REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. ANTONIO HERAS, DEFENDANT-APPELLEE.

The Republic of the Philippines
is here appeal­ing from the decision of the Court of First Instance of Rizal (in Civil Case No. Q-7987) holding as valid the
payment of income taxes by means of backpay
certificates by assignees or holders thereof, con­trary to our ruling in De Borja vs. Gella, L-18330, 31 July
1963, 8 SCRA 602.

The records of this case establish the following facts:

On 30 April 1959,
Antonio Heras filed his income tax return for 1958
declaring a taxable net income of P62,444.64. 
Upon audit and examination of the return, the Bureau of Internal Revenue
found as due and collectible from said taxpayer the sum of P13,962.00.  The cor­responding demand therefor
was made under Income Tax Assessment Notice No. 43-1-415-833-58, dated 14 May 1959.  On 17
August 1959, the taxpayer paid the tax said to be due to the
Municipal Trea­surer of Bacoor, Cavite, by means of negotiable
certificates of in­debtedness in the sum of P13,934.55 and cash in the amount
of P27,45, or a total of P13,962.00

On 12 August 1960
and 3 November 1960, the
Revenue office notified the taxpayer that, pursuant to BIR General Circular No.
V-289 dated 8 May 1959, payment of income taxes with indorsed negotiable backpay certificates is not allowed, and thus required that
the tax supposedly unsettled be paid. 
And when another demand for payment, made on 7 April 1964, remained unheeded, an action was
instituted by the Republic of the Philippines
against taxpayer Antonio Heras in the Court of First
Instance of Rizal (Quezon City, Civil Case No.
Q-7987) for collection of the alleged deficiency income tax in the sum of
P13,934.55; P697.00, as 5% surcharge thereon; plus 1% monthly interest on the
amount from 31 May 1959 amounting to P5,016.00,^[1]
or a total of P19,637.04.

Traversing the allegations of the complaint, defendant taxpayer
set up as affirmative defenses (a) the validity of his tax payment to
the Municipal Treasurer of Bacoor, Cavite, on 17 August 1959; (b) that having accepted such
payment plaintiff Republic of the Philippines was estopped
from pursuing the complaint; and (3) that the opinion of the Secretary of
Justice (Op. No. 69, s. 1959), upon which Circular No. V-289 of the Internal
Revenue Office was based, is not binding upon the courts.

In its decision of 14
May 1966, the court rendered judgment for the taxpayer and held as
valid and effective the payment of the defendant’s 1958 income tax by the use
of indorsed negotiable backpay certificates.

The issues presented in this case are simple, viz., (1) whether
or not negotiable certificates of indebtedness or backpay
certificates may be used for payment of their tax liabilities by holders who
are not the original applicants therefor;
and (2) whether or not herein appellee tax­payer is
liable for surcharges and interests for late payment of his 1958 income tax.

It is not denied that the negotiable certificates of indebtedness
utilized by appellee in paying his 1958 deficiency
income tax were not originally issued to him but to the following persons:

Assailing the correctness of the judgment of the court below
that: there had been valid settlement of the appellee’s
tax liability, appellant Republic of the Philippines contends that the
privilege to use backpay certificates for payment of
taxes and other obligations to the government is limited by law^[2]
only to the original appli­cants of such certificates and does not
extend to subsequent assignees or holders thereof; that appellee.  Heras not being the
original applicant of the certificates involved herein, the effected payment of
his tax obligation by means of such certificates constituted no valid payment
at all.  Consequently, according to
appellant, Heras‘ tax liability not only remained unextinguished; he even became subject to surcharges and
penalties for late payment of tax.

This contention of appellant is not unmeritorious; it is
supported by the ruling in the case of De Borja
vs. Gella, supra, wherein this Court, passing
upon the same issue of whether or not the subsequent holder or assignee of a certificate
of indebtedness could use backpay certificates for
the settlement of tax obligations, declared:

“———–Neither can it be contended that appellee
can compel the government to accept the alleged certificates of in­debtedness
in payment of his real estate taxes under proviso No. 2 above-quoted (of Rep.
Act 304, as amended) also for the reason that in order that such payment may be
allowed the tax must be owed by the applicant himself.  This is the correct implication that may be
drawn from the use by the law of the words ‘his taxes‘.  Verily, the right to use the backpay certificate in settlement of taxes is given only to
the applicant and not to any holder of any negotiable certificate to whom the
law only gives the right to have it discounted by a Filipino citizen or
corporation under certain limitations. 
Here appellee is not himself the appli­cant of
the certificate in question.  He is
merely an assignee thereof, or a subsequent holder whose right is at most to
have it discounted upon maturity — or to negotiate it in the meantime.
——–.”

