REPUBLIC OF THE PHILIPPINES, PLAINTIFF AND APPELLEE, VS. XAVIER GUN TRADING AND LUZON SURETY CO., INC., DEFENDANTS, LUZON SURETY CO., INC., DEFENDANT AND APPELLANT. REPUBLIC OF …

G. R. No. L-17325:—The Bureau of Internal Revenue discovered that the “Xavier
Gun Trading” (Iligan and Malabang branches), failed to declare certain amounts
representing sales for 1948. Mrs. Estrella F. Javier, branch manager,
acknowledged the violation and promised to pay the corresponding tax delinquency
in the amount of P712.20. Thereafter, Xavier Gun Trading made partial payments
until a balance of P312.70 still remained due and collectible. On June 5, 1952,
in Manila, Xavier Gun Trading, as principal and the Luzon Surety Co. Inc., as
surety, executed an ordinary bond for payment of taxes, guaranteeing payment of
the sum of P312.70 in favor of the Republic of the Philippines. In said bond,
the said principal and the Luzon Surety Co. bound themselves jointly and
severally, to pay the aforesaid obligation of P312.70 within six months from
date thereof.

The Manila store of the Xavier Gun Trading was likewise investigated and an
assessment letter dated May 19, 1952, was sent, demanding payment of P2,951.14,
representing sales taxes, fixed taxes, surcharge and penalty for 1948 and 1950.
On June 5, 1952, also in Manila, Xavier Gun Trading, as principal and the Luzon
Surety Co., Inc., as surety, executed an ordinary bond for payment of taxes,
guaranteeing payment of said amount in favor of the Republic, in which the
principal and the surety, bound themselves jointly and severally to p&y the
said obligation of “P2,951.14 within six months from date thereof.”

The condition common to the two bonds is “that if the above-bounden principal
shall well and truly pay unto the Republic of the Philippines the full sum of
(P312.70 and P2,951.14), in the manner and at the date indicated above, this
obligation shall ipso facto become null and void; otherwise, it shall
remain in full force and effect.” Notwithstanding repeated demands, neither the
Xavier Gun Trading nor the surety company paid the aforementioned amounts
secured by the bonds.

On May 23, 1958, an action was instituted in the CFI of Manila by the
plaintiff Republic against the defendants Xavier Gun Trading and Luzon Surety
Co. Inc. for the forfeiture of the two ordinary bonds for payment of the taxes
in question. Defendant Xavier Gun Trading was declared in default for failure to
answer within the reglementary period; while the surety company, although
admitting the execution of the two bonds, puts up. the defense that plaintiff’s
cause of action, if any, is barred by the statute of limitations and that the
Court of First Instance has no jurisdiction over the subject matter of the
action. Both contentions, were overruled by the trial court which rendered
judgment ordering the defendants to pay plaintiff the amounts prayed for in the
complaint, and to pay the costs. The defendants appealed and alleged that the
lower court erred:—

G. R. No. L-16594:—On June 16, 1951, Tomas Dorego, as principal, with
Natividad Dorego and Silvestre Arroyo as sureties, executed in the City of
Iloilo, a surety bond guaranteeing payment of P2,600.00 in favor of the
Republic, representing percentage taxes due from the principal Tomas Dorego on
his sales of sand and gravel. Under the said bond, the Doregos bound themselves
jointly and severally, to pay the aforesaid obligation as follows—

“I will pay the Government the sum of P260.00 upon acceptance of this bond
and P260.00 monthly, beginning July 16, 1951, until the whole amount of
P2,600.00 is fully paid; and that if the principal shall be in default in the
payment of this obligation or any installment hereof, the Commissioner of
Internal Revenue or its authorized deputy may consider the entire balance as at
once due and payable and demand its payment”.

