G. R. No. 136773. June 25, 2003] Petitioners alleged that Guevarra was the original owner of the Property.

etitioners alleged that Guevarra was the original owner of the Property. Upon Guevarras death,
her children inherited the Property. Since Dominador Lopez died without offspring, there were only
MILAGROS MANONGSONG, joined by her husband, CARLITO five children left as heirs of Guevarra. Each of the five children, including Vicente Lopez, the father
MANONGSONG, Petitioners, v.FELOMENA JUMAQUIO ESTIMO, EMILIANA JUMAQUIO, NARCISO of Manongsong, was entitled to a fifth of the Property. As Vicente Lopez sole surviving heir,
ORTIZ, CELESTINO ORTIZ, RODOLFO ORTIZ, ERLINDA O. OCAMPO, PASTOR ORTIZ, JR., ROMEO ORTIZ Manongsong claims her fathers 1/5 share in the Property by right of representation.
BENJAMIN DELA CRUZ, SR., BENJAMIN DELA CRUZ, JR., AURORA NICOLAS, GLORIA RACADIO,
ROBERTO DELA CRUZ, JOSELITO DELA CRUZ and LEONCIA S. LOPEZ, respondents. There is no dispute that respondents, who are the surviving spouses of Guevarras children and their
offspring, have been in possession of the Property for as long as they can remember. The area
DECISION actually occupied by each respondent family differs, ranging in size from approximately 25 to 50
CARPIO, J.: square meters. Petitioners are the only descendants not occupying any portion of the Property.

The Case Most respondents, specifically Narciso, Rodolfo, Pastor Jr., and Celestino Ortiz, and Erlinda Ortiz
Ocampo (Ortiz family), as well as Benjamin Sr., Benjamin Jr., and Roberto dela Cruz, Aurora dela
Before this Court is a petition for review1 assailing the Decision2 of 26 June 1998 and the Resolution Cruz Nicolas and Gloria Dela Cruz Racadio (Dela Cruz family), entered into a compromise agreement
of 21 December 1998 of the Court of Appeals in CA-G.R. CV No. 51643. The Court of Appeals with petitioners. Under the Stipulation of Facts and Compromise Agreement 8 dated 12 September
reversed the Decision dated 10 April 1995 of the Regional Trial Court of Makati City, Branch 135, in 1992 (Agreement), petitioners and the Ortiz and Dela Cruz families agreed that each group of heirs
Civil Case No. 92-1685, partitioning the property in controversy and awarding to petitioners a would receive an equal share in the Property. The signatories to the Agreement asked the trial court
portion of the property. to issue an order of partition to this effect and prayed further that those who have exceeded said
one-fifth (1/5) must be reduced so that those who have less and those who have none shall get the
Antecedent Facts correct and proper portion.9cräläwvirtualibräry
Spouses Agatona Guevarra (Guevarra) and Ciriaco Lopez had six (6) children, namely: (1) Dominador Among the respondents, the Jumaquio sisters and Leoncia Lopez who each occupy 50 square meter
Lopez; (2) Enriqueta Lopez-Jumaquio, the mother of respondents Emiliana Jumaquio Rodriguez and portions of the Property and Joselito dela Cruz, did not sign the Agreement. 10 However, only the
Felomena Jumaquio Estimo (Jumaquio sisters); (3) Victor Lopez, married to respondent Leoncia Jumaquio sisters actively opposed petitioners claim. The Jumaquio sisters contended that Justina
Lopez; (4) Benigna Lopez-Ortiz, the mother of respondents Narciso, Celestino, Rodolfo, Pastor Jr. Navarro (Navarro), supposedly the mother of Guevarra, sold the Property to Guevarras daughter
and Romeo Ortiz, and Erlinda Ortiz Ocampo; (5) Rosario Lopez-dela Cruz, married to respondent Enriqueta Lopez Jumaquio.
Benjamin dela Cruz, Sr. and the mother of respondents Benjamin Jr., Roberto, and Joselito, all
surnamed dela Cruz, and of Gloria dela Cruz Racadio and Aurora dela Cruz Nicolas; and (6) Vicente The Jumaquio sisters presented provincial Tax Declaration No. 91111 for the year 1949 in the sole
Lopez, the father of petitioner Milagros Lopez Manongsong (Manongsong). name of Navarro. Tax Declaration No. 911 described a residential parcel of land with an area of
172.51 square meters, located on San Jose St., Manuyo, Las Pias, Rizal with the following
The contested property is a parcel of land on San Jose Street, Manuyo Uno, Las Pias, Metro Manila boundaries: Juan Gallardo to the north, I. Guevarra Street to the south, Rizal Street to the east and
with an area of approximately 152 square meters (Property). The records do not show that the San Jose Street to the west. In addition, Tax Declaration No. 911 stated that the houses of "Agatona
Property is registered under the Torrens system. The Property is particularly described in Tax Lopez" and "Enriquita Lopez" stood on the Property as improvements.
Declaration No. B-001-003903 as bounded in the north by Juan Gallardo, south by Calle Velay, east
by Domingo Lavana and west by San Jose Street. Tax Declaration No. B-001-00390 was registered The Jumaquio sisters also presented a notarized KASULATAN SA BILIHAN NG LUPA12 (Kasulatan)
with the Office of the Municipal Assessor of Las Pias on 30 September 1984 in the name of Benigna dated 11 October 1957, the relevant portion of which states:
Lopez, et al.4 However, the improvements on the portion of the Property denominated as No. 831
San Jose St., Manuyo Uno, Las Pias were separately declared in the name of Filomena J. Estimo AKO SI JUSTINA NAVARRO, sapat ang gulang, may asawa, Pilipino at naninirahan sa LAS PIAS, ay
under Tax Declaration No. 90-001-02145 dated 14 October 1991.5cräläwvirtualibräry siyang nagma-may-ari at nagtatangkilik ng isang lagay na lupa na matatagpuan sa Manuyo, Las Pias,
Rizal, lihis sa anomang pagkakautang lalong napagkikilala sa pamamagitan ng mga sumusunod na
Milagros and Carlito Manongsong (petitioners) filed a Complaint6 on 19 June 1992, alleging that palatandaan:
Manongsong and respondents are the owners pro indiviso of the Property. Invoking Article 494 of
the Civil Code,7 petitioners prayed for the partition and award to them of an area equivalent to one- BOUNDARIES:
fifth (1/5) of the Property or its prevailing market value, and for damages. NORTH: JUAN GALLARDO SOUTH: I. GUEVARRA ST. EAST: RIZAL ST., WEST: SAN JOSE ST.,

na may sukat na 172.51 metros cuadrados na may TAX DECLARATION BILANG 911.
NA DAHIL AT ALANG ALANG sa halagang DALAWANG DAAN LIMANGPUNG PISO (P250.00), 4-1(sic)] did not at all provide for the reserved legitime or the heirs, and, therefore it has no force
SALAPING PILIPINO, na sa akin ay kaliwang iniabot at ibinayad ni ENRIQUETA LOPEZ, may sapat na and effect against Agatona Guevarra and her six (6) legitimate children including the grandchildren,
gulang, Pilipino, may asawa at naninirahan sa Las Pias, Rizal, at sa karapatang ito ay aking by right of representation, as described in the order of intestate succession. The same Deed of Sale
pinatutunayan ng pagkakatanggap ng nasabing halaga na buong kasiyahan ng aking kalooban ay should be declared a nullity ab initio. The law on the matter is clear. The compulsory heirs cannot be
aking IPINAGBILI, ISINALIN AT INILIPAT sa nasabing, ENRIQUETA LOPEZ, sa kanyang mga deprived of their legitime, except on (sic) cases expressly specified by law like for instance
tagapagmana at kahalili, ang kabuuang sukat ng lupang nabanggit sa itaas nito sa pamamagitan ng disinheritance for cause. xxx (Emphasis supplied)
bilihang walang anomang pasubali. Ang lupang ito ay walang kasama at hindi taniman ng palay o
mais. Since the other respondents had entered into a compromise agreement with petitioners, the
dispositive portion of the trial courts decision was directed against the Jumaquio sisters only, as
Simula sa araw na ito ay aking ililipat ang pagmamay-ari at pagtatangkilik ng nasabing lupa kay follows:
ENRIQUETA LOPEZ sa kanilang/kanyang tagapagmana at kahalili x x x.
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs and against
The Clerk of Court of the Regional Trial Court of Manila certified on 1 June 1994 that the remaining active defendants, Emiliana Jumaquio and Felomena J. Estimo, jointly and
the KASULATAN SA BILIHAN NG LUPA, between Justina Navarro (Nagbili) and Enriqueta Lopez severally, ordering:
(Bumili), was notarized by Atty. Ruperto Q. Andrada on 11 October 1957 and entered in his Notarial
Register xxx.13 The certification further stated that Atty. Andrada was a duly appointed notary public 1. That the property consisting of 152 square meters referred to above be immediately partitioned
for the City of Manila in 1957. giving plaintiff Milagros Lopez-Manongsong her lawful share of 1/5 of the area in square meters, or
the prevailing market value on the date of the decision;
Because the Jumaquio sisters were in peaceful possession of their portion of the Property for more
than thirty years, they also invoked the defense of acquisitive prescription against petitioners, and 2. Defendants to pay plaintiffs the sum of P10,000.00 as compensatory damages for having
charged that petitioners were guilty of laches. The Jumaquio sisters argued that the present action deprived the latter the use and enjoyment of the fruits of her 1/5 share;
should have been filed years earlier, either by Vicente Lopez when he was alive or by Manongsong 3. Defendants to pay plaintiffs litigation expenses and attorneys fee in the sum of P10,000.00; and
when the latter reached legal age. Instead, petitioners filed this action for partition only in 1992
when Manongsong was already 33 years old. 4. Defendants to pay the costs of suit.

The Ruling of the Trial Court SO ORDERED.15 (Emphasis supplied)

After trial on the merits, the trial court in its Decision 14 of 10 April 1995 ruled in favor of petitioners. When the trial court denied their motion for reconsideration, the Jumaquio sisters appealed to the
The trial court held that the Kasulatan was void, even absent evidence attacking its validity. The trial Court of Appeals.
court declared:
The Ruling of the Court of Appeals
It appears that the ownership of the estate in question is controverted. According to defendants
Jumaquios, it pertains to them through conveyance by means of a Deed of Sale executed by their Petitioners, in their appellees brief before the Court of Appeals, presented for the first time a
common ancestor Justina Navarro to their mother Enriqueta, which deed was presented in supposed photocopy of the death certificate16 of Guevarra, which stated that Guevarras mother
evidence as Exhs. 4 to 4-A. Plaintiff Milagros Manongsong debunks the evidence as fake. The was a certain Juliana Gallardo. Petitioner also attached an affidavit17 from Benjamin dela Cruz, Sr.
document of sale, in the observance of the Court, is however duly authenticated by means of a attesting that he knew Justina Navarro only by name and had never met her personally, although he
certificate issued by the RTC of the Manila Clerk of Court as duly notarized public document (Exh. had lived for some years with Agatona Guevarra after his marriage with Rosario Lopez. On the basis
5). No countervailing proof was adduced by plaintiffs to overcome or impugn the documents of these documents, petitioners assailed the genuineness and authenticity of the Kasulatan.
legality or its validity. The Court of Appeals refused to take cognizance of the death certificate and affidavit presented by
xxx The conveyance made by Justina Navarro is subject to nullity because the property conveyed petitioners on the ground that petitioners never formally offered these documents in evidence.
had a conjugal character. No positive evidence had been introduced that it was solely a paraphernal The appellate court further held that the petitioners were bound by their admission that Navarro
property. The name of Justina Navarros spouse/husband was not mentioned and/or whether the was the original owner of the Property, as follows:
husband was still alive at the time the conveyance was made to Justina Navarro. Agatona Guevarra
as her compulsory heir should have the legal right to participate with the distribution of the estate
under question to the exclusion of others. She is entitled to her legitime. The Deed of Sale [Exhs 4 &
Moreover, plaintiffs-appellees themselves admitted before the trial court that Justina Navarro and WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A
not Juliana Gallardo was the original owner of the subject property and was the mother of Agatona new one is hereby rendered DISMISSING plaintiffs-appellees complaint in so far as defendants-
Navarro (sic). Plaintiffs-appellees in their Reply-Memorandum averred: appellants are concerned.

As regards the existence of common ownership, the defendants clearly admit as follows: Costs against plaintiffs-appellees.

xxx xxx xxx SO ORDERED.