That the law indeed confined the
privilege of using backpay certificates for payment
of taxes to the original applicants thereof is clear from the pertinent
provisions of Section 2 of Republic Act 304, as amended by Republic Act 800 and
897, thus:

“SEC. 2. The Treasurer of the Philippines shall, upon application
of all persons specified in section one hereof and within one year from the
approval of this amendatory’ Act, and under such rules and regulations as may
be prom­ulgated by the Secretary of finance, acknow­ledge and file requests for
the recognition of the right to the salaries or wages as provided in section
one hereof, and notice of such ac­knowledgment shall be issued to the applicant
which shall state the total amount of such salaries or wages due the  applicant, and certify that it shall be
redeemed by the Government of the Philippines within ten years from the date of
their issuance without interest: Provided, That upon application and
subject to such rules and regulations as may be approved by the Secretary of
Finance a certificate of indebtedness may be issued by the Treasurer of the
Philippines covering the whole or a part of the total salaries or wages the
right to which has been duly acknowledged and recognized, provided that the
face value of such certificate of indebtedness shall not exceed the amount that
the applicant may need for the payment of (1) obligations subsisting at
the time of the approval of this amendatory Act for which the applicant may
directly be liable to the Government or to any of its branches or
instrumentalities, or the corporations owned or controlled by the Government,
or to any citizen of the Philippines, or to any association or corporation organized
under the laws of the Phi­lippine , who may be willing to accept the same for
such settlement: (2) his taxes; (3) government hospital bills of the
applicant (4) lands purchased or leased or to be purchased or leased by
him from the public domain; and (5) any amount received by the
applicant as gratuity or pension which he has to refund to the Government
or to any of its branches or instrumentalities: ‘Provided further, That
such settlement shall be effected by indorsement on
the instrument: Provided, furthermore, That no certificate  shall be transferred or ceded by indorsement more than once, nor at a discount rate
exceeding two per centum per annum: And provided, also, That any
person who is not an alien, bank or other financial institution at least sixty per
centum of whose capital is owned by Filipinos may, notwithstanding any
provision of its charter, articles of incorporation, by-laws, or rules and
regulations to the contrary, accept or discount at not more than three and
one-half per centum per annum for ten years a negotiable certificate of
indebtedness which shall be issued by the Treasurer of the Philippines upon
appli­cation by a holder of back pay acknowledgment:——-.” (Underlining
supplied)

It may be observed that in enumerating (in the first half of the
quoted section) the obligations that may properly be settled with the use of backpay certificates, the law referred to them as “his
taxes”, government hospital bills of “the applicant”, lands
purchased or leased “by him”, and any amount received by “the
applicant”, thereby rendering unmistakable the intent of the law­making
body, which is to limit the use of these certificates in            certain specified cases to the applicants or original
holders thereof.

Appellee, however, claims that to
sustain appellant’s stand would be to circumscribe the negotiability of the
certificate prescribed in the later part of the section (after the words and
provided also) and thus defeat the purpose of the law.  This is not correct.  The first part of the section quoted earlier,
allowing its acceptance by the government for the settlement of applicant’s
obligations, is by certificates of limited negotiability, transferable only by indorsement to the applicant’s creditor and no further
(“Provided, furthermore, that no certificate shall be transferred by indorsement more than once”) and at a discount of not
more than 2% per annum; while those certificates negotiable to any citizen,
bank or financial institution at least 60% of whose capital is Filipino-owned,
at a discount not exceeding 3 ½% per annum for ten years, are made without the
privilege of applying them to the payment of similar obligations of the
indorses or persons to whom they are negotiated.

Neither would it be correct to conclude that there has been valid
payment of appellee’s tax in this case on the basis
of our rulings in the cases of Tan vs. Veterans Backpay
Commission^[3]
and Tirona vs. Cudiamat^[4]
For while it is true that we declared in the Tan case that backpay certificates may be utilized for payment of
obligations to the Government, such as taxes, government hospital bills, etc.,
and, in the Tirona case, that the
applicability of such certificates for payment of taxes is without limitation
in point of time, such rulings are under­stood to be applicable only where the
payment of taxes with certificates is proper, i.e., where they are used for
settlement of the applicants’ tax liabilities.

