G.R. No. L-23041. July 31, 1969
E. RODRIGUEZ, INC., PETITIONER, VS. THE COLLECTOR OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS.
BARREDO, J.:
This is a petition for review of the decision of the Court of Tax
Appeals in its CTA Case No. 849, affirming the decision of the respondent
Collector (now Commissioner) of Internal Revenue holding petitioner E.
Rodriguez, Inc. liable for deficiency income tax in the sum of P63, 880.00 for
the year 1950.
The records of the case show that on July 17, 1948, Congress enacted Republic Act No.
333,[1]
pursuant to which the Republic of the Philippines
sued the petitioner, among four other defendants, in Civil Case No. Q-54 of the
Court of First Instance of Quezon City, for the expropriation
of about 1,360,000 square meters of land owned by it and situated within the
area delimited’ for the new capital city site.
After due trial, the said court rendered a decision in the case, dated February 21, 1950, with the following
dispositive portion:
“WHEREFORE, judgment is hereby rendered, declaring plaintiff
entitled to retain and appropriate the property involved in this proceeding, as
site for the development and establishment of the new capital city of the
Philippines, in accordance with our condemnation order dated September 19,
1949; and ordering plaintiff to pay defendants, as just compensation for the
lands to be taken from them, the following amounts, to wit: to defendant Eulogio
Rodriguez, Sr., the sum of THIRTY-NINE THOUSAND SEVEN HUNDRED SEVENTY-SIX PESOS
(P39,776. 00); to defendant E. Rodriguez,
Inc., the sum of ONE MILLION FOUR HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR
(P1,418,604.00) PESOS; to defendant Luzon Investment & Development Co., the
sum of FIVE THOUSAND TWO HUNDRED EIGHTY (P5,280.00) PESOS; and to defendants
Enrique Manaloto and Canuto
G. Manuel, the sum of SIXTEEN THOUSAND SEVEN HUNDRED TWENTY (P16,720. 00)
PESOS, with interest at the rate of 67 per annum on the said amounts from September 19, 1949, the date the
plaintiff entered upon the possession of the landsin question until payment,
plus the costs.”
Following the issuance of
the above-mentioned decision, however, a series of negotiations were had between
petitioner and the Government, represented by the Capital City Planning
Commission, after which, the said parties entered into a compromise agreement
under date of May 11, 1950, providing, inter alia,
as follows:
“(1) That the parties will accept the decision laid down in
said case by the Court of First Instance of Rizal (Quezon City Branch) with the following stipulations:
“a. That the defendants mentioned above hereby waive all interest
due on the adjudged value of the expropriation properties;
“b. That the defendants above-named hereby donate 207,006 square meters
out of Lots Nos. 41-C-3 and 39, object of expropriation in Civil Case No. Q-54;
“c. That defendant Eulogio Rodriguez,
Inc. obligates itself to donate as it hereby donates the land object of
expropriation in Civil Case No. Q-90, in favor of the Republic of the Philippines,
containing an area of 15,200 square meters, which is a portion of Lot No.
41-C-3 as indicated in the plan attached to the complaint therein; said
defendant Eulogio Rodriguez, Inc. binding itself to
execute the necessary deed of donation thereof;
“d. That defendants named above agree to the payment of the price
awarded by the Court subject to the foregoing stipulations in the total sum of
ONE MILLION TWO HUNDRED FIFTY THOUSAND
SIX HUNDRED THIRTY-ONE PESOS and
EIGHTY CENTAVOS (P1,250,631.80) payable in the following manner:
“1) SIX HUNDRED
TWENTY-FIVE THOUSAND THREE HUNDRED FIFTEEN PESOS AND NINETY CENTAVOS
(P625,315.90) in government bonds in favor of Eulogio
Rodriguez, Sr. and E. Rodriguez, Inc., payable within five (5) years at not
less than three percent (3%) per annum;
“2) THREE HUNDRED THOUSAND PESOS (P300,000.00) to be given to the
Philippine National Bank in payment of the mortgage indebtedness of defendants
E. Rodriguez, Sr. and E. Rodriguez, Inc.; and
“3) the balance of THREE HUNDRED TWENTY-FIVE THOUSAND TWO HUNDRED
FIFTEEN PESOS AND NINETY CENTAVOS (P325,215.90) in cash to be paid to all
defendants above named, through Eulogio Rodriguez,
Sr., within a reasonable time.