History of this case tells us that originally the property was owned by JUSTINA NAVARRO who has a Petitioners filed a motion for reconsideration, but the Court of Appeals denied the same in its
daughter by the name of AGATONA GUEVARRA who on the other hand has six children namely: xxx Resolution of 21 December 1998.
xxx xxx.
On 28 January 1999, petitioners appealed the appellate courts decision and resolution to this Court.
which point-out that co-ownership exists on the property between the parties. Since this is the The Court initially denied the petition for review due to certain procedural defects. The Court,
admitted history, facts of the case, it follows that there should have been proper document to however, gave due course to the petition in its Resolution of 31 January 2000.20
extinguish this status of co-ownership between the common owners either by (1) Court action or
proper deed of tradition, xxx xxx xxx. The Issues

The trial court confirms these admissions of plaintiffs-appellees. The trial court held: Petitioners raise the following issues before this Court:

xxx xxx xxx 1. WHETHER PETITIONER HAS NO COUNTERVAILING EVIDENCE ON THE ALLEGED SALE BY ONE
JUSTINA NAVARRO;
With the parties admissions and their conformity to a factual common line of relationship of the
heirs with one another, it has been elicited ascendant Justina Navarro is the common ancestor of 2. WHETHER THERE IS PRETERITION AND THE ISSUES RAISED ARE REVIEWABLE;
the heirs herein mentioned, however, it must be noted that the parties failed to amplify who was 3. WHETHER THERE IS CO-OWNERSHIP PRO INDIVISO;
the husband and the number of compulsory heirs of Justina Navarro. xxx xxx xxx
4. WHETHER THE RULE OF THE MAJORITY CO-OWNERS ON THE LAND SHOULD PREVAIL;
Therefore, plaintiffs-appellees cannot now be heard contesting the fact that Justina Navarro was
their common ancestor and was the original owner of the subject property. 5. WHETHER THE ALLEGED SALE IS VALID AND BINDS THE OTHER CO-HEIRS;

The Court of Appeals further held that the trial court erred in assuming that the Property was 6. WHETHER PRESCRIPTION APPLIES AGAINST THE SHARE OF PETITIONERS.
conjugal in nature when Navarro sold it. The appellate court reasoned as follows:
The fundamental question for resolution is whether petitioners were able to prove, by the requisite
However, it is a settled rule that the party who invokes the presumption that all property of quantum of evidence, that Manongsong is a co-owner of the Property and therefore entitled to
marriage belongs to the conjugal partnership, must first prove that the property was demand for its partition.
acquired during the marriage. Proof of acquisition during the coveture is a condition sine qua
non for the operation of the presumption in favor of conjugal ownership. The Ruling of the Court

In this case, not a single iota of evidence was submitted to prove that the subject property was The petition lacks merit.
acquired by Justina Navarro during her marriage. xxx The issues raised by petitioners are mainly factual in nature. In general, only questions of law are
The findings of the trial court that the subject property is conjugal in nature is not supported by any appealable to this Court under Rule 45. However, where the factual findings of the trial court and
evidence. Court of Appeals conflict, this Court has the authority to review and, if necessary, reverse the
findings of fact of the lower courts.22 This is precisely the situation in this case.
To the contrary, records show that in 1949 the subject property was declared, for taxation purposes
under the name of Justina Navarro alone. This indicates that the land is the paraphernal property of We review the factual and legal issues of this case in light of the general rules of evidence and the
Justina Navarro. burden of proof in civil cases, as explained by this Court in Jison v. Court of Appeals :

For these reasons, the Court of Appeals reversed the decision of the trial court, thus: xxx Simply put, he who alleges the affirmative of the issue has the burden of proof, and upon the
plaintiff in a civil case, the burden of proof never parts. However, in the course of trial in a civil case,
once plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence shifts to There was no evidence presented to establish that Navarro acquired the Property during her
defendant to controvert plaintiff's prima facie case, otherwise, a verdict must be returned in favor marriage. There is no basis for applying the presumption under Article 160 of the Civil Code to the
of plaintiff. Moreover, in civil cases, the party having the burden of proof must produce a present case. On the contrary, Tax Declaration No. 911 showed that, as far back as in 1949, the
preponderance of evidence thereon, with plaintiff having to rely on the strength of his own Property was declared solely in Navarros name. 29 This tends to support the argument that the
evidence and not upon the weakness of the defendants. The concept of preponderance of evidence Property was not conjugal.
refers to evidence which is of greater weight, or more convincing, that which is offered in
opposition to it; at bottom, it means probability of truth. We likewise find no basis for the trial courts declaration that the sale embodied in
the Kasulatan deprived the compulsory heirs of Guevarra of their legitimes. As opposed to a
Whether the Court of Appeals erred in affirming the validity of the disposition inter vivos by lucrative or gratuitous title, a valid sale for valuable consideration does not
diminish the estate of the seller. When the disposition is for valuable consideration, there is no
Kasulatan sa Bilihan ng Lupa diminution of the estate but merely a substitution of values,30 that is, the property sold is replaced
Petitioners anchor their action for partition on the claim that Manongsong is a co-owner or co-heir by the equivalent monetary consideration.
of the Property by inheritance, more specifically, as the heir of her father, Vicente Lopez. Petitioners Under Article 1458 of the Civil Code, the elements of a valid contract of sale are: (1) consent or
likewise allege that the Property originally belonged to Guevarra, and that Vicente Lopez inherited meeting of the minds; (2) determinate subject matter and (3) price certain in money or its
from Guevarra a 1/5 interest in the Property. As the parties claiming the affirmative of these issues, equivalent.31 The presence of these elements is apparent on the face of the Kasulatan itself. The
petitioners had the burden of proof to establish their case by preponderance of evidence. Property was sold in 1957 for P250.00.32
To trace the ownership of the Property, both contending parties presented tax declarations and the Whether the Court of Appeals erred in not admitting the documents presented by petitioners for the
testimonies of witnesses. However, the Jumaquio sisters also presented a notarized KASULATAN SA first time on appeal
BILIHAN NG LUPA which controverted petitioners claim of co-ownership.
We find no error in the Court of Appeals refusal to give any probative value to the alleged birth
The Kasulatan, being a document acknowledged before a notary public, is a public document certificate of Guevarra and the affidavit of Benjamin dela Cruz, Sr. Petitioners belatedly attached
and prima facie evidence of its authenticity and due execution. To assail the authenticity and due these documents to their appellees brief. Petitioners could easily have offered these documents
execution of a notarized document, the evidence must be clear, convincing and more than merely during the proceedings before the trial court. Instead, petitioners presented these documents for
preponderant.24 Otherwise the authenticity and due execution of the document should be the first time on appeal without any explanation. For reasons of their own, petitioners did not
upheld.25 The trial court itself held that (n)o countervailing proof was adduced by plaintiffs to formally offer in evidence these documents before the trial court as required by Section 34, Rule
overcome or impugn the documents legality or its validity.26cräläwvirtualibräry 132 of the Rules of Court.33 To admit these documents now is contrary to due process, as it deprives
Even if the Kasulatan was not notarized, it would be deemed an ancient document and thus still respondents of the opportunity to examine and controvert them.
presumed to be authentic. The Kasulatan is: (1) more than 30 years old, (2) found in the proper Moreover, even if these documents were admitted, they would not controvert Navarros ownership
custody, and (3) unblemished by any alteration or by any circumstance of suspicion. It appears, on of the Property. Benjamin dela Cruz, Sr.s affidavit stated merely that, although he knew Navarro by
its face, to be genuine.27cräläwvirtualibräry name, he was not personally acquainted with her.34 Guevarras alleged birth certificate casts doubt
Nevertheless, the trial court held that the Kasulatan was void because the Property was conjugal at only as to whether Navarro was indeed the mother of Guevarra. These documents do not prove
the time Navarro sold it to Enriqueta Lopez Jumaquio. We do not agree. The trial courts conclusion that Guevarra owned the Property or that Navarro did not own the Property.
that the Property was conjugal was not based on evidence, but rather on a misapprehension of Petitioners admitted before the trial court that Navarro was the mother of Guevarra. However,
Article 160 of the Civil Code, which provides: petitioners denied before the Court of Appeals that Navarro was the mother of Guevarra. We agree
All property of the marriage is presumed to belong to the conjugal partnership, unless it be proved with the appellate court that this constitutes an impermissible change of theory. When a party
that it pertains exclusively to the husband or to the wife. adopts a certain theory in the court below, he cannot change his theory on appeal. To allow him to
do so is not only unfair to the other party, it is also offensive to the basic rules of fair play, justice
As the Court of Appeals correctly pointed out, the presumption under Article 160 of the Civil Code and due process.35cräläwvirtualibräry
applies only when there is proof that the property was acquired during the marriage. Proof of
acquisition during the marriage is an essential condition for the operation of the presumption in If Navarro were not the mother of Guevarra, it would only further undermine petitioners case.
favor of the conjugal partnership.28cräläwvirtualibräry Absent any hereditary relationship between Guevarra and Navarro, the Property would not have
passed from Navarro to Guevarra, and then to the latters children, including petitioners, by
succession. There would then be no basis for petitioners claim of co-ownership by virtue of
inheritance from Guevarra. On the other hand, this would not undermine respondents position
since they anchor their claim on the sale under the Kasulatan and not on inheritance from
Guevarra.

Since the notarized Kasulatan is evidence of greater weight which petitioners failed to refute by
clear and convincing evidence, this Court holds that petitioners were not able to prove by
preponderance of evidence that the Property belonged to Guevarras estate. There is therefore no
legal basis for petitioners complaint for partition of the Property.

WHEREFORE, the Decision of 26 June 1998 of the Court of Appeals in CA-G.R. CV No. 51643,
dismissing the complaint of petitioners against Felomena Jumaquio Estimo and Emiliana Jumaquio,
is AFFIRMED.

SO ORDERED.
A.C. No. 6955 July 27, 2006 borrowed P100,000 from them in December 2002. It was agreed that the loan would be repaid
before the end of the following year,8 in time for the debut on November 24, 2003.9
MAR YUSON, complainant,
vs. To guarantee payment, respondent executed in favor of complainant several postdated checks to
ATTY. JEREMIAS R. VITAN, respondent. cover the loaned amount. Those checks, however, turned out to be worthless, because they had
been drawn against the lawyer's closed account in the Bank of Commerce in Escolta, Manila. The six
DECISION dishonored checks were presented during the hearing before the IBP commissioner.10
PANGANIBAN, C.J.: Complainant maintained that he had repeatedly tried to recover the debt, only to be turned away
Once again this Court exhorts members of the bar to live up to the strictures of the Lawyers' Oath, empty-handed each time. He conceded, though, that respondent had given an undisclosed amount
the Code of Professional Responsibility, and the Canons of Professional Ethics. Otherwise, they shall covered by the checks dated January and February 2003.11 The amounts covered by the dishonored
be sanctioned by this Court. checks remained unpaid.

The Case This development prompted complainant to seek the aid of the IBP National Committee on Legal
Aid (NCLA) in obtaining payment. On November 14, 2003, the IBP-NCLA, through Deputy Director
Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by Mar Yuson Rosalie J. de la Cruz, sent him a letter.12 It informed him of the impending administrative case and
with the Commission on Bar Discipline (CBD) of the Integrated Bar of the Philippines (IBP). advised him to confer with complainant, presumably to settle the matter. Upon receipt13 of the
Respondent was accused of taking advantage of complainant's generosity and credulity. letter, he again gave assurances that he would pay the loan in time for the debut. 14

