JOSE LEON GONZALES, PETITIONER AND APPELLANT, VS. THE HON. COURT OF TAX APPEALS AND THE COLLECTOR OF INTERNAL REVENUE, RESPONDENTS AND APPELLANTS; JUANA F. GONZALES AND FORTUNAT…

Statement. – This is an appeal from the
decision of the Court of Tax Appeals denying the refund of income taxes imposed
on, and paid by, Jose Leon Gonzales and Juana F. Gonzales.

The Facts.-Jose Leon Gonzales and Juana F.
Gonzales are brother and sister / the latter being married to Atty. Fortunato de Leon ^[1]/. Both petitioners are co-heirs and
co-owners, (one-sixth each) of a tract of land of 871,982 square meters’ which
they, along with four other co-heirs, inherited from their
mother.

This realty, locked at
Caloocan, Rizal, was the object of expropriation proceedings, which
this Court finally decided in May 1954, in G. R. No. L-4918. Therein we fixed the just compensation for the
property at P1.50 per square meter. We also ordered the payment of interest at
the legal rate of 6% from January 25,
1947
(when the Government took possession of the property) to the date of payment,
which payment was actually made on October 31,
1954.
Excluded from the payment of interest the sum of P28,850.00, the amount deposited by the Government upon taking
possession of the estate.

The total compensation paid the
six heirs for the expropriated properly amounted to P1,307,973.00. Subtracting therefrom
the amount of P28.850.00 just mentioned, there remained a difference of P1,279,123.00, the interest on which, at the legal rate of 6%
per annum, totalled P535,587.70. Divided among the six
heirs, this total gave a share of P89,305.61 as
interest to each of them.

Upon the amounts received from
the Government, Jose Leon Gonzales and Juana F. Gonzales, were each ascertained
to have made a capital gain of P213,328.82 [P1,279,973,00 ^[2] divided by 6 heirs]; and each of them to
have received the amount of P89,309.61 as share in the interests of P535.857.70
(this sum is divided by 6). A tentative return for 1954 was thus prepared and
filed for each of the two petitioners describing the amount of P213,328.82 as
capital gain, and in addition, the amount of P89,309.61 as ordinary income. On
the basis of such income, each of the petitioners was assessed P86,166.00.

The Government paid to
petitioners the proceeds of the expropriation award and interest through the
People’s Homesite and Housing Corporation sometime in
October 1954 the last check having been delivered on November 4,
1954.
However, the sum of P532,234.70 was retained by the
Housing Corporation; and on November 18,
1954, at
the request of respondent Collector, it turned over to the Bureau of Internal
Revenue the amount of P516,007.00 representing income taxes reportedly due and
owing from the six co-heirs of the estate. Therefore, petitioners Jose Leon
Gonzales and his sister Juana F. Gonzales were each credited income tax. (Official Receipts Nos. 520491 and 520496 dated November 19,
1954.)

On February 29,
1956,
petitioner Juana F. Gonzales wrote the respondent Collector a letter, seeking
the refund of P24,426.00 allegedly representing excess
payment of income taxes for 1954. The letter pertinently
stated:

“We respectfully contend that the
assessment was erroneous in that the amount of P80.309.61 representing interest, was considered as ordinary income and not merely
capital gain. If the interest was computed as capital gain, there shall be due
and owing from your office the amount of P24,426.00
assuming for argument’s sake that your assessment was
correct.”

(Exh. H & 2, also par. 22, ‘Stifacts‘)

On November 5,
1956,
petitioner Jose Leon Gonzales also wrote a letter to said respondent requesting
refund of a similar amount of P24,426.00 for the same
reasons as his co-petitioner. No action appears to have been taken on this
refund claim.

On November 12,
1956,
respondent Collector denied the request of Juana F. Gonzales for refund of
P24,426.00.

The Suits.- So on November 15, 1956, Jose
Leon Gonzales and Juana F. Gonzales submitted to the Court of Tax Appeals a
joint petition seeking a refund, this time of the amount of P86,166.00
for each of the two petitioners; but the next day, both petitioners amended
their petition by filing separate petitions which were docketed separately as
CTA Case No. 328 and CTA Case No. 329.