“(2) That after approval of this compromise by the Court, the
parties herein agree not to interpose an appeal from the judgment of the Court
of First Instance of Rizal (Quezon
City Branch) which shall be considered final and executory
under the Rules of Court;
“(3) And, finally, that the said parties will submit this
compromise agreement to the Court for its approval and/or its consideration in
the decision rendered in this case.”
This compromise agreement was duly approved by the Court of First
Instance of Rizal (Quezon
City Branch) on May 12, 1950,
and pursuant to the terms thereof, the Government paid to petitioner the sum of
P1,238,204.00, of which, P625,315.90
were in Government Bonds.
On March 1, 1951,
petitioner filed its income tax return for the year 1950, showing on the face thereof a loss of
P17,982.06. In said return, petitioner did not include the sum of
P625,315.90 received by it from the government in the form of bonds in payment
of its expropriated properties, in the belief that the said amount was free or
exempt from taxation. When this return
was later examined by an agent of the Bureau of Internal Revenue, the Collector
of said bureau assessed against petitioner a deficiency income tax of P63,
880.00, computed as follows:
“Net income per return (loss)…….. P17,982.06
Amount received
for property ……….. P1,238,204.00
Less: Cost of
Land ……………….. 827,279.82
Gain ………………… P 410,924.18
Undeclared gain …………………….
410,924.18
Accounts receivable charged
off as bad debts but not
forming part of gross income …….. 1,860.00
Miscellaneous expenses not
connected with the business ……… 4,450.00
Net Income …………………………. P399, 252.12
Tax due on P399,252.12 ………….
63,880.00“
A series of
communications between petitioner and respondent Collector of Internal Revenue
followed the foregoing assessment, with the former protesting against and
requesting the cancellation of the deficiency income tax assessed against it,
and the latter maintaining its accuracy and demanding payment thereof. As petitioner did not pay, on July 6,
1959, the Collector,
of Internal Revenue sought the collection of said deficiency income tax of P63,
880.00, plus 5% surcharge and 1% monthly interest thereon from March
11, 1956, by means
of an action in the Court of First Instance of Manila.
On June 8, 1960,
petitioner offered, by way of compromise, to pay the amount of P30, 676.25 in
full settlement of its disputed deficiency income tax liability for 1950. This offer was rejected by the Collector of
Internal Revenue; whereupon, under date of June 24, 1960, petitioner filed a petition for review of
the assessment in question before the respondent Court of Tax Appeals which,
after trial on the merits, rendered its decision affirming the assessment in
question. Hence, this appeal by petitioner
thru the instant petition for review of the said decision of respondent Court
of Tax Appeals, with the following assigned errors:
“I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE EXEMPTION
CONTEMPLATED BY THE BONDS IN QUESTION APPLIES ONLY TO DOCUMENTARY STAMP TAX AND
TAX ON INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH EXEMPTION CONSTITUTES
SUFFICIENT INDUCEMENT FOR PETITIONER TO ACCEPT SAID BONDS.
“II. THE RESPONDENT COURT
ERRED IN AFFIRMING THE ORDER OF THE RESPONDENT COLLECTOR HOLDING PETITIONER
LIABLE FOR INCOME TAX ON THE EXCHANGE OF ITS PROPERTIES FOR GOVERNMENT
TAX-EXEMPT BONDS UNDER REPUBLIC ACT NO. 333.”
As petitioner correctly
puts it, the only question to decide here is whether or not in determining the
profit realized from the payment of the purchase price of its (petitioner’s)
expropriated property, for income tax purposes, portion of the purchase price
paid in the form of tax-exempt bonds issued under Republic Act No. 333 should be included.
The pertinent provisions
of law involved are found in Section 9 of the Act abovementioned which reads as
follows:
“SEC. 9. The President
of the Philippines is authorized to issue,
in the name and behalf of the Republic of the Philippines, bonds in an
amount of twenty million pesos, the
proceeds of which shall be used as a revolving fund for the acquisition of
private estates, the subdivision of the area, and the construction of streets,
bridges, waterworks, sewerage and other municipal improvements in the Capital
City of the Philippines.
“The bonds so authorized to be issued shall bear such date and in such form as the President
of the Philippines
may determine and shall bear such rate of interest and run for such length of
time as may be determined by the President.
Both principal and interest shall be payable in Philippine currency or
its equivalent in the United States currency, in the discretion of the
Secretary of Finance, at the Treasury of the Philippines, and the interest
shall be payable at such periods as the President of the Philippines may
determine.
