COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. ANTONIO PRIETO ET AL., RESPONDENTS.

Before
us is petitioner’s action praying that our decision of August 29, 1961
be reconsidered and set aside “insofar as said decision affirms the
ruling of the Court of Tax Appeals charging interest against the
Government on the tax payment declared refundable to the respondents”.
He relies upon our decision in Collector of Internal Revenue vs. St. Paul’s Hospital of Iloilo, promulgated on May 25, 1959, in which we said:

“We
agree, however, with the Solicitor General that the Court of Tax
Appeals erred in ordering the payment of interest on the amount to be
refunded to respondent herein. In the absence of a statutory provision
clearly or expressly directing or authorizing such payment, and none
has been cited by respondent, the National Government cannot be
required to pay interest (H. E. Heacock Co. v. Collector of Customs, 37 Phil., 970; Marino Trading Co. v. Gov’t. of the P. I., 39 Phil., 29, Sarasola v.
Trinidad, 40 Phil., 252). So much of the decision appealed from as
requires the payment of interest should, therefore, be eliminated.”

Prior,
however, to the decision relied upon we held in Carcar Electric &
Ice Plant Co., Inc. vs. Collector of Internal Revenue (G. R. No.
L-9257, Oct. 17, 1956, 53 O. G. No. 4, 1068) that “under the present
Internal Revenue Code the Collector of Internal Revenue may be made to
answer for interest at the legal rate on taxes improperly collected.
Such liability serves as additional safeguard in favor of the taxpayer
against arbitrariness in the exaction or collection of taxes and
imposts.” (See Resolution on the Motion for Reconsideration filed by
the Collector of Internal Revenue, 53 O. G. No. 4, 1071-1075).

In
reasoning our Resolution in the Carcar case we said that “Under the
Internal Revenue Act of 1941, the Collector of Internal Revenue was
liable for interest on taxes improperly collected as held in Hongkong
Shanghai Bank vs. Rafferty, 39 Phil. 153; Heacock Co. vs. Collector of Customs, 37 Phil. 970; Vda. Hijos de P. Roxas vs.
Rafferty, 37 Phil. 957″; that, subsequently, Section 1579 of the
Administrative Code of 1917 expressly authorized suits against the
Collector of Internal Revenue “for the recovery without interest
of the sum alleged to have been illegally collected”; that for this
reason, thereafter no judgments for interest were rendered against the
Collector; that in 1939, the National Internal Revenue Code, in its
section 306, authorized recovery of taxes erroneously or illegally
collected, but omitting the expression “without interest” employed in
the aforesaid section of the Administrative Code of 1917, which it
superseded; that considering our repeated rulings holding the Collector
of Internal Revenue liable for interest on taxes improperly collected,
in the absence of express exemption, it was clear that the Legislatures
failure to reenact the words “without interest” of the Administrative
Code of 1917 showed a clear desire to return to the rule in force
before said year.

Our decision in the Carcar case, however,
must be understood as holding the Collector of Internal Revenue liable
of interest on taxes improperly collected only if the collection was
attended with “arbitrariness”. The facts involved in the case relied
upon by petitioner—the St. Paul’s Hospital of Iloilo case—do not seem
to justify the conclusion that arbitrariness attended or characterized
the collection of the taxes in question therein. Said facts are as
follows:

“Petitioner is a corporation
‘dedicated to charitable, educational and religious purposes’,
operating a hospital giving medical assistance to destitute persons.
(See St. Paul’s Hospital of Iloilo v. Collector of Internal
Revenue, C. T. A. Case No. 6, promulgated on December 4, 1954). It
maintains a pharmacy department within the premises of its hospital to
supply drugs and medicines only to charity and paying patients confined
therein. However, only the paying patients are required to pay the
medicines supplied to them and the charge consists of the cost of such
medicines plus an additional 10% thereof to partly offset the cost of
medicines supplied free of charge to charity patients. On May 3, 1954,
respondent assessed and demanded from petitioner the sum of P485.00
allegedly representing business tax on its operation of a pharmacy
department. From this assessment petitioner appealed to this Court.

The
question of whether or no the sale of drugs and medicines made at the
pharmacy department of the St. Paul’s Hospital of Iloilo were taxable
was, in our opinion, a fairly debatable issue. The Collector,
therefore, can not be said to have acted arbitrarily in assessing the
corresponding tax on the hospital. This being the case, we see no real
conflict between our decision in the Carcar case, on the one hand, and
the one rendered in the St. Paul’s Hospital of Iloilo case.

The
question we now have to decide is whether the first or the second
ruling is the one applicable to the present case. Upon consideration of
the facts appearing of record we believe that it is the first. The
Collector of Internal Revenue had no reason to insist in collecting the
inheritance tax from respondents on the basis of the value of the
properties alloted to each of them, in accordance with the project of
partition submitted to and approved by the court, without deducting
therefrom the cash payments which, in accordance with their agreement
with their coheirs, they had to pay to the latter for the purpose of
making the share of each heir equal in value to that of the others—as
ordained in the will of the deceased Doña Teresa Tuason y de la Paz,
and as agreed among the heirs. What each of the respondents really
received as his share in the estate of said deceased was the value of
the properties allotted to each of them minus the cash payment each had
to make in order to equalize their respective share with that of the
other heirs. The collection of the inheritance taxes herein involved
being clearly unjustified, we are constrained, as already stated above,
to hold the ruling in the Carcar case applicable to the present.

WHEREFORE, petitioner’s motion for reconsideration is hereby denied.

Bengzon, C. J., Padilla, Labrador, Concepcion, Reyes, J. B. L., Paredes, and De Leon, JJ., concur.