It appears that on
November 24,
1956,
Atty. Fortunato de Leon wrote the respondent Collector
the following letter:

“Sir:

This is to acknowledge receipt
today of your letter of November 12,
1956,
denying the claim of Mrs. Juana F. Gonzales de Leon for refund, to which we take
exception.

We are not only claiming the
refund of P24,426.00 but the entire amount of P86,166.00 for various reasons
more specifically contained in our petition before the Court of Tax Appeals on
November 16 1956, Case No. 328. We had to file the petition because we believe
our claim is meritorious and that the prescriptive period may run
out.

For all legal purposes we shall
consider your letter herein referred to as denial of the claim for refund of the
total amount of P86,166.00. And the difference in
amount may be considered for all purposes as variance
only.”

Respondent Collector, however,
disclaims receipt of this second written claim for refund.

On December 5,
1956,
respondent Collector contested the amended petitions. Trial ensued, and in the
course thereof the parties signed a “Partial Stipulation of
Facts.”

Decision. – On July
16, 1958,
a decision was rendered by the Court of Tax Appeals denying petitioners’ claim
for refund, with costs against them. Their motion for
reconsideration and new trial having been denied, petitioners perfected this
appeal and now pray for reversal.

Issue. – A careful perusal of the
debated issues will show that the resolution of this appeal hinges decisively on
two propositions:

(1) Whether or not petitioner’s
claim for refund of the total of P86,166.00 may be
properly entertained; and

(2) Whether or not the sum of
P89,309.61 which each of the petitioners received as
interest on the value of the land expropriated is taxable as ordinary income,
and not as capital gain.

Discussion. – The record shows that on
November 18,
1954, at
the request of respondent Collector, the People’s Homesite and Housing Corporation turned over to the Bureau
of Internal Revenue the sum of P516.007.00 representing income taxes due from
the six co-owners of the expropriated property. Of this amount, the two
appellants Gonzales were each credited with the amount of P86,166.00 as income taxes for 1954. (The receipts evidencing
such payments are O. R. No. 520491, dated November 19, 1954 for P86,166.00 for
Jose Leon Gonzales and O. R. No. 520496 dated November 19, 1954 for Juana F.
Gonzales.)

It likewise appears that
appellant Juana F. Gonzales in letter of February 29,
1956,
requested for the refund P24,426.00 (only),
citing as sole ground therefor that amount of
P89,309.61 which was her share in the interests paid on the expropriated
property was taxed by respondent Collector as ordinary income. She
contended that it should have been taxed as capital gain. Appellant Jose
de Leon Gonzales on his part, in his letter of November 5,
1956,
requested the refund of a similar amount of P24,426.00
(only).

Then a joint petition was filed
by both parties before the Court of Tax Appeals first on November 15,
1956; but
the next day, November 16,
1956,
they filed separate petitions containing similar
allegations.

It would appear, therefore, that
from November 19,
1954,
when the payments for income taxes were received from the appellants to
February 29,
1956,
when appellant Juana Gonzales filed her claim for refund and to November 5,
1956, and
appellant Jose Leon Gonzales filed his own refund claim, less than two years had elapsed.

But, since their respective
claims for refund were restricted to the amount of P24,426.00 only, it should be clear that their demand for the
return of an amount in excess thereof (P86,166.00) is not
included.

Remarkably, the so-called claim
for refund of the amount of P86,166.00 was made only
on November 24,
1956,
(after the complaints had been filed) without giving the Collector “an
opportunity to consider his mistake, if mistake has been committed.” (Kiener Co. vs. David, 92 Phil. 945) And it refers
specifically and exclusively to appellant Juana F. Gonzales’ claim (Exh. “J”). Appellant Jose
Leon Gonzales seems not to have filed any refund claim for a similar
amount.

Be that as it may, this later
claim for refund for P86,166.00 made on
November 24,
1956, by
appellant Juana F. Gonzales has been definitely filed beyond the statutory
period of two years from the date of payment, which was November 19,
1954.