The question now is should appellee be
held liable also for sur­charges and interests on the unpaid tax? The answer is
in the affirm­ative.  Under Section 51-e
(2) and (3) of the Internal Revenue Code, where deficiency tax is not paid in
full, there shall be collected upon the unpaid amount, as part of the tax,
interest of 1% a month, but not to exceed the amount corresponding to 3 years,
plus 5-6 surcharge, such surcharge and interests to be computed from notice of
the assessment or demand therefor by the
Commissioner.^[5]
For once, informed of the basis of the demand by the Commissioner – in this
case, of the existence of the BIR circular disallowing acceptance of backpay certificates for settlement of the tax obligations
of assignees or subsequent holders thereof – the refusal of the taxpayer to pay
the demanded tax cannot be considered as made in good faith that would relieve
him of liability for payment of surcharges and interests.^[6]
It may even be mentioned that, in the present case, appellee’s
act of tendering payment, with backpay certificates,
of the deficiency tax is an acknowledgement that the said tax is really due and
demandable.  There having been, as we
hereby affirm, an invalid payment of appellee’s tax
liability, which constituted no payment at all, the collection of surcharges
and interests thereon from said tax­payer becomes mandatory on the Commissioner
of Internal Revenue and the courts.^[7]
It may not be amiss to state further that the interests collectible here is not
punitive in nature, as appellee would like to
impress, but compensatory; it is compensation to the state for the delay in the
payment of the tax.  It is the charge for
the use by the taxpayer of funds that rightfully should have been in the
government coffers and utilized for the ends thereof.^[8]

As regard appellee’s allegation that
the present appeal was filed out of time and, therefore, should be dismissed,
we find, it to be without merit.  It
appears from the records that the complaint in the court below was filed for
the plaintiff by BIR Special Counsel Jesus Licopit
that said counsel was later transferred to another division of the Internal
Revenue Office and the case was assigned to Atty. Valentin
Festejo, also of the same office, who entered
appearance therein and actually attended the court hearings.  When the decision was rendered, however, copy
thereof was sent by registered mail to Atty. Licopit,
and it was returned to the court unclaimed. 
On 6 May 1966,
learning of the ren­dition of the decision, Atty. Festejo
moved for the service of the de­cision on him. 
The motion was granted, and said lawyer was furnished copy of the
decision on 14 May 1966. On
24 May 1966, he filed a
motion for reconsideration, which was denied on 15 August 1966. 
Copy of this order of denial was received by said counsel on 22 August 1966.  On 12
September 1966, the record on appeal was filed and approved by the
trial court.

It can be seen from the foregoing narration of facts that service
of the decision was considered made upon the plaintiff only on 14 May 1966,
thus making timely the filing of the record on appeal on 12 Sept­ember
1966.  And this is not incorrect; the
addressing of copy of the decision to Jesus T. Licopit,
Special Attorney, c/o Bureau of Internal Revenue, Cubao,
Quezon City,^[9]
did not constitute valid service on said plaintiff.  We have here not an instance of two counsels
of record appearing for a party, where the service of notice to one is
considered valid and complete service upon the party.  The counsel for the plaintiff was only the
proper legal division or section of the Bureau of Internal Revenue, not Atty. Licopit or Atty. Festejo
personally.  Considering that the records
would have shown that Atty. Festejo was already
appearing in the case, notice of the decision at least should have been sent to
him.

WHEREFORE, the decision of the lower court appealed from is
hereby set aside, and appellee Antonio Heras is ordered to pay to appellant Republic of the
Philippines the sum of P13,934.55 as deficiency income tax; 1% monthly interest
on the said unpaid tax, but not to exceed 36%, plus 5% surcharge thereon,
computed from notice of the assessment thereof by the Commissioner of Internal
Revenue, until the total amount due is fully paid.  No costs.

Concepcion, C.J., Dizon,
Makalintal, Zaldivar, Ruiz
Castro, Teehankee, and
Villamor, JJ., concur.

Fernando, J., did not take
part.

Barredo, J., on leave.

^[1]
For a period of 36 months, in accordance with Section 51-e(2), internal Revenue
Code.

^[2]
Section. 2, Republic Act 304, as amended by Republic Acts 800 and 897.

^[3]
L-12944, 30 March 1959, 105
Phil. 377.

^[4]
L-21236, 31 May 1965, 14
SCRA 264

^[5]
L-Republic vs. Razon, L-17462 & L-17472,
29 May 1967, 20 SCRA 234; Central Azucarera Don Pedro
vs. CTA L-23236 & L-23254, 31 May 1967, 20 SCRA 344; Republic vs.
Lim Tian Teng dons 6 Co.,
Inc., L-21731, 31 March 1966, 16 SCRA 584.

^[6] Connel Bros. vs. Collector, L-15470, 31 March 1964, 10 SCRA 469.

^[7] Pirovano vs. Commissioner, L-19865, 31 July 1965, 14 SCRA 832.

^[8]
Castro vs. Collector, L-12174, 28
December 1962, 6 SCRA 886.

^[9]
Since July, 1964, Atty. Licopit was already working
in the Internal Security Division, Bureau of internal Revenue, in the Depart­ment
of Finance building in Manila.