On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days from receipt of When the date passed without any payment, complainant demanded a collateral to secure the loan.
the Order;2otherwise, he would be considered in default and the case heard ex parte. Thus, in his favor, Atty. Vitan executed a document denominated as a Deed of Absolute Sale,
covering the latter's parcel of land located in Sta. Maria, Bulacan. According to complainant, their
Because respondent failed to submit his Answer within the given period, the CBD considered his intention was to transfer the title of the property to him temporarily, so that he could either sell or
failure and non-appearance as a waiver of his right to participate in the proceedings. 3 Thus, the mortgage15 it. It was further agreed that, if it was mortgaged, respondent would redeem it as partial
hearing scheduled for August 11, 2005, pushed through, with the original copies of the checks he or full payment of the loan.16
had issued presented by complainant as evidence. Afterwards, the CBD issued an Order submitting
the case for Resolution.4 On August 23, 2005, Commissioner Milagros V. San Juan rendered her Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time in favor of
Report and Recommendation.5 Atty. Vitan, with complainant as vendor. The purpose of this particular document was not explained
by either party.
Respondent denied having received a copy of the Complaint against him and alleged that it was only
on August 24, 2005, that he received the Order submitting the case for resolution. Thus, he filed an On April 12, 2004, complainant was able to mortgage18 the property for P30,000.19 Contrary to their
Urgent Motion to Revive/Re-open and with Leave to Admit Attached Answer.6 earlier agreement, respondent did not redeem it from the mortgagee and, instead, simply sent
complainant a letter20 dated July 7, 2004, promising to pay on or before July 12, 2004. As this
In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of Directors adopted and promise was not fulfilled, the mortgagee demanded payment from complainant and thereby
approved, with modification, the investigating commissioner's Report and Recommendation. Upon allegedly exposed the latter to shame and ridicule.21
respondent was imposed the penalty of suspension from the practice of law for two years, after the
board found that he had taken advantage of complainant through deceit and dishonesty. The On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant. Respondent was
lawyer was further ordered to give back the money he had received from complainant. informed that an administrative case would be filed against him, unless he settled his obligations by
July 30, 2004, the date given by complainant.
The Facts
On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004, submitted by Atty. Vitan
Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he received a sum of who explained that he had already settled his obligation. He maintained that he had in fact
money by way of inheritance. According to him, he and his wife intended to use the money to executed, in complainant's favor, a Deed of Absolute Sale over his 203-square-meter residential
purchase a taxi, repair their dilapidated house, and hold a debut party for their daughter.7 property in Sta. Maria, Bulacan. He clarified that "[their] understanding was that [complainant]
They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the legal matters ha[d] the option to use, mortgage or sell [the property] and return to me the excess of the proceeds
concerning this purchase. Regrettably, their other plans were put on hold, because the lawyer after obtaining his money represented by my six (6) dishonored checks."24Interestingly, respondent
attached the Deed of Absolute Sale in which he was the vendee and complainant the vendor. 25 It "Mar:
appears that this was the second Deed of Absolute Sale, also referred to in the Complaint. 26
"We will settle on July 12, 2004, on or before said date."36
Only after the IBP investigating commissioner had rendered her Report and Recommendation27 did
Atty. Vitan submit his Answer to the Letter-Complaint. He called the second document a "Counter The wordings of these promissory notes disclose that he had a personal obligation to complainant,
Deed of Sale," executed as a "sort of collateral/security for the account of [his] liaison officer [Evelyn without any mention of Estur at all. If it were true that Atty. Vitan had executed those notes for the
Estur]."28 He admitted having given several postdated checks amounting to P100,000, supposedly to account of his liaison officer, he should have used words to that effect. As a lawyer, he was aware
guarantee the indebtedness of Estur to complainant. Atty. Vitan argued for the first time that it was that the preparation of promissory notes was not a "mere formality;" it had legal consequences. It is
she who had incurred the debts, and that he had acted only as a "character reference and/or quite far-fetched for a lawyer to assume the role of guarantor, without saying so in the notes.
guarantor."29 He maintained that he had given in to the one-sided transactions, because he was A lawyer may be disciplined for evading the payment of a debt validly incurred.37 In this case, the
"completely spellbound by complainant's seeming sincerity and kindness."30 To corroborate his failure of Atty. Vitan to pay his debt for over three years despite repeated demands puts in question
statements, he attached Estur's Affidavit.31 his standing as a member of the bar. Worse, he made several promises to pay his debt promptly,
Report of the Investigating Commissioner but reneged on all of them. He even started to hide from complainant according to the latter .38

In her Report and Recommendation, Commissioner San Juan recommended that Atty. Vitan be Failure to honor just debts, particularly from clients, constitutes dishonest conduct that does not
suspended until his restitution of the amount he had borrowed. She held that respondent, having speak well of a member of the bar.39 It is vital that a lawyer's conduct be kept beyond reproach and
taken advantage of complainant and thus shown dishonesty and untrustworthiness, did not deserve above suspicion at all times. Rule 1.01 of the Code of Professional Responsibility clearly provides
to retain his membership in the bar. that lawyers must not engage in unlawful, immoral or deceitful conduct. They must comport
themselves in a manner that will secure and preserve the respect and confidence of the public for
On November 24, 2005, the Supreme Court received the IBP Resolution adopting, with modification, the legal profession.40
the Report and Recommendation of the investigating commissioner.
Atty. Vitan contends that his obligation was already extinguished, because he had allegedly sold his
The Court's Ruling Bulacan property to complainant.41 Basically, respondent is asserting that what had transpired was
a dation in payment. Governed by the law on sales, it is a transaction that takes place when a piece
We agree with the findings of the IBP Board of Governors, but reduce the period of suspension to of property is alienated to the creditor in satisfaction of a debt in money. 42 It involves delivery and
six months. transmission of ownership of a thing -- by the debtor to the creditor -- as an accepted equivalent of
Respondent's Administrative Liability the performance of the obligation.43

Lawyers are instruments for the administration of justice. They are expected to maintain not only Going over the records of this case, we find the contention of Atty. Vitan undeserving of credence.
legal proficiency but also a high standard of ethics, honesty, integrity and fair dealing. In this way, The records reveal that he did not really intend to sell and relinquish ownership over his property in
the people's faith and confidence in the judicial system is ensured. 32 Sta. Maria, Bulacan, notwithstanding the execution of a Deed of Absolute Sale in favor of
complainant. The second Deed of Absolute Sale, which reconveyed the property to respondent, is
In the present case, Atty. Vitan undoubtedly owed money to complainant. In a letter33 to IBP Deputy proof that he had no such intention. This second Deed, which he referred to as his "safety
Director de la Cruz, respondent admitted having incurred the P100,000 loan. It was only in his net,"44 betrays his intention to counteract the effects of the first one .
Answer34 that the lawyer suddenly denied that he had personally incurred this obligation. This time,
he pointed to his employee, Estur, as the true debtor. We find his version of the facts implausible. In a manner of speaking, Atty. Vitan was taking back with his right hand what he had given with his
left. The second Deed of Absolute Sale returned the parties right back where they started, as if
First, the story involving a certain Evelyn Estur was clearly a mere afterthought, conjured simply to there were no sale in favor of complainant to begin with. In effect, on the basis of the second Deed
escape his liability. If it were true that it was she who owed the money, he should have mentioned of Sale, respondent took back and asserted his ownership over the property despite having
this alleged fact in his letter to the IBP NCLA deputy director. Instead, respondent was completely allegedly sold it. Thus, he fails to convince us that there was a bona fide dation in payment or sale
silent about Estur and merely asserted that he had already settled his debt with complainant. that took place between the parties; that is, that there was an extinguishment of obligation.

Second, the promise of Atty. Vitan to settle his obligations on particular dates is contained in two It appears that the true intention of the parties was to use the Bulacan property
handwritten notes signed by him and worded as follows: to facilitate payment. They only made it appear that the title had been transferred to complainant
to authorize him to sell or mortgage the property.45Atty. Vitan himself admitted in his letter dated
"I undertake to settle the financial obligations of P100,000 – plus before the end of the year."35
July 30, 2004, that their intention was to convert the property into cash, so that payment could be circulation of valueless commercial papers can very well pollute the channels of trade and
obtained by complainant and the excess returned to respondent.46 The records, however, do not commerce, injure the banking system and eventually hurt the welfare of society and the public
show that the proceeds derived were sufficient to discharge the obligation of the lawyer fully; thus, interest."52
he is still liable to the extent of the deficiency.
We have also held that the deliberate failure to pay just debts and the issuance of worthless checks
We hasten to add, however, that this administrative case is not the proper venue for us to constitute gross misconduct,53 for which a lawyer may be sanctioned with one year's suspension
determine the extent of the remaining liability. This Court will not act as a collection agency from from the practice of law,54 or a suspension of six months upon partial payment of the obligation. 55
faltering debtors, when the amount of the indebtedness is indefinite and disputed.47
In the instant case, complainant himself admits that respondent had already paid the amounts
Nevertheless, the records satisfactorily reveal the failure of respondent to live up to his duties as a covered by the January and February checks.56 Thus, there has been a partial payment that justifies
lawyer in consonance with the strictures of the Lawyer's Oath, the Code of Professional a modification of IBP's recommended penalty.
Responsibility, and the Canons of Professional Ethics, thereby degrading not only his person but his
profession as well. So far, we find that his lack of sincerity in fulfilling his obligations is revealed by WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross misconduct
his acts of issuing promissory notes and reneging on them; executing a simulated Deed of Absolute and SUSPENDED from the practice of law for six (6) months, effective upon his receipt of this
Sale; and breaking his promise to redeem the property from the mortgagee. Decision, with the warning that a repetition of the same or any other misconduct will be dealt with
more severely.
The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity and character.
Indeed, not only his integrity as an individual but, more important, his stature as a member of the Let a copy of this Decision be entered in respondent's record as a member of the Bar, and notice
bar is affected by his acts of welching on his promises and misleading complainant. Canon 1 and served on the Integrated Bar of the Philippines and on the Office of the Court Administrator for
Rule 1.01 of the Code of Professional Responsibility explicitly state thus: circulation to all courts in the country.

"CANON 1 — A lawyer shall uphold the constitution, obey the laws of the land and promote respect SO ORDERED.
for law and legal processes.

"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct."

Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the profession
justifies disciplinary action.48

There is yet another reason to find Atty. Vitan administratively liable. In his letter of July 30, 2004,
was an admission that the personal checks he issued in favor of complainant had all been
dishonored.49 Whether those checks were issued for the account of respondent or of Estur is not
important. The fact remains that the lawyer knowingly issued worthless checks and thus revealed
his disposition to defraud complainant.

The act of a lawyer in issuing a check without sufficient funds to cover them -- or, worse, drawn
against a closed account --constitutes such willful dishonesty and unethical conduct as to
undermine the public confidence in the law and in lawyers.50 The act also manifests a low regard for
the Oath taken by the lawyer upon joining the profession, whose image should be held in high
esteem, not seriously and irreparably tarnished.51

Moreover, the inimical effect of the issuance of worthless checks has been recognized by this Court
in an earlier case, from which we quote:

"[T]he effect [of issuance of worthless checks] transcends the private interests of the parties directly
involved in the transaction and touches the interests of the community at large. The mischief it
creates is not only a wrong to the payee or holder, but also an injury to the public since the
G.R. No. 166704 December 20, 2006 Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334, as well as
copies of the promissory notes and acknowledgment receipts executed by Felicidad covering the
AGRIFINA AQUINTEY, petitioner, loaned amounts.5
vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents. In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans from
Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher interest rates.
DECISION They, likewise, alleged that they had executed deeds of assignment in favor of Agrifina, and that
CALLEJO, SR., J.: their debtors had executed promissory notes in Agrifina's favor. According to the spouses Tibong,
this resulted in a novation of the original obligation to Agrifina. They insisted that by virtue of these
Before us is a petition for review under Rule 45 of the Revised Rules on Civil Procedure of the documents, Agrifina became the new collector of their debtors; and the obligation to pay the
Decision1 of the Court of Appeals in CA-G.R. CV No. 78075, which affirmed with modification the balance of their loans had been extinguished.
Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio City, and the Resolution 3 of the
appellate court denying reconsideration thereof. The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of the
complaint. While they did not state the total amount of their loans, they declared that they did not
The Antecedents receive anything from Agrifina without any written receipt.7 They prayed for that the complaint be
dismissed.
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for
sum of money and damages against the respondents, spouses Felicidad and Rico Tibong. Agrifina In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any loan from
alleged that Felicidad had secured loans from her on several occasions, at monthly interest rates of Agrifina without the benefit of a written document.8
6% to 7%. Despite demands, the spouses Tibong failed to pay their outstanding loan, amounting
to P773,000.00 exclusive of interests. The complaint contained the following prayer: On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of the case
were defined:
WHEREFORE, premises considered, it is most respectfully prayed of this Honorable Court, after due
notice and hearing, to render judgment ordering defendants to pay plaintiff the following: Whether or not plaintiff is entitled to her claim of P773,000.00;

a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00) representing the principal Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and
obligation of the defendants with the stipulated interests of six (6%) percent per month from May Whether or not the parties are entitled to their claim for damages.9
11, 1999 to date and or those that are stipulated on the contracts as mentioned from paragraph
two (2) of the complaint. The Case for Petitioner

b). FIFTEEN PERCENT (15%) of the total accumulated obligations as attorney's fees. Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's husband, Rico,
also happened to be a distant relative of Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend
c). Actual expenses representing the filing fee and other charges and expenses to be incurred during money to Felicidad. According to Felicidad, Agrifina would be earning interests higher than those
the prosecution of this case. given by the bank for her money. Felicidad told Agrifina that since she (Felicidad) was engaged in
Further prays for such other relief and remedies just and equitable under the premises.4 the sale of dry goods at the GP Shopping Arcade, she

would use the money to buy bonnels and thread.10 Thus, Agrifina lent a total sum of P773,000.00 to Felicidad, and each loan transaction was covered by either a promissory note or an acknowledgment
receipt.11 Agrifina stated that she had lost the receipts signed by Felicidad for the following amounts: P100,000.00, P34,000.00 and P2,000.00.12 The particulars of the transactions are as follows:

