REPUBLIC OF THE PHILIPPINES, PLAINTIFF AND APPELLEE, VS. MAMBULAO LUMBER COMPANY, ET AL., DEFENDANTS AND APPELLANTS.

Republic versus Mambulao Lumber Company

The Case

This is a civil action for the collection of money brought by the Republic of the Philippines against Mambulao Lumber Company and the General Insurance and Surety Corporation, to recover forest charges due from the lumber company and secured by surety bonds. The defendants admit the amounts but resist payment by invoking a set-off: they claim that reforestation charges they had paid to the government, which were never spent on reforesting the area covered by their license, should be refunded or applied to what they owe. The case matters because it fixes two enduring rules — that reforestation charges are a tax forming part of a special fund, and that taxes are not a proper subject of compensation or set-off.

Procedural History

The Republic filed the complaint in the Court of First Instance of Manila. The trial court rendered judgment ordering the defendant company to pay the Republic the sum of 4,802 pesos and 37 centavos, with interest at six percent from the filing of the complaint until fully paid, plus costs. The defendant company appealed. The appeal was originally taken to the Court of Appeals, but that court certified the case to the Supreme Court on the ground that it involves questions of law only. The Supreme Court thus resolved the appeal directly.

Facts

Under three separate causes of action, the defendants admitted their liabilities to the Republic: 587 pesos and 37 centavos in forest charges for the period from September 1952 to May 1953, covered by a bond executed in July 1953; 286 pesos and 70 centavos, covered by a bond dated November 1953; and 3,928 pesos and 30 centavos, covered by a bond dated July 1954. These three liabilities aggregate to 4,802 pesos and 37 centavos.

Against this, the lumber company set up an unusual defense. From July 1948 to December 1956 it had paid 8,200 pesos and 52 centavos in reforestation charges, and for an earlier period from April 1947 to June 1948 it had paid a further 927 pesos and 8 centavos, for a total of 9,127 pesos and 50 centavos. These were paid under Section 1 of Republic Act Number 115, which imposes, in addition to the regular forest charges, fifty centavos on each cubic meter of timber cut from any public forest for commercial purposes, the amount collected to be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Commerce, for reforestation and afforestation of watersheds, denuded areas, and other public forest lands found to need reforestation.

The company contended that because the Republic had not used those reforestation charges to reforest the denuded area covered by its license, the amount should be refunded, or at least set off against the forest charges it owed. It wrote the Director of Forestry in February 1957 requesting that its account be credited with the reforestation charges it had paid. The Director replied in March 1957, quoting an opinion of the Secretary of Justice that he had no discretion to extend the time for paying reforestation charges, and explaining why not all denuded areas are being reforested.

Issues

• Whether or not the 9,127 pesos and 50 centavos paid by the lumber company as reforestation charges from 1947 to 1956 may be refunded to it or set off against the 4,802 pesos and 37 centavos it owes as forest charges.
• Whether or not the law on compensation under the Civil Code applies between the lumber company and the Republic.

Applicable Provisions

Section 1 of Republic Act Number 115 provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first and second groups and forty centavos for the third and fourth groups cut out and removed from any public forest for commercial purposes. The amount collected shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources (Commerce), for reforestation and afforestation of watersheds, denuded areas and cogon and open lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other public forest lands, which, upon investigation, are found needing reforestation or afforestation, or needing to be under forest cover for the growing of economic trees for timber, tannin, oils, gums, and other minor forest products or medicinal plants, or for watersheds protection, or for prevention of erosion and floods and preparation of necessary plans and estimate of costs and for reconnaissance survey of public forest lands and for such other expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected, by virtue of, and pursuant to, the provisions of the preceding paragraph and from the sale of barks, medicinal plants and other products derived from plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in carrying out the purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents of the Director of Forestry for the collection of the revenues or incomes derived from the provisions of this Act.

This provision is the core of the case: it shows that the charges collected constitute a special fund expended for reforestation generally, with no requirement of refund or exclusive use for the licensee's own area.

Article 1278 of the new Civil Code provides:

ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

The appellant invoked this article, but the Court held that it does not apply because the parties are not mutually creditors and debtors.

Ruling

On the first issue, the Court held that the claim is devoid of merit. Under Section 1 of Republic Act Number 115, the amount collected as reforestation charges constitutes a fund known as the Reforestation Fund, to be expended by the Director of Forestry, with the approval of the Secretary, for the reforestation or afforestation of denuded areas found upon investigation to need it. The Court stressed that there is nothing in the law requiring that the amount be used exclusively for the reforestation of the area covered by the licensee's own license, nor that it be refunded if not so used. The licensee's area may or may not be reforested at all, depending on the Director's investigation. The conclusion is that the amount paid as reforestation charges is in the nature of a tax forming part of the Reforestation Fund, payable by the licensee irrespective of whether the area covered by its license is reforested or not.

On the second issue, the Court held that the principle of compensation does not apply, because the appellant and the appellee are not mutually creditors and debtors of each other. The trial court's observation was correct: with respect to the forest charges paid to the government, they are in the coffers of the government as taxes collected, and the government owes nothing to the lumber company. The Court added that the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, cannot be the subject of set-off or compensation, since taxes are not in the nature of contracts between party and party but grow out of a duty to the government, and allowing set-off would throw the financial affairs of the government into confusion.

Doctrine

First, reforestation charges collected under Republic Act Number 115 are in the nature of a tax, forming part of the Reforestation Fund, and are payable by a timber licensee irrespective of whether the area covered by its license is actually reforested. The law does not require that the fund be spent exclusively on the licensee's own area, nor does it provide for a refund.

Second, under Article 1278 of the Civil Code, compensation requires that two persons be, in their own right, creditors and debtors of each other. Where the government holds the money as taxes collected, it owes nothing to the taxpayer, so no mutual debt exists.

Third, as a matter of public policy, taxes cannot be the subject of set-off or compensation. A taxpayer cannot refuse to pay his tax on the ground that he has a claim against the government.

Disposition

The Supreme Court affirmed the judgment of the trial court in all respects, with costs against the defendant-appellant, so the lumber company must pay the forest charges.

Remember This

The one line to memorize: reforestation charges are a tax forming part of a special fund, and taxes are not a proper subject of set-off or compensation. Examiners use this case to test the requisites of compensation under Article 1278 and the public-policy rule against setting off tax liabilities against claims against the government.