A stringent requirement of the
Tax Code is that before a suit or proceeding for the refund of any internal
revenue tax can be maintained in any court, a written claim for its refund shall
be filed with the Collector of Internal Revenue before filing the action in
court and before the expiration of two years from the date of payment
of the taxes to be refunded.^[3] This
requirement is mandatory and failure to comply therewith is fatal to the
action.^[4] What is more, the claim for
refund should set forth in detail the facts and the grounds upon which it is
based, so as to apprise the Collector accordingly.^[5]

Appellants maintain that it was
not they who had paid the tax of P86,166.00 imposed
upon each of them, but that it was respondent Collector himself who paid those
taxes and issued receipts therefor without their
knowledge and consent. And that even if the receipts of payment were in fact
sent by the respondent Collector to the People’s Homesite and Housing Corporation and were received by the
latter on November 23, 1954, said receipts could not have been received by
appellants earlier than November 28, 1954, considering that the Rules of Court
treats a service as complete only upon the expiration of five days from
mailing.

We find no merit in these
contentions. To begin with, there is no proof positive on record that appellant
Juana F. Gonzales’ so-called refund claim for the amount of P86,166.00 had been sent to, let alone received, by respondent.
Neither have they protested against this payment by the Collector
to the Collector. In the second place, the refund
letter of November 24,
1956, assuming that it was duly
filed, referred to Juana F. Gonzales’ claim alone, and made no mention of Jose
Leon Gonzales’. In the third place, the
aforesaid refund claim does not set forth in detail the facts and grounds upon
which it was based and failed to apprise the respondent of her grounds for
raising her claim from P24.426.00 to P86,166.00 (see
letter). Lastly, appellant Juana F. Gonzales’ eleventh-hour modification upping
her refund claim from P24,426.00 to P86, 166.00 was made on November 24, 1956 or
eight days after the filing of her amended petition before the respondent
court on November 16, 1956, and a few days after the two-year
period.

Obviously then, the requirement
of prior timely claim for refund of the sum of P86,166.00 has not been met in this case. The demand for refund
must precede the suit, and this requirement is mandatory; so much so that
noncompliance therewith bars the action.^[6]

Appellants insist that payment of
the tax was not made by them but by the respondent Collector himself, and that,
therefore, the prescriptive period should begin not from the date of such
payment but from the date appellants learned of such
payment.

This contention offers no help to
appellants’ cause. Assuming that appellants indeed learned of their payments
only on November 24,
1954,
they should have claimed the refund of P86,166.00 from
said date and before they filed their petitions with the respondent Court
on November 15 or 16, 1956. Neither could they blame the respondent Collector
for failing to act on their refund claims sooner for it was incumbent upon
appellants’ to urge him to act expeditiously on their claims, knowing as they
did that the time for bringing an action for a refund of income tax, fixed by
statute, is not extended by the delay of the Collector of Internal Revenue in
giving notice of the rejection of their claim.^[7]

Moreover, the provisions of
section 306 of the Tax Code are mandatory and not subject to any qualification
and, hence, they apply regardless of the conditions under which the payment has
been made.”^[8]

With respect, therefore, loathe
issue of whether or not appellants claim for refund of P86,166.00 (each) could now be entertained, we believe that the
same has been barred by prescription.

Anyway, it is mainly based on the
proposition that our ruling in Gutierrez vs. Court of Tax Appeals, L-9738,9771, May 31, 1957, should be abandoned, a proposition we
are not disposed to encourage.

This our decision will,
therefore, address itself only to appellants earlier claim for refund in the sum
of P24,126.00. Which brings us to the question, of
whether or not the sum of P89,309.61 which each of the
appellants had received as share in the interest on the proceeds of the
expropriation should be taxed as capital gain or as ordinary
income.

Appellants argue that the
accessory follows the principal, that the amount paid in expropriation
proceedings (the principal) i.e. the profit thereon is admittedly capital
gain, not ordinary income, and that therefore, the interest paid thereon
(the accessory) is capital gain, not ordinary income.

This contention may not be
sustained. In a previous case ^[9], we held
that “the acquisition by the Government of private properties through the
exercise of the power of eminent domain, said properties being justly
compensated, is embraced within the meaning of the term “sale” or “disposition
of property” and the definition of gross income laid down by Section 29 of the
Tax Code of the Philippines. We also adhered to the view that the transfer of
property through condemnation proceedings is a sale or exchange and that profit
from the transaction constitutes capital gain.