Amount Date Obtained Interest Per Mo. Due Date

P 100,000.00 May 11, 1989 6% August 11, 1989

4,000.00 June 8, 1989 - -

60,000.00 Aug. 16, 1989 7% January 1990

205,000.00 Oct. 13, 1989 7% January 1990

128,000.00 Oct. 19, 1989 7% January 1990

2,000.00 Nov. 12, 1989 6% April 28, 1990

10,000.00 June 13, 1990 - -

80,000.00 Jan. 4, 1990 - -

34,000.00 - 6% October 19, 1989

100,000.00 July 14, 1989 5% October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting to P122,600.00.14

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August 25, 1990 in the amount of P50,000.00 as partial payment.15 However, the check was dishonored for having been drawn
against insufficient funds.16 Agrifina then filed a criminal case against Felicidad in the Office of the City Prosecutor. An Information for violation of Batas Pambansa Bilang 22 was filed against Felicidad, docketed
as Criminal Case No. 11181-R. After trial, the court ordered Felicidad to pay P50,000.00. Felicidad complied and paid the face value of the check.17

In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her to require Felicidad to execute deeds of
assignment over Felicidad's debtors. The lawyer also suggested that Felicidad's debtors execute promissory notes in Agrifina's favor, to "turn over" their loans from Felicidad. This arrangement would facilitate
collection of Felicidad's account. Agrifina agreed to the proposal. 19 Agrifina, Felicidad, and the latter's debtors had a conference20 where Atty. A-ayo explained that Agrifina could apply her collections as
payments of Felicidad's account.21

From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits (obligations) 22 duly notarized by Atty. A-ayo, in which Felicidad transferred and assigned to Agrifina the total amount
of P546,459.00 due from her debtors.23 In the said deeds, Felicidad confirmed that her debtors were no longer indebted to her for their respective loans. For her part, Agrifina conformed to the deeds of
assignment relative to the loans of Virginia Morada and Corazon Dalisay.24 She was furnished copies of the deeds as well as the promissory notes.25

The following debtors of Felicidad executed promissory notes where they obliged themselves to pay directly to Agrifina:

Debtors Account Date of Instrument Date Payable

Juliet & Tommy Tibong P50,000.00 August 7, 1990 November 4, 1990 and February 4, 1991

Corazon Dalisay 8,000.00 August 7, 1990 No date

Rita Chomacog 4,480.00 August 8, 1990 September 23, 1990

Rosemarie Bandas 8,000.00 August 8, 1990 February 3, 1991

Fely Cirilo 63,600.00 September 13, 1990 No date

Virginia Morada 62,379.00 August 9, 1990 February 9, 1991

Carmelita Casuga 59,000.00 August 28, 1990 February 28, 1991

Merlinda Gelacio 17,200.00 August 29, 1990 November 29, 199026

Total P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her to narrated that she received P250,000.00 from one of her debtors, Rey Rivera, and remitted the
collect from them. One of the debtors, Helen Cabang, did not execute any promissory note but payment to Agrifina.41
conformed to the Deed of Assignment of Credit which Felicidad executed in favor of Agrifina. 27 Eliza
Abance conformed to the deed of assignment for and in behalf of her sister, Fely Cirilo. 28 Edna Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad. When
Papat-iw was not able to affix her signature on the deed of assignment nor sign the promissory note she asked Felicidad to consolidate her loans in one document, the latter told her to seek the
because she was in Taipei, Taiwan.29 assistance of Atty. A-ayo.42 The lawyer suggested that Felicidad assign her credits in order to help
her collect her loans.43 She agreed to the deeds of assignment to help Felicidad collect from the
Following the execution of the deeds of assignment and promissory notes, Agrifina was able to debtors.44
collect the total amount of P301,000.00 from Felicidad's debtors.30 In April 1990, she tried to collect
the balance of Felicidad's account, but the latter told her to wait until her debtors had On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of the
money.31 When Felicidad reneged on her promise, Agrifina filed a complaint in the Office of decision reads:
the Barangay Captain for the collection of P773,000.00. However, no settlement was arrived at.32 WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants ordering the
latter to pay the plaintiffs (sic) the following amounts:

The Case for Respondents 1. P472,000 as actual obligation with the stipulated interest of 6% per month from May 11, 1999
until the said obligation is fully paid. However, the amount of P50,000 shall be deducted from the
Felicidad testified that she and her friend Agrifina had been engaged in the money-lending total accumulated interest for the same was already paid by the defendant as admitted by the
business.33 Agrifina would lend her money with monthly interest,34 and she, in turn, would re-lend plaintiff in her complaint,
the money to borrowers at a higher interest rate. Their business relationship turned sour when
Agrifina started complaining that she (Felicidad) was actually earning more than Agrifina. 35 Before 2. P25,000 as attorney's fees,
the respective maturity dates of her debtors' loans, Agrifina asked her to pay her account since 3. [T]o pay the costs.
Agrifina needed money to buy a house and lot in Manila. However, she told Agrifina that she could
not pay yet, as her debtors' loan payments were not yet due. 36 Agrifina then came to her store SO ORDERED.46
every afternoon to collect from her, and persuaded her to go to Atty. Torres G. A-ayo for legal
advice.37 The lawyer suggested that she indorse the accounts of her debtors to Agrifina so that the The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment
latter would be the one to collect from her debtors and she would no longer have any obligation to and the promissory notes executed by Felicidad's borrowers. It explained that the documents did
Agrifina.38 She then executed deeds of assignment in favor of Agrifina covering the sums of money not contain any express agreement to novate and extinguish Felicidad's obligation. It declared that
due from her debtors. She signed the deeds prepared by Atty. A-ayo in the presence of the deeds and notes were separate contracts which could stand alone from the original
Agrifina.39 Some of the debtors signed the promissory notes which were likewise prepared by the indebtedness of Felicidad. Considering, however, Agrifina's admission that she was able to collect
lawyer. Thereafter, Agrifina personally collected from Felicidad's debtors.40 Felicidad further from Felicidad's debtors the total amount of P301,000.00, this should be deducted from the latter's
accountability.47 Hence, the balance, exclusive of interests, amounted to P472,000.00.
On appeal, the CA affirmed with modification the decision of the RTC and stated that, based on the Petitioner avers that the appellate court erred in ruling that respondents' original obligation
promissory notes and acknowledgment receipts signed by Felicidad, the appellants secured loans amounted to only P637,000.00 (instead of P773,000.00) simply because she lost the promissory
from the appellee in the total principal amount of only P637,000.00, not P773,000.00 as declared by notes/receipts which evidenced the loans executed by respondent Felicidad Tibong. She insists that
the trial court. The CA found that, other than Agrifina's bare testimony that she had lost the the issue of whether Felicidad owed her less than P773,000.00 was not raised by respondents
promissory notes and acknowledgment receipts, she failed to present competent documentary during pre-trial and in their appellate brief; the appellate court was thus proscribed from taking
evidence to substantiate her claim that Felicidad had, likewise, borrowed the amounts cognizance of the issue.
of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total account, P585,659.00 was
covered by the deeds of assignment and promissory notes; hence, the balance of Felicidad's Petitioner avers that respondents failed to deny, in their verified answer, that they had secured
account amounted to only P51,341.00. The fallo of the decision reads: the P773,000.00 loan; hence, respondents are deemed to have admitted the allegation in the
complaint that the loans secured by respondent from her amounted to P773,000.00. As gleaned
WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the RTC, Baguio City, from the trial court's pre-trial order, the main issue is whether or not she should be made to pay
Branch 61 in Civil Case No. 4370-R is hereby MODIFIED. Defendants-appellants are hereby ordered this amount.
to pay the balance of the total indebtedness in the amount of P51,341.00 plus the stipulated
interest of 6% per month from May 11, 1999 until the finality of this decision. Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00
covered by the deeds of assignment executed by Felicidad and the promissory notes executed by
SO ORDERED.48 the latter's debtors, and that the balance of respondents' account was only P51,341.00. Moreover,
the appellate court's ruling that there was no novation runs counter to its holding that the primary
The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina had not recourse was against Felicidad's debtors. Petitioner avers that of the 11 deeds of assignment and
been novated by the deeds of assignment and promissory notes executed in the latter's favor. promissory notes, only two bore her signature. 52 She insists that she is not bound by the deeds
Although Agrifina was subrogated as a new creditor in lieu of Felicidad, Felicidad's obligation to which she did not sign. By assigning the obligation to pay petitioner their loan accounts, Felicidad's
Agrifina under the loan transaction remained; there was no intention on their part to novate the debtors merely assumed the latter's obligation and became co-debtors to petitioner. Respondents
original obligation. Nonetheless, the appellate court held that the legal effects of the deeds of were not released from their obligation under their loan transactions, and she had the option to
assignment could not be totally disregarded. The assignments of credits were onerous, hence, had demand payment from them or their debtors. Citing the ruling of this Court in Magdalena Estates,
the effect of payment, pro tanto, of the outstanding obligation. The fact that Agrifina never Inc. v. Rodriguez,53 petitioner insists that the first debtor is not released from responsibility upon
repudiated or rescinded such assignments only shows that she had accepted and conformed to it. reaching an agreement with the creditor. The payment by a third person of the first debtor's
Consequently, she cannot collect both from Felicidad and her individual debtors without running obligation does not constitute novation, and the creditor can still enforce the obligation against the
afoul to the principle of unjust enrichment. Agrifina's primary recourse then is against Felicidad's original debtor. Petitioner also cites the ruling of this Court in Guerrero v. Court of Appeals.54
individual debtors on the basis of the deeds of assignment and promissory notes.
In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's
The CA further declared that the deeds of assignment executed by Felicidad had the effect of execution of the deeds of assignment, and the original debtors' execution of the promissory notes
payment of her outstanding obligation to Agrifina in the amount of P585,659.00. It ruled that, since (along with their conformity to the deeds of assignment with petitioner's consent), their loan
an assignment of credit is in the nature of a sale, the assignors remained liable for the warranties as accounts with petitioner amounting to P585,659.00 had been effectively extinguished. Respondents
they are responsible for the existence and legality of the credit at the time of the assignment. point out that this is in accordance with Article 1291, paragraph 2, of the Civil Code. Thus, the
Both parties moved to have the decision reconsidered,49 but the appellate court denied both original debtors of respondents had been substituted as petitioner's new debtors.
motions on December 21, 2004.50 Respondents counter that petitioner had been subrogated to their right to collect the loan accounts
Agrifina, now petitioner, filed the instant petition, contending that of their debtors. In fact, petitioner, as the new creditor of respondents' former debtors had been
able to collect the latter's loan accounts which amounted to P301,000.00. The sums received by
1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in favor of petitioner respondents' debtors were the same loans which they obliged to pay to petitioner under the
has the effect of payment of the original obligation even as it ruled out that the original obligation promissory notes executed in petitioner's favor.
and the assigned credit are distinct and separate and can stand independently from each other;
Respondents aver that their obligation to petitioner cannot stand or exist separately from the
2. The Honorable Court of Appeals erred in passing upon issues raised for the first time on appeal; original debtors' obligation to petitioner as the new creditor. If allowed to collect from them as well
and as from their original debtors, petitioner would be enriching herself at the expense of respondents.
Thus, despite the fact that petitioner had collected P172,600.00 from respondents and P301,000.00
3. The Honorable Court of Appeals erred in resolving fact not in issue.51
from the original debtors, petitioner still sought to collect P773,000.00 from them in the RTC. Under in its allegations that the pleader's adversary should not be left in doubt as to what is admitted,
the deeds of assignment executed by Felicidad and the original debtors' promissory notes, the what is denied, and what is covered by denials of knowledge as sufficient to form a belief.60
original debtors' accounts were assigned to petitioner who would be the new creditor. In fine,
respondents are no longer liable to petitioner for the balance of their loan account inclusive of In the present case, petitioner alleged the following in her complaint:
interests. Respondents also insist that petitioner failed to prove that she (petitioner) was merely 2. That defendants are indebted to the plaintiff in the principal amount of SEVEN HUNDRED
authorized to collect the accounts of the original debtors so as to to facilitate the payment of SEVENTY-THREE THOUSAND PESOS (P773,000.00) Philippine Currency with a stipulated interest
respondents' loan obligation. which are broken down as follows. The said principal amounts was admitted by the defendants in
The Issues their counter-affidavit submitted before the court. Such affidavit is hereby attached as Annex "A;"61