“Said bonds shall be exempt from taxation by the Government
of the Republic of the Philippines or by any political or municipal
subdivisions thereof, which fact shall be stated upon their face, in accordance
with this Act, under which the said bonds are issued.” [Underscoring
supplied]
Petitioner maintains that
the portion (paid in tax-exempt Government Bonds) of the profit it derived from
the expropriation of its property should not be made subject to income tax, for
the reasons that: (1) the Republic of
the Philippines gave no concession to petitioner in the compromise agreement
involved in this case except that, as testified to by the lawyer who represented
petitioner in the negotiations which led to the compromise agreement in
question, it was understood between the parties, and it was precisely the only
inducement, according to the witness, that made petitioner accept payment of
P625,315.90 in Government Bonds instead of cash, that said bonds would be
“tax-free”; now, it is argued that by tax-free is meant that by
acceptance of the bonds rather than cash, petitioner would not also have to pay
income tax on the exchange gain from said bonds;[2](2) that the third paragraph of Section 9 of
the Act granting tax exemption on bonds issued thereunder
was inserted in the law as a further inducement to private land owners within
the new capital site to part away with their properties in favor of the
Government other than for cash, which legislative history of the law allegedly
sustains the position of petitioner; and (3) Congress must have really intended
such income tax exemption under Republic Act No. 333 since, similar provisions
in Republic Act No. 1400,[3] likewise involving the expropriation of private’
estates, expressly declare that the price paid by the Government for the lands
acquired for resale to tenants under the authority of said Act (Republic Act
No. 1400) shall not be considered as income of the landowner for purposes of
the income tax. This- reasoning was
brushed aside by the respondent Court of Tax Appeals in its decision under
review, on the following rationale:
“Petitioner contends that since the Government bonds which it
received as part payment of the price of its lot were exempt from taxation, the
deficiency assessment made by respondent against it is not in order. On the other hand, respondent claims that the
exemption of Government bonds refers only to documentary stamps on the bonds
and does not include income tax on the income derived by petitioner which was paid
to him in the form of bonds.
“The pertinent portion of Section 9 of Republic Act No. 333,
which is the sole basis of petitioner’s claim for exemption, provides:
‘Said bonds shall be exempt from taxation by the Government of the
Republic of the Philippines
or by any political or municipal subdivision thereof, which fact shall be
stated upon their face, in accordance with this Act, under which the said bonds
are issued.’
“There can be no question that petitioner is taxable on its
income derived from the sale of its property to the Government. The fact that a portion of the purchase price
of the property was paid by the Government in the form of tax exempt bonds does
not operate to exempt said income from income tax. The income from the sale of the land in question
and the bonds are two different and distinct taxable items so that the exemption
of one does not operate to exempt the other, unless the law expressly so
provides.
“It is alleged that to deny exemption from income tax on the
amount represented by the said bonds would be to nullify the purpose of the law
in granting exemption. The question has
been asked: If income or gain derived
from the acceptance of such bonds in exchange for private estates would be
taxed, what inducement did such provision of Republic Act No. 333 give to land
owners to accept payment in bonds for their properties in the proposed site of
the Capital City? To our mind, there is
sufficient inducement, and that is, the exemption not only of the bonds from
documentary stamp tax but also of the
interest derived from such bonds.
Section 29(b) (4) of the National Internal Revenue Code exempts interest
derived from such bonds from income tax to the extent provided in the law
authorizing the issue thereof.
“Counsel for petitioner also allege that the prevailing rule obtaining in the United
States before removal of exemptions of
government obligations was to exempt such
bonds from income tax both as to principal and interest. To quote from the memorandum of counsel:
‘x x x Actually,
most of the Federal Treasury Bonds issued by the U.S. Government from 1921 to
1941, or before the Public Debt Acts of 1941 and 1942 that removed tax
exemptions on obligations issued by the United States and its agencies and instrumentalities,
were ?
‘”exempt, both as to principal and interest, from all taxation
now or hereafter imposed by the United States, any State, or any of the
possessions of the United States, or by any local taxing authority, except (a) estate or
inheritance taxes, and (b) graduated additional income taxes, known as
surtaxes, and excess profits and war-profits taxes, now or hereafter imposed by
the United States, upon the income or profits of individuals, partnerships,
associations, or corporations.” (I Mertens, Law
of Federal Income Taxation, pp. 297-313).’ [See page 12, Memorandum of counsel
for petitioner, March 20, 1963.]
“Apparently the import of the ruling quoted above from the
book of Mertens has not been clearly understood. We think that the exemption referred to
therein of both principal and interest has reference to the exemption from income
tax of the income derived from the sale or exchange of the bonds and the
interest paid by the U.S. Government on such bonds.