But to say that the proceeds of
expropriation which is the return of capital and, therefore, a capital gain,
partakes of the same nature as interests paid thereon is far from correct;
because interest is compensation for the delay in the return of such capital. In
fact, the authorities support the conclusion that for income tax purposes,
interest does not form part of the price paid by the Government in condemnation
proceedings; and may not be treated as part of the capital gain. It was so held
by the United States Supreme Court in Kieselback vs.
Commissioner of Internal Revenue, 317 U.S. 399.

Borrowing the words and phrases
of said Court, we could say now:

The sum paid these taxpayers
above the award of P1,307,973.00 was paid because of
the failure to put the award in the taxpayer’s hands oh the day,
January 25,
1947,
when the property was taken. This additional payment was necessary to give the
owners the full equivalent of the value of the property at the time it was
taken. Whether one calls it interest on the value or payments to meet the
constitutional requirement of just compensation is immaterial. It is income paid
to the taxpayers in lieu of what they might have earned on the sum found to be
the value of the property on the day the property was taken. It is not a
capital gain upon an asset sold. The sale price was the P1,307,973.00. ^[10]

The property was turned over in
January, 1947. This was the sale. Title then passed. The subsequent earnings of
the property went to the Government. The transaction was as though a purchase
money lien at legal interest was retained upon the property. Such interest when
paid would, of course, be ordinary income.

Incidentally, the above Supreme
Court’s decision disapproved the Seaside Improvement case on which petitioners
rely.

We see, therefore, no reason to
impute error to the opinion of the Collector of Internal Revenue and the Court
of Tax Appeals that interest paid was ordinary income, bearing in mind that the
Tax Code provided,

“Sec.
29. Gross
Income.—(a) General Definition—”Gross income” includes Rains, profits, and
income derived from x x x
interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profit, or gain or profits and income derived
from any source whatever.” ^[11]

Having arrived at these
conclusions, we deem it unnecessary to discuss the other points extensively
argued in the appellants’ brief.

Judgment.—Consequently, finding no error in the appealed decision, we
hereby affirm it, with costs. So
ordered.

Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Rcgala, Makalintal, Bengzon, J.P. and Zaldivar, JJ., concur.

^[1]
For
convenience, he will not referred to as petitioner,
being practically a nominal party.

^[2] Acquisition cost of
land………………………P28,000.00;
Payment
by Government……………………..1,307,973.00
Therefore, capital
gain…………………………1,279,973.00

^[3]
Sec.
306, National Internal Revenue Code. Giving him copy of the complaint is not
enough. See Areñas, Annotations (1963) Vol. III, p.
206.

^[4] Wee Poco & Co. vs. Posadas, 64
Phil. 640; Bermejo vs. Col. of Internal Revenue, 87
Phil., 96; 47 Off. Gaz., Suppl. 12, p. 292; Keiner Ltd. vs.
Court of Tax Appeals & Col. of Internal Revenue, 52 Off. Gaz.,
5226.

^[5] Asiatic Petroleum Co. vs. Posadas, 52 Phil. 728; Wee Poco
vs. Posadas, supra.

^[6] Johnston Lumber Co. Inc. vs.
Court of Tax Appeals & Col. of Internal Revenue, supra.

^[7] U.S. vs. Michel, 282, U.S. 656
cited in Koppel (Phil) Inc. vs. Col. of Internal Revenue, L-10550, Sept. 19,
1961. See also: Kiener Col. Ltd. vs. S. David, supra.

^[8]
Guagua Electric Light Plant Co. vs.
Col. of Internal Revenue & the Court of Tax Appeals, 59 Off. Gaz., Suppl. 27, p. 4207.

^[9] Gutierrez vs. CTA & Col. of
Internal Revenue, Col. of Internal Revenue vs. Gutierrez, et al., G. R. Nos.
L-9738, 9771, May 31, 1957.

^[10] The involuntary character of the
transaction is not significant. Helvering vs. Hammel, 311 U.S. 504, 85 L ed 303,
61 S Ct 368, 131 ALR 1481.

^[11] Sec. 29 (b) (4) does not apply , and is not invoked by
petitioners.