The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00 from xxxx
petitioner; and (2) whether the obligation of respondents to pay the balance of their loans, H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six (6%) per cent per
including interest, was partially extinguished by the execution of the deeds of assignment in favor of month and payable on October 19, 1989, however[,] the receipt for the meantime cannot be
petitioner, relative to the loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo recovered as it was misplaced by the plaintiff but the letter of defendant FELICIDAD TIBONG is
in the total amount of P371,000.00. hereby attached as Annex "H" for the appreciation of the Honorable court;
The Ruling of the Court I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at five (5%) percent per
We have carefully reviewed the brief of respondents as appellants in the CA, and find that, indeed, month, obtained on July 14, 1989 and payable on October 14, 1989. Such receipt was lost but
they had raised the issue of whether they received P773,000.00 by way of loans from petitioner. admitted by the defendants in their counter-affidavit as attached [to] this complaint and marked as
They averred that, as gleaned from the documentary evidence of petitioner in the RTC, the total Annex "A" mentioned in paragraph one (1); x x x62
amount they borrowed was only P673,000.00. They asserted that petitioner failed to adduce In their Answer, respondents admitted that they had secured loans from petitioner. While the
concrete evidence that they received P773,000.00 from her.55 allegations in paragraph 2 of the complaint were specifically denied, respondents merely averred
We agree, however, with petitioner that the appellate court erred in reversing the finding of the that petitioner and respondent Felicidad entered into an agreement for the lending of money to
RTC simply because petitioner failed to present any document or receipt signed by Felicidad. interested borrowers at a higher interest rate. Respondents failed to declare the exact amount of
the loans they had secured from petitioner. They also failed to deny the allegation in paragraph 2 of
Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each material the complaint that respondent Felicidad signed and submitted a counter-affidavit in I.S. No. 93-334
allegation of fact the truth of which he does not admit and, whenever practicable, x x x set forth the where she admitted having secured loans from petitioner in the amount of P773,000.00.
substance of the matters upon which he relies to support his denial.56 Respondents, likewise, failed to deny the allegation in paragraph 2(h) of the complaint that
respondents had secured a P34,000.00 loan payable on October 19, 1989, evidenced by a receipt
Section 11, Rule 8 of the same Rules provides that allegations of the complaint not specifically which petitioner had misplaced. Although respondents specifically denied in paragraph 2.11 of their
denied are deemed admitted.57 Answer the allegations in paragraph 2(I) of the complaint, they merely alleged that "they have not
The purpose of requiring the defendant to make a specific denial is to make him disclose the received sums of money from the plaintiff without any receipt therefor."
matters alleged in the complaint which he succinctly intends to disprove at the trial, together with Respondents, likewise, failed to specifically deny another allegation in the complaint that they had
the matter which he relied upon to support the denial. The parties are compelled to lay their cards secured a P100,000.00 loan from petitioner on July 14, 1989; that the loan was payable on October
on the table.58 14, 1989; and evidenced by a receipt which petitioner claimed to have lost. Neither did respondents
A denial is not made specific simply because it is so qualified by the defendant. A general denial deny the allegation that respondents admitted their loan of P100,000.00 in the counter-affidavit of
does not become specific by the use of the word "specifically." When matters of whether the respondent Felicidad, which was appended to the complaint as Annex "A." In fine, respondents had
defendant alleges having no knowledge or information sufficient to form a belief are plainly and admitted the existence of their P773,000.00 loan from petitioner.
necessarily within the defendant's knowledge, an alleged "ignorance or lack of information" will not We agree with the finding of the CA that petitioner had no right to collect from respondents the
be considered as a specific denial. Section 11, Rule 8 of the Rules also provides that material total amount of P301,000.00, which includes more than P178,980.00 which respondent Felicidad
averments in the complaint other than those as to the amount of unliquidated damages shall be collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio, and Manuel.
deemed admitted when not specifically denied.59 Thus, the answer should be so definite and certain Petitioner cannot again collect the same amount from respondents; otherwise, she would be
enriching herself at their expense. Neither can petitioner collect from respondents more surety. If there is no agreement as to solidarity, the first and the new debtor are considered
than P103,500.00 which she had already collected from Nimo, Cantas, Rivera, Donguis, Fernandez obligated jointly.69
and Ramirez.
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary to
There is no longer a need for the Court to still resolve the issue of whether respondents' obligation support a contract of novation, the rule is the same as in other contracts. The consideration need
to pay the balance of their loan account to petitioner was partially extinguished by the promissory not be pecuniary or even beneficial to the person promising. It is sufficient if it be a loss of an
notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda inconvenience, such as the relinquishment of a right or the discharge of a debt, the postponement
Gelacio and Antoinette Manuel because, as admitted by petitioner, she was able to collect the of a remedy, the discontinuance of a suit, or forbearance to sue.
amounts under the notes from said debtors and applied them to respondents' accounts.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the theory of
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which novation is that the new debtor contracts with the old debtor that he will pay the debt, and also
obligations are extinguished. Obligations may be modified by changing their object or principal to the same effect with the creditor, while the latter agrees to accept the new debtor for the old.
creditor or by substituting the person of the debtor.63 The burden to prove the defense that an A novation is not made by showing that the substituted debtor agreed to pay the debt; it must
obligation has been extinguished by novation falls on the debtor.64 The nature of novation was appear that he agreed with the creditor to do so. Moreover, the agreement must be based on the
extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows: consideration of the creditor's agreement to look to the new debtor instead of the old. It is not
essential that acceptance of the terms of the novation and release of the debtor be shown by
Novation may either be extinctive or modificatory, much being dependent on the nature of the express agreement. Facts and circumstances surrounding the transaction and the subsequent
change and the intention of the parties. Extinctive novation is never presumed; there must be an conduct of the parties may show acceptance as clearly as an express agreement, albeit implied.72
express intention to novate; in cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving consideration for the We find in this case that the CA correctly found that respondents' obligation to pay the balance of
emergence of the new one. Implied novation necessitates that the incompatibility between the old their account with petitioner was extinguished, pro tanto, by the deeds of assignment of credit
and new obligation be total on every point such that the old obligation is completely superseded by executed by respondent Felicidad in favor of petitioner.
the new one. The test of incompatibility is whether they can stand together, each one having an
independent existence; if they cannot and are irreconciliable, the subsequent obligation would also An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
extinguish the first. assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the assignee,
An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation who acquires the power to enforce it to the same extent as the assignor could enforce it against the
and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four debtor.73 It may be in the form of sale, but at times it may constitute a dation in payment, such as
essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has
new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new against a third person.74
obligation. Novation is merely modificatory where the change brought about by any subsequent
agreement is merely incidental to the main obligation (e.g., a change in interest rates or an In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery and
extension of time to pay); in this instance, the new agreement will not have the effect of transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
extinguishing the first but would merely supplement it or supplant some but not all of its performance of the obligation. It is a special mode of payment where the debtor offers another
provisions.66 (Citations Omitted) thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying
Novation which consists in substituting a new debtor (delegado) in the place of the original one the thing or property of the debtor, payment for which is to be charged against the debtor's
(delegante) may be made even without the knowledge or against the will of the latter but not obligation. As such, the essential elements of a contract of sale, namely, consent, object certain, and
without the consent of the creditor. Substitution of the person of the debtor may be effected cause or consideration must be present. In its modern concept, what actually takes place in dacion
by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a third person en pago is an objective novation of the obligation where the thing offered as an accepted
who consents to the substitution and assumes the obligation. Thus, the consent of those three equivalent of the performance of an obligation is considered as the object of the contract of sale,
persons is necessary.67 In this kind of novation, it is not enough to extend the juridical relation to a while the debt is considered as the purchase price. In any case, common consent is an essential
third person; it is necessary that the old debtor be released from the obligation, and the third prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or
person or new debtor take his place in the relation.68 Without such release, there is no novation; obligation.76
the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a
The requisites for dacion en pago are: (1) there must be a performance of the prestation in lieu of respondents. In the meantime, petitioner had collected from respondents' debtors the amount
payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a of P301,000.00.
credit against the third person; (2) there must be some difference between the prestation due and
that which is given in substitution (aliud pro alio); and (3) there must be an agreement between the While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the
creditor and debtor that the obligation is immediately extinguished by reason of the performance of debtors' accounts, and for the latter to pay the same directly, it cannot thereby be considered that
a prestation different from that due.77 respondent merely authorized petitioner to collect the accounts of respondents' debtors and for
her to apply her collections in partial payments of their accounts. It bears stressing that petitioner,
All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds, as assignee, acquired all the rights and remedies passed by Felicidad, as assignee, at the time of the
respondent Felicidad assigned to petitioner her credits "to make good" the balance of her assignment.82 Such rights and remedies include the right to collect her debtors' obligations to her.
obligation. Felicidad testified that she executed the deeds to enable her to make partial payments
of her account, since she could not comply with petitioner's frenetic demands to pay the account in Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled
cash. Petitioner and respondent Felicidad agreed to relieve the latter of her obligation to pay the that the mere fact that novation does not follow as a matter of course when the creditor receives a
balance of her account, and for petitioner to collect the same from respondent's debtors. guaranty or accepts payments from a third person who has agreed to assume the obligation when
there is no agreement that the first debtor would be released from responsibility. Thus, the creditor
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their can still enforce the obligation against the original debtor.
conformity to the deeds. In an assignment of credit, however, the consent of the debtor is not
essential for its perfection; the knowledge thereof or lack of it affecting only the efficaciousness or In the present case, petitioner and respondent Felicidad agreed that the amounts due from
inefficaciousness of any payment that might have been made. The assignment binds the debtor respondents' debtors were intended to "make good in part" the account of respondents. Case law is
upon acquiring knowledge of the assignment but he is entitled, even then, to raise against the that, an assignment will, ordinarily, be interpreted or construed in accordance with the rules of
assignee the same defenses he could set up against the assignor78 necessary in order that construction governing contracts generally, the primary object being always to ascertain and carry
assignment may fully produce legal effects. Thus, the duty to pay does not depend on the consent out the intention of the parties. This intention is to be derived from a consideration of the whole
of the debtor. The purpose of the notice is only to inform that debtor from the date of the instrument, all parts of which should be given effect, and is to be sought in the words and language
assignment. Payment should be made to the assignee and not to the original creditor. employed.83

The transfer of rights takes place upon perfection of the contract, and ownership of the right, Indeed, the Court must not go beyond the rational scope of the words used in construing an
including all appurtenant accessory rights, is acquired by the assignee79 who steps into the shoes of assignment, words should be construed according to their ordinary meaning, unless something in
the original creditor as subrogee of the latter80 from that amount, the ownership of the right is the assignment indicates that they are being used in a special sense. So, if the words are free from
acquired by the assignee. The law does not require any formal notice to bind the debtor to the ambiguity and expressed plainly the purpose of the instrument, there is no occasion for
assignee, all that the law requires is knowledge of the assignment. Even if the debtor had not been interpretation; but where necessary, words must be interpreted in the light of the particular subject
notified, but came to know of the assignment by whatever means, the debtor is bound by it. If the matter.84 And surrounding circumstances may be considered in order to understand more perfectly
document of assignment is public, it is evidence even against a third person of the facts which gave the intention of the parties. Thus, the object to be accomplished through the assignment, and the
rise to its execution and of the date of the latter. The transfer of the credit must therefore be held relations and conduct of the parties may be considered in construing the document.
valid and effective from the moment it is made to appear in such instrument, and third persons Although it has been said that an ambiguous or uncertain assignment should be construed most
must recognize it as such, in view of the authenticity of the document, which precludes all suspicion strictly against the assignor, the general rule is that any ambiguity or uncertainty in the meaning of
of fraud with respect to the date of the transfer or assignment of the credit.81 an assignment will be resolved against the party who prepared it; hence, if the assignment was
As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other prepared by the assignee, it will be construed most strictly against him or her. 85 One who chooses
debtors, petitioner was authorized to collect the amounts of P6,000.00 from Cabang, the words by which a right is given ought to be held to the strict interpretation of them, rather than
and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent Felicidad, the other who only accepts them.86
likewise, unequivocably declared that Cabang and Cirilo no longer had any obligation to her. Considering all the foregoing, we find that respondents still have a balance on their account to
Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds, petitioner in the principal amount of P33,841.00, the difference between their loan of P773,000.00
petitioner no longer attempted to collect from respondents the balance of their accounts. It was less P585,659.00, the payment of respondents' other debtors amounting to P103,500.00, and
only in 1999, or after nine (9) years had elapsed that petitioner attempted to collect from the P50,000.00 payment made by respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and Resolution of the Court
of Appeals are AFFIRMED with MODIFICATION in that the balance of the principal account of the
respondents to the petitioner is P33,841.00. No costs.