The Doregos paid only the sum of P260.00, as first installment on June 19,
1951, thereby leaving unpaid the balance of P2,340.00. Notwithstanding repeated
demands, the Doregos failed and refused to pay the balance. Hence, on March 25,
1959, the Republic filed a complaint in the CFI of Iloilo against them, for
collection.

On April 14, 1959, the defendants-Doregos filed a motion to dismiss the
complaint on the ground that the right of the Republic to collect has already
prescribed. Acting on the motion, the CFI of Iloilo, dismissed the complaint,
declaring that since the payment of the first installment of P260.00 on June 19,
1951, no action was instituted in due time to enforce the collection of the
balance unpaid, “As the action to collect the principal obligation prescribed in
five years, that is, on June 20, 1956, the guaranty to pay the same necessarily
ceased to exist also on June 20, 1956, for the accessory can not outlive the
principal obligation.” The Republic appealed directly to this Court, contending
that the lower court erred in dismissing the case on the ground of prescription
of action, an issue which is purely legal in nature.

The tax-payers and their sureties in both cases do not deny having executed
the bonds in question but claim that under section 332, par. (c) of the Tax
Code, the cause of action of the Republic is barred by the statute of
limitations. Their theory is that the action being for collection of taxes, the
action is barred pursuant to section 332 (c) of the Tax Code, inasmuch as the
present actions were instituted more than 5 years from the assessments. The
Government, on the other hand, avers that Article 1144 of the new Civil Code is
applicable, because the actions are for the forfeiture of the bonds in question.
The all-important issue, therefore, is: which law should apply?

The Internal Revenue Code provides—

“SEC. 332. Exceptions as to period of limitation of assessment and collection
of taxes-

(a) * * * * * * *

(b) * * * * * * *

(c) Where the assessment of any internal revenue tax has been made within the
period of limitation above described such tax may be collected by distraint or
levy or by a proceeding in court, but only if begun (1) within five years after
the assessment of the tax, or (2) prior to the expiration of any period for
collection agreed upon in writing by the Collector of Internal Revenue and the
taxpayer before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon”.

Article 1144 of the new Civil Code states—

“The following actions must be brought within ten years from the time the
right of action accrues:

(1) Upon a written contract.

* * * * * * *.”

The herein tax-payers and the bondsmen argue that the subject-matter of the
actions, “being the assessment taxes”, they would be without the authority of
law, after 5 years from the date of assessment; that Article 1144 aforequoted is
unavailing, because the execution of the bonds was merely incidental to the
collection of the taxes, as they were filed to give the tax-payer additional
time of grace, and that as the Civil Code provisions are general, referring to
all classes of contract, while the provision in the Revenue Code is specific,
referring to internal revenue taxes, the latter constitute an exception to the
general act, or provision (Lichauco vs. Apostol, 44 Phil., 138).

We do not share this view. The present actions by the government are for the
forfeiture of the bonds in question. Although the subject-matter of said bonds
are internal revenue taxes, it cannot be denied that upon the execution of said
bonds, the tax-payer, as principal and the bondsman, as surety, assumed a new
and entirely distinct obligation and became subject to an entirely different
kind of liability. Thus, it has been held:

“However, as soon as the bond was executed, the taxpayer assumed a
secondand entirely distinct obligation, and became subject to a new and entirely
different kind of liability . . . The new liability was voluntary and
contractual. It was in form a direct and primary obligation, not to pay a tax,
but to pay the sum of $12,635.00, defeasible only upon payment by the taxpayer
of a certain amount, to be fixed by subsequent action of the Commissioner. No
limitation was put upon the time within which the Commissioner was required to
act in fixing such sum. Inasmuch as the Collector had the right to proceed
immediately for the collection of the tax, it follows that he also had the right
to require, as the price of forbearance from such action, a general promise to
pay such amount as might be found due at any time, either before or after the
expiration of the statutory period . . .” (McCaughn vs. Philadelphia Barge Co.
27 F (2d) 628, Italics supplied.)

