  Six months having elapsed from the promulga­tion
of those decisions until the payment of the deficiency tax, the defendant
is liable for the payment of 1% monthly interest in the sum of P6,977.64, and for not paying on the due date it is also
liable for 5% surcharge in the amount of P5,814.70.  The total of these two amounts is P12,792.34 which the defendant should pay to the plaintiff, instead
of P20,932.92 appearing in paragraph 21 of the joint stipulation of
facts.”

The State’s position is that since General Circular V-123 dated
September 18, 1951 which permitted property owners to include war losses
suffered by them as deduction in their income tax returns for the year 1950 was
revoked by BIR General Circular No. 139 dated August 30, 1952, and since the
Bank had failed to claim its war losses as deductions from its income tax in
the year of actual loss or destruction, the same could not be deducted in
another year or during the taxable years
following said revocation, In support of this view our decisions in Cu Unjieng Sons, Inc. vs. B.T.A., G. R. No. L-6293, Sept.
29, 1956; and Hilado vs. Collector
of Internal Revenue, G. R. No. L-9408, Oct. 31, 1956, 53 O. G. 2480 are relied upon.

On the other hand, the Bank’s contention is that it should not be
made to pay interests on the amount of the tax assessed because it had acted in
good faith at least from the time payment of the tax was demanded on February 29, 1956 up to its actual payment on
April 8, 1957; that, if at all,
it should be charged interest thereon only after the Supreme Court promulgated
its decisions in the two cases of Cu Unjieng Sons,
Inc. vs. B.T.A., G. R. No. L-6293, Sept. 29, 1956 and Hilado
vs. Collector of Internal Revenue, G. R. No. L-9408, Oct. 31, 1956,
53 O. G. 2480.  Computed
at 1% monthly, interest for six months
following the promulgation of the decision rendered in the Cu Unjieng case, the Bank should be held liable for only P5,814.70.

Section 51, paragraph (e)
of the National Internal Revenue Code, as amended by Republic Act No.
2343, pro­vides:

“(e) Additions to the tax in case of nonpayment.–

“(1) Tax shown on the return.- Where the amount determined by
the taxpayer as the tax imposed by this Title or any installment thereof, or
any part of such amount or installment, is not paid on or before the data
prescribed for its payment, there shall be collected as a part of the tax, interest upon
such unpaid amount at the rate of one per centum a month from the date
prescribed for its payment until it is paid: 
Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of
three years, the present provisions regard­ing prescription to the contrary
notwithstanding.

“(2) Deficiency.– Where a deficiency, or any interest assessed in
connection therewith under paragraph (d) of this section, or any addition to
the taxes provided for in section seventy-two of this Code is not paid in full
within thirty days from the date of notice and demand from the Commissioner of
Internal Revenue, there shall be collected upon the unpaid amount, as part of the tax, interest at the rate
of one per centum a month from the date of such notice and demand until it is
paid: Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of
three years, the present provisions regarding prescription to the contrary
notwithstanding.

“(3) Surcharge.– If any amount of the tax
included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after
such notice and demand, there shall be collected in addition to the interest
prescribed herein and in paragraph (d) above and as part of the tax a surcharge
of five per centum of the amount of tax unpaid.”

The above legal provision makes no distinctions nor does it
establish exceptions.  It directs the
collection of the surcharge and interest at the stated rate upon any sum or sums due and unpaid after the
dates prescribed in subsections (b), (c), and (d) of the Act for the payment of
the amounts due.  The provision therefore
is mandatory in case of delinquency. 
This is justified because the intention of the law is precisely to
discourage delay in the payment of taxes due to the State and, in this sense, the surcharge and interest charged are not penal
but compensatory in nature – they are compensation to the State for the delay
in Payment, or for the concomitant use of the funds by the taxpayer beyond the
date he is supposed to have paid them to the State (Castro vs. Collector etc.,
Resolution on Motion for Reconsider­ation, G. R. No. L-12174, December
28, 1962).

WHEREFORE, the appealed decision is hereby modi­fied by
ordering the Bank to pay the State the sum of P15,118.22
representing the 1% monthly interest due to the latter on the sum of
P116,294.00 for the period from March 1956 to April 8, 1957.  In
all other respects the decision of the lower court stands.  With costs.

Concepcion, C.J., Reyes, Makalintal, Zaldivar, Castro,
Fernando, Teehankee, Barredo,
and Villamor, JJ., concur.