SO ORDERED.
G.R. No. 115349 April 18, 1997 WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the
COMMISSIONER OF INTERNAL REVENUE, petitioner, fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA SO ORDERED.
UNIVERSITY, respondents.
Not in accord with said decision, petitioner has come to this Court via the present petition for
PANGANIBAN, J.: review raising the following issues:

In conducting researches and studies of social organizations and cultural values thru its Institute of 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT
Philippine Culture, is the Ateneo de Manila University performing the work of an independent CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and
contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue
Code levying a three percent contractor's tax? This question is answer by the Court in the negative 2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER
as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP SECTION 205 OF THE TAX CODE.
No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3 The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
The Antecedent Facts Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being threeper centum of the gross receipts is hereby imposed on the following:
largely undisputed by the parties. xxx xxx xxx
Private respondent is a non-stock, non-profit educational institution with auxiliary units and (16) Business agents and other independent contractors except persons, associations and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), corporations under contract for embroidery and apparel for export, as well as their agents and
which has no legal personality separate and distinct from that of private respondent. The IPC is a contractors and except gross receipts of or from a pioneer industry registered with the Board of
Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it Investments under Republic Act No. 5186:
accepts sponsorships for its research activities from international organizations, private foundations
and government agencies. xxx xxx xxx

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a The term "independent contractors" include persons (juridical or natural) not enumerated above
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether
alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax or not the performance of the service calls for the exercise or use of the physical or mental faculties
liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a of such contractors or their employees.
memorandum contesting the validity of the assessments.
xxx xxx xxx
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount Petitioner contends that the respondent court erred in holding that private respondent is not an
due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a term "independent contractor", as defined by the Code, encompasses all kinds of services rendered
petition for review of the said letter-decision of the petitioner. While the petition was pending for a fee and that the only exceptions are the following:
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the a. Persons, association and corporations under contract for embroidery and apparel for export and
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No.
and interest. 5186;
On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads: b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b]
of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational corporations, The term "independent contractors" include persons (juridical or natural) not enumerated above
including their alien executives, and which headquarters do not earn or derive income from the (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
Philippines and which act as supervisory, communication and coordinating centers for their whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether
affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code). or not the performance of the service calls for the exercise or use of the physical or mental faculties
of such contractors or their employees.
Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore The term "independent contractor" shall not include regional or area headquarters established in
subject to the 3% contractor's tax imposed under the same Code. 4 the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-
the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA Pacific Region.
through this petition for review.
The term "gross receipts" means all amounts received by the prime or principal contractor as the
The Issues total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the
Petitioner submits before us the following issues: taxable gross receipts of the subcontractor.

1) Whether or not private respondent falls under the purview of independent contractor pursuant Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
to Section 205 of the Tax Code. University "falls within the definition" of an independent contractor and "is not one of those
mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor' is not
Code. 5 specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders
physical and mental service for a fee, is now indubitably considered an independent contractor
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its
unit or branch — the Institute of Philippine Culture — performing the work of an independent exemption from the coverage of the law.
contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the
National Internal Revenue Code? We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition
The Court's Ruling of taxes. It is obviously both illogical and impractical to determine who are exempted without first
The petition is unmeritorious. determining who are covered by the aforesaid provision. The Commissioner should have
determined first if private respondent was covered by Section 205, applying the rule of strict
Interpretation of Tax Laws interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does
read: so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of
construing statutes applies with peculiar strictness to tax lawsand the provisions of a taxing act
threeper centum of the gross receipts is hereby imposed on the following:
are not to be extended by implication." 8 Parenthetically, in answering the question of who is
xxx xxx xxx subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens because burdens are not to
(16) Business agents and other independent contractors, except persons, associations and be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
Investments under the provisions of Republic Act No. 5186; independent contractor be engaged in the business of selling its services. Hence, to impose the
three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently
xxx xxx xxx proven that the private respondent is indeed selling its services for a fee in pursuit of an
independent business. And it is only after private respondent has been found clearly to be subject requirement of Section 123 of the National Internal Revenue Code providing for the exemption of
to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such such gifts to an educational institution. 13
coverage is shown does the rule of construction — that tax exemptions are to be strictly construed
against the taxpayer — come into play, contrary to petitioner's position. This is the main line of Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA. To our mind, private respondent hardly fits into the definition of an "independent contractor".
The Ateneo de Manila University Did Not Contract For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in
for the Sale of the Service of its Institute of Philippine Culture business. Undisputedly, private respondent is mandated by law to undertake research activities to
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine maintain its university status. In fact, the research activities being carried out by the IPC is focused
Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and not on business or profit but on social sciences studies of Philippine society and culture. Since it can
independently of the academic purposes of the university. only finance a limited number of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international organizations, private
Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner foundations and governmental agencies. However, such sponsorships are subject to private
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting respondent's terms and conditions, among which are, that the research is confined to topics
researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the consistent with the private respondent's academic agenda; that no proprietary or commercial
contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is purpose research is done; and that private respondent retains not only the absolute right to publish
imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is but also the ownership of the results of the research conducted by the IPC. Quite clearly, the
made under a contract and the various contracts entered into between private respondent and its aforementioned terms and conditions belie the allegation that private respondent is a contractor or
clients are almost of the same terms, showing, among others, the compensation and terms of is engaged in business.
payment." 11(Emphasis supplied.)
For another, it bears stressing that private respondent is a non-stock, non-profit educational
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental.
that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by For, the main function of the IPC is to undertake research projects under the academic agenda of
the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the the private respondent. Moreover the records do not show that in accepting sponsorship of
established factual milieu obtaining in the instant case. research work, IPC realized profits from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are less
In the first place, the petitioner has presented no evidence to prove its bare contention that, than actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks
indeed, contracts for sale of services were ever entered into by the private respondent. As of the fact that education and not profit is the motive for undertaking the research projects.
appropriately pointed out by the latter:
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals still remains that there is no proof that part of such earnings or profits was ever distributed as
shows that only the following documentary evidence was presented: dividends to any stockholder, as in fact none was so distributed because they accrued to the benefit
Exhibit 1 BIR letter of authority no. 331844 of the private respondent which is a non-profit educational institution. 14

2 Examiner's Field Audit Report Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given
in the concept of a fee or price in exchange for the performance of a service or delivery of an object.
3 Adjustments to Sales/Receipts Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors
solely for the purpose of sponsoring or funding the research with no strings attached. As found by
4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr. the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary
None of the foregoing evidence even comes close to purport to be contracts between private or commercial research is done, and IPC retains the ownership of the results of the research,
respondent and third parties. 12 including the absolute right to publish the same. The copyrights over the results of the research are
owned by
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The
the Ateneo de Manila University are technically not a fee. They may however fall as gifts or amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that
donations which are tax-exempt" as shown by private respondent's compliance with the can be subjected to the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the
cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of Ateneo is patently erroneous because the former is not an independent juridical entity that is
sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a separate and distinct form the latter.
determinate thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its
very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals
"expressly makes the obligation to transfer ownership as an essential element of the contract of Generally Conclusive
sale, following modern codes, such as the German and the Swiss. Even in the absence of this In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically
express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to
Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of determine the issue of whether" 21 Ateneo de Manila University may be deemed a subject of the
sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not mean a three percent contractor's tax "through the evidence presented before it." Consequently, "as a
mere physical transfer, but is a means of transmitting ownership. Transfer of title or an agreement matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax
to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a Appeals which is, by the very nature of its function, dedicated exclusively to the study and
contract for a piece of work, "the contractor binds himself to execute a piece of work for the consideration of tax problems and has necessarily developed an expertise on the subject unless
employer, in consideration of a certain price or compensation. . . . If the contractor agrees to there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more
produce the work from materials furnished by him, he shall deliver the thing produced to the evident in the case before us where the findings and conclusions of both the Court of Tax Appeals
employer and transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of
sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks discretion. Thus, we find the decision of the latter affirming that of the former free from any
away with an object. 19 In the case at bench, it is clear from the evidence on record that there was palpable error.
no sale either of objects or services because, as adverted to earlier, there was no transfer of
ownership over the research data obtained or the results of research projects undertaken by the Public Service, Not Profit, is the Motive
Institute of Philippine Culture.
The records show that the Institute of Philippine Culture conducted its research activities at a huge
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972
pursuance of maintaining Ateneo's university status and not in the course of an independent to 1985. 23 In fact, it was Ateneo de Manila University itself that had funded the research projects of
business of selling such research with profit in mind. This is clear from a reading of the regulations the institute, and it was only when Ateneo could no longer produce the needed funds that the
governing universities: institute sought funding from outside. The testimony of Ateneo's Director for Accounting Services,
Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit nature of the
31. In addition to the legal requisites an institution must meet, among others, the following institute's research activities done in furtherance of the university's purposes, as follows:
requirements before an application for university status shall be considered:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
xxx xxx xxx Philippine Culture) that as far as grants from sponsored research it is possible that the grant
(e) The institution must undertake research and operate with a competent qualified staff at least sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a
three graduate departments in accordance with the rules and standards for graduate education. lot less than the grant who shoulders the additional cost?
One of the departments shall be science and technology. The competence of the staff shall be A The University.
judged by their effective teaching, scholarly publications and research activities published in its
school journal as well as their leadership activities in the profession. Q Now, why is this done by the University?

(f) The institution must show evidence of adequate and stable financial resources and support, a A Because of our faculty development program as a university, because a university has to have its
reasonable portion of which should be devoted to institutional development and research. (emphasis own research institute. 24
supplied)
So, why is it that Ateneo continues to operate and conduct researches through its Institute of
xxx xxx xxx Philippine Culture when it undisputedly loses not an insignificant amount in the process? The plain
and simple answer is that private respondent is not a contractor selling its services for a fee but an
32. University status may be withdrawn, after due notice and hearing, for failure to maintain academic institution conducting these researches pursuant to its commitments to education and,
satisfactorily the standards and requirements therefor. 20 ultimately, to public service. For the institute to have tenaciously continued operating for so long
despite its accumulation of significant losses, we can only agree with both the Court of Tax Appeals Moreover, as shown from the investigation of petitioner's book of accounts, during the period from
and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the January 1, 1952 to September 30, 1952, it sold sash, doors and windows worth P188,754.69. I find it
research difficult to believe that this amount which runs to six figures was derived by petitioner entirely from
projects." 25 its few customers who made special orders for these items.