“The making of the bond gives the United States a cause of action separate
and distinct from an action to collect taxes which it already had. The statutes
now pleaded to bar the suit can not be extended by implication to a suit
upon a subsequent and substituted contract. The postponement of the collection
of taxes returned was a waiver of the statutory limitation of five years that
would have applied had the voluntary return of the taxpayer stood and no bond
been given. If there is any limitation applicable to a suit on the bond, it is
conceded that it has not yet became effective.” (United States vs. Barth Co., 73
L. Ed. 746, U.S. 278-279, Italics supplied.)

Section 332 (c) of the Revenue Code, is not applicable to actions of
forfeiture of bonds. The period of limitation provided in this section is
evidently confined to actions for the collection of taxes. So that the question
of conflict between a general and special law, has no relevance to the present
cases.

The bonds under consideration are written contracts imposing rights and
liabilities, according to the terms thereof. Since the principals and sureties
failed to pay the liabilities in the manner and on the dates indicated in said
bond, the right of the government to take court action for their forfeiture is
clear. And these actions were filed in both cases, within the 10 years period
from the accrual of the right of action.

Furthermore, to uphold the tax-payers’ defense of prescription would in
effect nullify their distinct and separate undertaking in the bonds which were
executed and filed by them to lighten the payment of their tax obligations. In a
recent case (Republic vs. Araneta, et al., 61 Off. Gaz., [9] 1174) this Court
held—

“* * *. The appellants-taxpayers failed to pay any of the installments
despite demand (Annexes E, G & I). Hence, the appellee sued on the bond
(Annex B) which is a separate and distinct obligation of the parties thereto.
For this Court to sustain the appellants’ defense of prescription would in
effect nullify their undertaking in the bond which was executed and filed by
them to lighten their tax obligation or burden by being allowed to pay in six
equal installments.

The action to enforce the obligation on the bond executed on 18 March 1949,
having been filed in court by the appellee on 22 February 1957, was within the
prescriptive period of ten years.

The appellants-taxpayers’ argument that the bond (Annex B) being ancillary to
the principal obligation to pay their tax liability, which already has
prescribed, the enforcement of their obligation in the bond also has prescribed,
is untenable. What has been said about their claim of prescription against the
collection of the tax equally applies to the claim of prescription against the
enforcement of the bond obligation or undertaking”.

Assuming for the purposes of argument that said section 332 (c) is
applicable, still We find that the collection of the tax liabilities in question
has not prescribed. Sub-par. (2), par. (c) of Sec. 832 (supra), states
that the 5 year period for collection of taxes may be extended by agreement
between the Collector and the tax-payer, made before the expiration of such
five-year period. The bonds in question, contain a promise that if the principal
shall well and truly pay to the Republic the sums in question, in the manner and
at the dates indicated therein, the obligations shall ipso facto become
null and void, otherwise, they shall remain in full force and effect. The
tax-payers having failed to pay their tax liabilities, the bonds remained in
full force and effect. The period during which the bonds remained effective may
be considered to have suspended the running of the 5 year period of prescription
provided for in said section 322 (c). The rule is in accord with the general law
on prescription that requires a written acknowledgment of the debtor to renew
the cause of action or interrupt the running of the limitation period (Art. 190,
sec. 50; Art. 1155, new Civil Code; Collector vs. Solano & CTA No. L-11475,
July 31, 1958). The obligations contracted in the bonds by the tax-payers,
constitute a written acknowledgment of the debt by the debtor which interrupted
the 5-year period of prescription (Act 1155 N.C.C.).

In view hereof—

(1) In case G. R. No. L-17325, the judgment appealed from is affirmed, with
costs against the defendant-appellant; and

(2) In case G. R. No. L-16594, the order of dismissal appealed from is
reversed, and the case remanded to the court of origin for further proceedings,
with costs against the defendants-appellees.

Bengzon, C. J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.
B. L., and Dizon, JJ., concur.