The opinion quoted from Mertens is
inapplicable to the instant case because it does not refer to any income
derived by petitioner from the sale or exchange of bonds received by petitioner
from the Government under Republic Act No. 333.
The tax here involved is on the income derived from the sale of
petitioner’s property to the Government, not the income derived from the sale
or exchange of the bonds.
“Mention has been made of Republic Act No. 1400, Section 22 of
which provides that ‘the purchase price paid by the Government for any
agricultural land acquired for resale to tenants under the authority of this
Act, whether by negotiation or expropriation, shall not be considered as income
of the landowner concerned for purposes of the income tax.’ It is argued that since
Republic Acts Nos. 333 and 1400 are in pari materia, both should be
construed together, and since Republic Act No. 1400 exempts income derived from the sale of property to the
Government under said Act, the same exemption
should also apply to income derived from the sale of property to the
Government under Republic Act No. 333.
It is precisely because Republic Act No. 1400 contains an express
exemption from income tax of the income derived by property owners from the
sale of their lands under said Act and the absence of a similar provision in Republic Act No. 333 which indicates plainly that Congress intended not
to grant such exemption to landowners under Republic Act No. 333. If Congress had intended to grant exemption
from income tax with respect to income derived by a person from the sale of his
property under Republic Act No. 333, it should have expressly made an express
provision to that effect as it did in Republic Act No. 1400; that it did not,
is a clear indication that its purpose was to withhold such exemption.”
We find no cogent reasons
to disturb the above holding of the Court of Tax Appeals. It has been the constant and uniform holding
of this Court that exemption from taxation is not favored and is never
presumed; in fact, if it is granted, the grant must be strictly construed
against the taxpayer.[4]
Affirmatively put, the law requires courts to frown on alleged exemptions from
taxation, hence, an exempting provision in a legislative enactment should be
construed in strictissimi juris[5] against the taxpayer and liberally in
favor of the taxing authority.[6]
This Court has been most consistent in this holding. In Asiatic Petroleum Co. vs. Llanes,[7]
it was explained beyond any possibility of miscomprehension that:
“x x x
Exemptions from taxation are highly disfavored, so much so that they may almost
be said to be odious to the law. He who
claims an exemption must be able to point to some positive provision of law
creating the right. It cannot be allowed
to exist upon a vague implication x x x. The books are
full of very strong expressions on this point.
As was said by the Supreme Court of Tennessee in Memphis vs. U. & P.
Bank (91 Tenn., 546, 550), ‘The right of taxation is inherent in the
State. It is a prerogative essential to
the perpetuity of the government; and he who claims an exemption from the
common burden, must justify his claim by the clearest grant of organic or
statute law.’ Other utterances equally or more emphatic come readily to hand
from the highest authority. In Ohio Life
Ins. and Trust Co. vs. Debolt (16 Howard, 416), it
was said by Chief Justice Taney, that the right of taxation will not be held to
have been surrendered, ‘unless the intention to surrender is manifested by
words too plain to be mistaken.’ In the case of the Delaware Railroad Tax (18
Wallace, 206,226), the Supreme Court of the United States said that the
surrender, when claimed, must be shown by clear, unambiguous language, which
will admit of no reasonable construction consistent with the reservation of the
power. If a doubt arise as to the intent of the
legislature, that doubt must be resolved in favor of the State. In Erie Railway Company vs. Commonwealth of Pennsylvania
(21 Wallace, 492, 499), Mr. Justice Hunt, speaking of exemptions, observed that
a State cannot strip itself of the most essential power of taxation by doubtful
words. ‘It cannot, by ambiguous
language, be deprived of this highest attribute of sovereignty.’ In Tennessee
vs. Whitworth (117 U.S.,
129, 136), it was said: ‘In all cases of this kind the question is as to the
intent of the legislature, the presumption always being against any surrender
of the taxing power.’ In Farrington vs. Tennessee
and County of Shelby
(95 U.S. 679, 685), Mr. Justice Swayne
said: “x x
x x When exemption is
claimed, it must be shown indubitably to exist.
At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession
are too explicit to admit fairly of any other construction that the proposition
can be supported.’”
The above rules should be applied to the case at bar where the
law invoked (Section 9 of Republic Act No. 333) does not make any reference
whatsoever to exemption of income derived from the sale of expropriated
property thereunder, unlike under Republic Act No.