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Even if we were to believe petitioner's claim that it does not manufacture ready-made sash, doors
Appeals is hereby AFFIRMED in full. and windows for the public and that it makes these articles only special order of its customers, that
does not make it a contractor within the purview of section 191 of the national Internal Revenue
SO ORDERED. Code. there are no less than fifty occupations enumerated in the aforesaid section of the national
G.R. No. L-8506 August 31, 1956 Internal Revenue Code subject to percentage tax and after reading carefully each and every one of
them, we cannot find under which the business of manufacturing sash, doors and windows upon
CELESTINO CO & COMPANY, petitioner, special order of customers fall under the category of "road, building, navigation, artesian well, water
vs. workers and other construction work contractors" are those who alter or repair buildings,
COLLECTOR OF INTERNAL REVENUE, respondent. structures, streets, highways, sewers, street railways railroads logging roads, electric lines or power
lines, and includes any other work for the construction, altering or repairing for which machinery
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General Guillermo E. Torres driven by mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
and Solicitor Federico V. Sian for respondent.
Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the national
BENGZON, J.: Internal Revenue Code, this leaves us to decide the remaining issue whether or not petitioner could
Appeal from a decision of the Court of Tax Appeals. be taxed with lesser strain and more accuracy as seller of its manufactured articles under section
186 of the same code, as the respondent Collector of Internal Revenue has in fact been doing the
Celestino Co & Company is a duly registered general copartnership doing business under the trade Oriental Sash Factory was established in 1946.
name of "Oriental Sash Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the
gross receipts of its sash, door and window factory, in accordance with section one hundred eighty- The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of
six of the National Revenue Code imposing taxes on sale of manufactured articles. However in 1952 services, in contradiction with the tax imposed in section 186 of the same Code which is a tax on the
it began to claim liability only to the contractor's 3 per cent tax (instead of 7 per cent) under section original sales of articles by the manufacturer, producer or importer. (Formilleza's Commentaries and
191 of the same Code; and having failed to convince the Bureau of Internal Revenue, it brought the Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold
matter to the Court of Tax Appeals, where it also failed. Said the Court: are manufactured by the seller does not exchange the contract from the purview of section 186 of
the National Internal Revenue Code as a sale of articles.
To support his contention that his client is an ordinary contractor . . . counsel presented . . .
duplicate copies of letters, sketches of doors and windows and price quotations supposedly sent by There was a strong dissent; but upon careful consideration of the whole matter are inclines to
the manager of the Oriental Sash Factory to four customers who allegedly made special orders to accept the above statement of the facts and the law. The important thing to remember is that
doors and window from the said factory. The conclusion that counsel would like us to deduce from Celestino Co & Company habitually makes sash, windows and doors, as it has represented in its
these few exhibits is that the Oriental Sash Factory does not manufacture ready-made doors, sash stationery and advertisements to the public. That it "manufactures" the same is practically admitted
and windows for the public but only upon special order of its select customers. . . . I cannot believe by appellant itself. The fact that windows and doors are made by it only when customers place their
that petitioner company would take, as in fact it has taken, all the trouble and expense of orders, does not alter the nature of the establishment, for it is obvious that it only accepted such
registering a special trade name for its sash business and then orders company stationery carrying orders as called for the employment of such material-moulding, frames, panels-as it ordinarily
the bold print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo, Manila, manufactured or was in a position habitually to manufacture.
Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes, furniture, etc. used season- Perhaps the following paragraph represents in brief the appellant's position in this Court:
dried and kiln-dried lumber, of the best quality workmanships" solely for the purpose of supplying
the needs for doors, windows and sash of its special and limited customers. One ill note that Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers sash,
petitioner has chosen for its tradename and has offered itself to the public as a "Factory", which windows and doors only for special customers and upon their special orders and in accordance with
means it is out to do business, in its chosen lines on a big scale. As a general rule, sash factories the desired specifications of the persons ordering the same and not for the general market: since
receive orders for doors and windows of special design only in particular cases but the bulk of their the doors ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in existence and which
sales is derived from a ready-made doors and windows of standard sizes for the average home. never would have existed but for the order of the party desiring it; and since petitioner's contractual
relation with his customers is that of a contract for a piece of work or since petitioner is engaged in kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it
the sale of services, it follows that the petitioner should be taxed under section 191 of the Tax Code used therefor (some of them at least).
and NOT under section 185 of the same Code." (Appellant's brief, p. 11-12).
In our opinion when this Factory accepts a job that requires the use of extraordinary or additional
But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, equipment, or involves services not generally performed by it-it thereby contracts for a piece of
may order windows or doors of the kind manufactured by this appellant. Therefore it is not true work — filing special orders within the meaning of Article 1467. The orders herein exhibited were
that it serves special customers only or confines its services to them alone. And anyone who sees, not shown to be special. They were merely orders for work — nothing is shown to call them special
and likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant doors requiring extraordinary service of the factory.
of the same kind, provided he pays the price. Surely, the appellant will not refuse, for it can easily
duplicate or even mass-produce the same doors-it is mechanically equipped to do so. The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously
made, such orders should not be called special work, but regular work. Would a factory do business
That the doors and windows must meet desired specifications is neither here nor there. If these performing only special, extraordinary or peculiar merchandise?
specifications do not happen to be of the kind habitually manufactured by appellant — special
forms for sash, mouldings of panels — it would not accept the order — and no sale is made. If they Anyway, supposing for the moment that the transactions were not sales, they were neither lease of
do, the transaction would be no different from a purchasers of manufactured goods held is stock for services nor contract jobs by a contractor. But as the doors and windows had been admittedly
sale; they are bought because they meet the specifications desired by the purchaser. "manufactured" by the Oriental Sash Factory, such transactions could be, and should be taxed as
"transfers" thereof under section 186 of the National Revenue Code.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a
customer-sizes not previously held in stock for sale to the public-it thereby becomes an employee or The appealed decision is consequently affirmed. So ordered.
servant of the customer,1 not the seller of lumber. The same consideration applies to this sash
manufacturer.

The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or habitually
makes; sash, panels, mouldings, frames, cutting them to such sizes and combining them in such
forms as its customers may desire.

On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable.
Nobody would regard the doing of two window panels a construction work in common parlance. 2

Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for
windows and doors according to specifications, it did not sell, but merely contracted for particular
pieces of work or "merely sold its services".

Said article reads as follows:

A contract for the delivery at a certain price of an article which the vendor in the ordinary course of
his business manufactures or procures for the general market, whether the same is on hand at the
time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer
and upon his special order, and not for the general market, it is contract for a piece of work.

It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio
Teodoro & Co. (To take one instance) because it also sold the materials. The truth of the matter is
that it sold materials ordinarily manufactured by it — sash, panels, mouldings — to Teodoro & Co.,
although in such form or combination as suited the fancy of the purchaser. Such new form does not
divest the Oriental Sash Factory of its character as manufacturer. Neither does it take the
transaction out of the category of sales under Article 1467 above quoted, because although the
Factory does not, in the ordinary course of its business, manufacture and keep on stock doors of the
G.R. No. L-27044 June 30, 1975 the theory that it misdeclared its importation of air conditioning units and parts and accessories
thereof which are subject to tax under Section 185(m)1 of the Tax Code, instead of Section 186 of
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment was revised on January 23, 1959,
vs. in line with the observation of the Chief, BIR Law Division, and was raised to P916,362.56
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX representing deficiency advance sales tax and manufacturers sales tax, inclusive of the 25% and 50%
APPEALS, respondents. surcharges. (pp. 72-80 BIR rec. Vol. I)
G.R. No. L-27452 June 30, 1975 On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, of the increased amount and suggested that P10,000 be paid as compromise in extrajudicial
vs. settlement of Engineering's penal liability for violation of the Tax Code. The firm, however,
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondent. contested the tax assessment and requested that it be furnished with the details and particulars of
the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, replied that the assessment was in accordance with law and the facts of the case.
Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel H. Montalino for Commissioner of
Internal Revenue, etc. On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the
pendency of the case the investigating revenue examiners reduced Engineering's deficiency tax
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. Balonkita for liabilities from P916,362.65 to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on
Engineering and Supply Company. findings after conferences had with Engineering's Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of
which reads as follows:
ESGUERRA, J.:
For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is hereby
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No. 681, modified, and petitioner, as a contractor, is declared exempt from the deficiency manufacturers
dated November 29, 1966, assessing a compensating tax of P174,441.62 on the Engineering sales tax covering the period from June 1, 1948. to September 2, 1956. However, petitioner is
Equipment and Supply Company. ordered to pay respondent, or his duly authorized collection agent, the sum of P174,141.62 as
As found by the Court of Tax Appeals, and as established by the evidence on record, the facts of compensating tax and 25% surcharge for the period from 1953 to September 1956. With costs
this case are as follows: against petitioner.

Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to this
engineering and machinery firm. As operator of an integrated engineering shop, it is engaged, Court on January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on January 4, 1967,
among others, in the design and installation of central type air conditioning system, pumping filed with the Court of Tax Appeals a motion for reconsideration of the decision abovementioned.
plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960) This was denied on April 6, 1967, prompting Engineering to file also with this Court its appeal,
docketed as G.R. No. L-27452.
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal
Revenue denouncing Engineering for tax evasion by misdeclaring its imported articles and failing Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties and issues, We
to pay the correct percentage taxes due thereon in connivance with its foreign suppliers (Exh. "2" have decided to consolidate and jointly decide them.
p. 1 BIR record Vol. I). Engineering was likewise denounced to the Central Bank (CB) for alleged Engineering in its Petition claims that the Court of Tax Appeals committed the following errors:
fraud in obtaining its dollar allocations. Acting on these denunciations, a raid and search was
conducted by a joint team of Central Bank, (CB), National Bureau of Investigation (NBI) and 1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable
Bureau of Internal Revenue (BIR) agents on September 27, 1956, on which occasion voluminous to the 30% compensating tax on its importations of equipment and ordinary articles used in the
records of the firm were seized and confiscated. (pp. 173-177 T.S.N.) central type air conditioning systems it designed, fabricated, constructed and installed in the
buildings and premises of its customers, rather than to the compensating tax of only 7%;
On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to
the then Collector, now Commissioner, of Internal Revenue (hereinafter referred to as 2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company guilty
Commissioner) that Engineering be assessed for P480,912.01 as deficiency advance sales tax on of fraud in effecting the said importations on the basis of incomplete quotations from the contents
of alleged photostat copies of documents seized illegally from Engineering Equipment and Supply (x) "Manufacturer" includes every person who by physical or chemical process alters the exterior
Company which should not have been admitted in evidence; texture or form or inner substance of any raw material or manufactured or partially manufactured
products in such manner as to prepare it for a special use or uses to which it could not have been
3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable put in its original condition, or who by any such process alters the quality of any such material or
to the 25% surcharge prescribed in Section 190 of the Tax Code; manufactured or partially manufactured product so as to reduce it to marketable shape, or prepare
4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed; it for any of the uses of industry, or who by any such process combines any such raw material or
manufactured or partially manufactured products with other materials or products of the same or
5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company liable of different kinds and in such manner that the finished product of such process of manufacture can
for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of completely be put to special use or uses to which such raw material or manufactured or partially manufactured
absolving it from the deficiency assessment of the Commissioner. products in their original condition could not have been put, and who in addition alters such raw
material or manufactured or partially manufactured products, or combines the same to produce
The Commissioner on the other hand claims that the Court of Tax Appeals erred: such finished products for the purpose of their sale or distribution to others and not for his own use
1. In holding that the respondent company is a contractor and not a manufacturer. or consumption.