1400 where, relative to the price paid by the Government for any agricultural
land acquired for resale to tenants, there is an express declaration that the
same “shall not be considered as income of the landowner concerned for
purposes of the income tax.” Nor are We convinced by the argument that the
particular provision of Republic Act No. 333 relied upon which grants exemption
on bonds issued thereunder for purposes of inducement
to private land owners within the new capital site to part away with their
properties in favor of the Government other than for cash should be taken to
mean that said property owners need not pay income tax on their income derived
from the sale of such properties. The
pertinent Congressional Record of the proceedings held during the consideration
of the bill which later became Republic Act No. 333,[8]
does not show that Congress had intended to exempt said property owners from
the payment of income tax on the proceeds of the sale of their properties when
the same is paid in government bonds issued under the said law. Likewise, even were We to assume, for the
sake of argument, that the Capitol City Planning Commission and other officials
of the government did make some assurance or promise to herein petitioner that
the portion of the price of its expropriated property paid in tax-exempt
government bonds would not be made subject to income tax payment, such
assurance or promise, made without statutory sanction, cannot bind the
Government. The same amounts to a
surrender of the State’s power to require payment of income tax, which in this
case is not explicitly granted by Republic Act No. 333. It is a well-known rule that erroneous
application and enforcement of the law by public officers do not block
subsequent correct application of the statute,[9]
and that the Government is never estopped by mistake
or error on the part of its agents.[10]
In the present circumstances, the Collector of Internal Revenue is right in
assessing against petitioner the deficiency income tax in question, consonant
with the proposition that income from expropriation proceedings is income from
sales or exchange and therefore taxable.[11]
FOR THE
FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals under
review is affirmed,
with costs against herein petitioner.
Concepcion, C.J., Dizon,
Sanchez, Castro, Fernando and Teehankee, JJ., concur.
Reyes, J.B.L., Makalintal, Zaldivar and
Capistrano, JJ., took no part.
[1]
An Act to establish the capital of the Philippines and the permanent seat of
the National Government, to create a Capital City Planning Commission, to
appropriate funds for the acquisition of private estates within the boundary
limits of said city, and to authorize the issuance of bonds of the National
Government fir the acquisition of private estates, for the subdivision thereof,
and for the construction of streets, bridges, waterworks, sewerage and other
municipal improvements in the said capital
city.
[2]
Per testimony of Atty. Jose A. Garcia, TSN, pp. 31-353.
[3]
Section 22 of Republic Act No. 1400, relied upon, reads:
“SEC. 22. Exemption from tax.- All land certificates
issued by authority of this Act shall be exempt from all forms of taxes. The purchase price paid by the Government for
any agricultural land acquired for resale to tenants under the authority of
this Act, whether through negotiation or expropriation, shall not be
considered as income of the landowner concerned for purposes of the income
tax.”
[4]
See Commissioner of Internal Revenue vs. Guerrero, L20812, Sept. 22,
1967. 21 SCRA 180, 183, and the numerous cases therein cited.
[5]
Id., citing Philippine Guarranty Co. vs.
Commissioner, L-22074, Sept. 6, 1965.
[6]
Esso Standard Eastern, Inc. vs. Actg.
Commissioner of Customs, L-21841, Oct. 28, 1966, 18 SCRA 488, citing cases.
[7]
49 Phil. 466, 471.
[8]
Consideration of House Bill No. 2003, Congressional Record, House of
Representatives, Vol. III, Nos. 1-9, June 14-24, 1948, p. 323, et seq.
[9]
Philippine Long Distance Telephone Co. vs. Collector of Internal
Revenue, 90 Phil. 674, 680; Republic vs. Philippine Long Distance
Telephone Company, L-18841, January 27, 1969, 26 SCRA 620, 631.
[10]
Pineda vs. Court of First Instance of Tayabas,
52 Phil. 803, 807; Benguet Consolidated Mining
Company vs. Pineda, 98 Phil. 711, 724; Central Azucarera
de Tarlac vs. Collector, et al., 104 Phil.
653, 656; Philippine American Drug Co. vs. Collector of Internal
Revenue, et al., 106 Phil. 161, 168; Koppel (Phil.) Inc. vs. Collector
of Internal Revenue, L-10550, September 19, 1961; Luzon Stevedoring Corporation
vs. Court of Tax Appeals, L-21005, October 22, 1966, 18 SCRA 436, 440;
Tan Guan vs. Court of Tax Appeals, L-23676, April 27, 1967, 19 SCRA 903,
907; Republic vs. Philippine Long Distance Telephone Co. supra.
[11]
Gutierrez, et al. vs. Court of Tax Appeals, 101 Phil. 713, 722.