2. In holding respondent company liable to the 3% contractor's tax imposed by Section 191 of the In answer to the above contention, Engineering claims that it is not a manufacturer and setter of
Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to Section 194(x) both air-conditioning units and spare parts or accessories thereof subject to tax under Section 185(m) of
of the same Code; the Tax Code, but a contractor engaged in the design, supply and installation of the central type of
air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code, which is
3. In holding that the respondent company is subject only to the 30% compensating tax under essentially a tax on the sale of services or labor of a contractor rather than on the sale of articles
Section 190 of the Tax Code and not to the 30% advance sales tax imposed by section 183 (b), in subject to the tax referred to in Sections 184, 185 and 186 of the Code.
relation to section 185(m) both of the same Code, on its importations of parts and accessories of air
conditioning units; The arguments of both the Engineering and the Commissioner call for a clarification of the term
contractor as well as the distinction between a contract of sale and contract for furnishing services,
4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the Tax Code labor and materials. The distinction between a contract of sale and one for work, labor and
on its importations of parts and accessories of air conditioning units, notwithstanding the finding of materials is tested by the inquiry whether the thing transferred is one not in existence and which
said court that the respondent company fraudulently misdeclared the said importations; never would have existed but for the order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some other persons even if the order had
5. In holding the respondent company liable for P174,141.62 as compensating tax and 25% not been given.2 If the article ordered by the purchaser is exactly such as the plaintiff makes and
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers tax and keeps on hand for sale to anyone, and no change or modification of it is made at defendant's
25% and 50% surcharge for the period from June 1, 1948 to December 31, 1956. request, it is a contract of sale, even though it may be entirely made after, and in consequence of,
the defendants order for it.3
The main issue revolves on the question of whether or not Engineering is a manufacturer of air
conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the Code, Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work
or a contractor under Section 191 of the same Code. thus:
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning units Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary
and parts or accessories thereof and, therefore, it is subject to the 30% advance sales tax prescribed course of his business manufactures or procures for the general market, whether the same is on
by Section 185(m) of the Tax Code, in relation to Section 194 of the same, which defines a hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for
manufacturer as follows: the customer and upon his special order and not for the general market, it is a contract for a piece
of work.
Section 194. — Words and Phrases Defined. — In applying the provisions of this Title, words and
phrases shall be taken in the sense and extension indicated below: The word "contractor" has come to be used with special reference to a person who, in the pursuit of
the independent business, undertakes to do a specific job or piece of work for other persons, using
xxx xxx xxx
his own means and methods without submitting himself to control as to the petty details. (Arañas,
Annotations and Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970
Ed.) The true test of a contractor as was held in the cases of Luzon Stevedoring Co., vs. Trinidad, 43, contained air conditioning units, are distinct from the central system which Engineering dealt in. To
Phil. 803, 807-808, and La Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be Our mind, the distinction as explained by Engineering, in its Brief, quoting from books, is not an idle
that he renders service in the course of an independent occupation, representing the will of his play of words as claimed by the Commissioner, but a significant fact which We just cannot ignore.
employer only as to the result of his work, and not as to the means by which it is accomplished. As quoted by Engineering Equipment & Supply Co., from an Engineering handbook by L.C. Morrow,
and which We reproduce hereunder for easy reference:
With the foregoing criteria as guideposts, We shall now examine whether Engineering really did
"manufacture" and sell, as alleged by the Commissioner to hold it liable to the advance sales tax ... there is a great variety of equipment in use to do this job (of air conditioning). Some devices are
under Section 185(m), or it only had its services "contracted" for installation purposes to hold it designed to serve a specific type of space; others to perform a specific function; and still others as
liable under section 198 of the Tax Code. components to be assembled into a tailor-made system to fit a particular building. Generally,
however, they may be grouped into two classifications — unitary and central system.
I
The unitary equipment classification includes those designs such as room air conditioner, where all
After going over the three volumes of stenographic notes and the voluminous record of the BIR and of the functional components are included in one or two packages, and installation involves only
the CTA as well as the exhibits submitted by both parties, We find that Engineering did not making service connection such as electricity, water and drains. Central-station systems, often
manufacture air conditioning units for sale to the general public, but imported some items (as referred to as applied or built-up systems, require the installation of components at different points
refrigeration compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which were used in in a building and their interconnection.
executing contracts entered into by it. Engineering, therefore, undertook negotiations and
execution of individual contracts for the design, supply and installation of air conditioning units of The room air conditioner is a unitary equipment designed specifically for a room or similar small
the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking into space. It is unique among air conditioning equipment in two respects: It is in the electrical appliance
consideration in the process such factors as the area of the space to be air conditioned; the number classification, and it is made by a great number of manufacturers.
of persons occupying or would be occupying the premises; the purpose for which the various air
conditioning areas are to be used; and the sources of heat gain or cooling load on the plant such as There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer,
sun load, lighting, and other electrical appliances which are or may be in the plan. (t.s.n. p. 34, Vol. I) who was once the Chairman of the Board of Examiners for Mechanical Engineers and who was
Engineering also testified during the hearing in the Court of Tax Appeals that relative to the allegedly responsible for the preparation of the refrigeration and air conditioning code of the City of
installation of air conditioning system, Engineering designed and engineered complete each Manila, who said that "the central type air conditioning system is an engineering job that requires
particular plant and that no two plants were identical but each had to be engineered separately. planning and meticulous layout due to the fact that usually architects assign definite space and
usually the spaces they assign are very small and of various sizes. Continuing further, he testified:
As found by the lower court, which finding4 We adopt —
I don't think I have seen central type of air conditioning machinery room that are exactly alike
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its various because all our buildings here are designed by architects dissimilar to existing buildings, and usually
customers the central type air conditioning system; prepares the plans and specifications therefor they don't coordinate and get the advice of air conditioning and refrigerating engineers so much so
which are distinct and different from each other; the air conditioning units and spare parts or that when we come to design, we have to make use of the available space that they are assigning to
accessories thereof used by petitioner are not the window type of air conditioner which are us so that we have to design the different component parts of the air conditioning system in such a
manufactured, assembled and produced locally for sale to the general market; and the imported air way that will be accommodated in the space assigned and afterwards the system may be
conditioning units and spare parts or accessories thereof are supplied and installed by petitioner considered as a definite portion of the building. ...
upon previous orders of its customers conformably with their needs and requirements.
Definitely there is quite a big difference in the operation because the window type air conditioner is
The facts and circumstances aforequoted support the theory that Engineering is a contractor rather a sort of compromise. In fact it cannot control humidity to the desired level; rather the
than a manufacturer. manufacturers, by hit and miss, were able to satisfy themselves that the desired comfort within a
room could be made by a definite setting of the machine as it comes from the factory; whereas the
The Commissioner in his Brief argues that "it is more in accord with reason and sound business central type system definitely requires an intelligent operator. (t.s.n. pp. 301-305, Vol. II)
management to say that anyone who desires to have air conditioning units installed in his premises
and who is in a position and willing to pay the price can order the same from the company The point, therefore, is this — Engineering definitely did not and was not engaged in the
(Engineering) and, therefore, Engineering could have mass produced and stockpiled air conditioning manufacture of air conditioning units but had its services contracted for the installation of a central
units for sale to the public or to any customer with enough money to buy the same." This is system. The cases cited by the Commissioner (Advertising Associates, Inc. vs. Collector of Customs,
untenable in the light of the fact that air conditioning units, packaged, or what we know as self- 97, Phil. 636; Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841 and Manila Trading &
Supply Co. vs. City of Manila, 56 O.G. 3629), are not in point. Neither are they applicable because tax status of its contractors. To transmit the warm or cool air over the buildings, the appellant
the facts in all the cases cited are entirely different. Take for instance the case of Celestino Co where installed system of ducts running from the basic units through walls, ceilings and floors to registers.
this Court held the taxpayer to be a manufacturer rather than a contractor of sash, doors and The contract called for completed air conditioning systems which became permanent part of the
windows manufactured in its factory. Indeed, from the very start, Celestino Co intended itself to be buildings and improvements to the realty." The Court held the appellant a contractor which used
a manufacturer of doors, windows, sashes etc. as it did register a special trade name for its sash the materials and the equipment upon the value of which the tax herein imposed was levied in the
business and ordered company stationery carrying the bold print "ORIENTAL SASH FACTORY performance of its contracts with its customers, and that the customers did not purchase the
(CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No. etc., Manufacturers equipment and have the same installed.
of All Kinds of Doors, Windows ... ." Likewise, Celestino Co never put up a contractor's bond as
required by Article 1729 of the Civil Code. Also, as a general rule, sash factories receive orders for Applying the facts of the aforementioned case to the present case, We see that the supply of air
doors and windows of special design only in particular cases, but the bulk of their sales is derived conditioning units to Engineer's various customers, whether the said machineries were in hand or
from ready-made doors and windows of standard sizes for the average home, which "sales" were not, was especially made for each customer and installed in his building upon his special order. The
reflected in their books of accounts totalling P118,754.69 for the period from January, 1952 to air conditioning units installed in a central type of air conditioning system would not have existed
September 30, 1952, or for a period of only nine (9) months. This Court found said sum difficult to but for the order of the party desiring to acquire it and if it existed without the special order of
have been derived from its few customers who placed special orders for these items. Applying the Engineering's customer, the said air conditioning units were not intended for sale to the general
abovestated facts to the case at bar, We found them to he inapposite. Engineering advertised itself public. Therefore, We have but to affirm the conclusion of the Court of Tax Appeals that Engineering
as Engineering Equipment and Supply Company, Machinery Mechanical Supplies, Engineers, is a contractor rather than a manufacturer, subject to the contractors tax prescribed by Section 191
Contractors, 174 Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as of the Code and not to the advance sales tax imposed by Section 185(m) in relation to Section 194
manufacturers. It likewise paid the contractors tax on all the contracts for the design and of the same Code. Since it has been proved to Our satisfaction that Engineering imported air
construction of central system as testified to by Mr. Rey Parker, its President and General Manager. conditioning units, parts or accessories thereof for use in its construction business and these items
(t.s.n. p. 102, 103) Similarly, Engineering did not have ready-made air conditioning units for sale but were never sold, resold, bartered or exchanged, Engineering should be held liable to pay taxes
as per testimony of Mr. Parker upon inquiry of Judge Luciano of the CTA — prescribed under Section 1905 of the Code. This compensating tax is not a tax on the importation of
goods but a tax on the use of imported goods not subject to sales tax. Engineering, therefore,
Q — Aside from the general components, which go into air conditioning plant or system of the should be held liable to the payment of 30% compensating tax in accordance with Section 190 of
central type which your company undertakes, and the procedure followed by you in obtaining and the Tax Code in relation to Section 185(m) of the same, but without the 50% mark up provided in
executing contracts which you have already testified to in previous hearing, would you say that the Section 183(b).
covering contracts for these different projects listed ... referred to in the list, Exh. "F" are identical in
every respect? I mean every plan or system covered by these different contracts are identical in II
standard in every respect, so that you can reproduce them? We take up next the issue of fraud. The Commissioner charged Engineering with misdeclaration of
A — No, sir. They are not all standard. On the contrary, none of them are the same. Each one must the imported air conditioning units and parts or accessories thereof so as to make them subject to a
be designed and constructed to meet the particular requirements, whether the application is to be lower rate of percentage tax (7%) under Section 186 of the Tax Code, when they are allegedly
operated. (t.s.n. pp. 101-102) subject to a higher rate of tax (30%) under its Section 185(m). This charge of fraud was denied by
Engineering but the Court of Tax Appeals in its decision found adversely and said"
What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland, Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355 SW ... We are amply convinced from the evidence presented by respondent that petitioner deliberately
2d, 100, 101, "where the cause presents the question of whether one engaged in the business of and purposely misdeclared its importations. This evidence consists of letters written by petitioner to
contracting for the establishment of air conditioning system in buildings, which work requires, in its foreign suppliers, instructing them on how to invoice and describe the air conditioning units
addition to the furnishing of a cooling unit, the connection of such unit with electrical and plumbing ordered by petitioner. ... (p. 218 CTA rec.)
facilities and the installation of ducts within and through walls, ceilings and floors to convey cool air Despite the above findings, however, the Court of Tax Appeals absolved Engineering from paying
to various parts of the building, is liable for sale or use tax as a contractor rather than a retailer of the 50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as follows:
tangible personal property. Appellee took the Position that appellant was not engaged in the
business of selling air conditioning equipment as such but in the furnishing to its customers of The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based on willful
completed air conditioning systems pursuant to contract, was a contractor engaged in the neglect to file the monthly return within 20 days after the end of each month or in case a false or
construction or improvement of real property, and as such was liable for sales or use tax as the fraudulent return is willfully made, it can readily be seen, that petitioner cannot legally be held
consumer of materials and equipment used in the consummation of contracts, irrespective of the subject to the 50% surcharge imposed by Section 183(a) of the Tax Code. Neither can petitioner be
held subject to the 50% surcharge under Section 190 of the Tax Code dealing on compensating tax cooperate with us on this requirement, we will thereafter be unable to utilize their forwarding
because the provisions thereof do not include the 50% surcharge. Where a particular provision of service. Please inform them that we will not tolerate another failure to follow our requirements.
the Tax Code does not impose the 50% surcharge as fraud penalty we cannot enforce a non-existing
provision of law notwithstanding the assessment of respondent to the contrary. Instances of the And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another letter, viz:
exclusion in the Tax Code of the 50% surcharge are those dealing on tax on banks, taxes on receipts In the past, we have always paid the air conditioning tax on climate changers and that mark is
of insurance companies, and franchise tax. However, if the Tax Code imposes the 50% surcharge as recognized in the Philippines, as air conditioning equipment. This matter of avoiding any tie-in on air
fraud penalty, it expressly so provides as in the cases of income tax, estate and inheritance taxes, conditioning is very important to us, and we are asking that from hereon that whoever takes care of
gift taxes, mining tax, amusement tax and the monthly percentage taxes. Accordingly, we hold that the processing of our orders be carefully instructed so as to avoid again using the term "Climate
petitioner is not subject to the 50% surcharge despite the existence of fraud in the absence of legal changers" or in any way referring to the equipment as "air conditioning."
basis to support the importation thereof. (p. 228 CTA rec.)
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a
We have gone over the exhibits submitted by the Commissioner evidencing fraud committed by solution, viz:
Engineering and We reproduce some of them hereunder for clarity.
We feel that we can probably solve all the problems by following the procedure outlined in your
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. "3-K" pp. letter of March 25, 1953 wherein you stated that in all future jobs you would enclose photostatic
152-155, BIR rec.) viz: copies of your import license so that we might make up two sets of invoices: one set describing
Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o equipment ordered simply according to the way that they are listed on the import license and
Engineering Equipment & Supply Co., Manila, Philippines — forwarding all correspondence and another according to our ordinary regular methods of order write-up. We would then include the
shipping papers concerning this order to us only and not to the customer. set made up according to the import license in the shipping boxes themselves and use those items
as our actual shipping documents and invoices, and we will send the other regular invoice to you, by
When invoicing, your invoices should be exactly as detailed in the customer's Letter Order dated separate correspondence. (Exh- No. "3-F-1", p. 144 BIR rec.)
March 14th, 1953 attached. This is in accordance with the Philippine import licenses granted to
Madrigal & Co., Inc. and such details must only be shown on all papers and shipping documents for Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p. 141 BIR rec.)
this shipment. No mention of words air conditioning equipment should be made on any shipping In the process of clearing the shipment from the piers, one of the Customs inspectors requested to
documents as well as on the cases. Please give this matter your careful attention, otherwise great see the packing list. Upon presenting the packing list, it was discovered that the same was prepared
difficulties will be encountered with the Philippine Bureau of Customs when clearing the shipment on a copy of your letterhead which indicated that the Trane Co. manufactured air conditioning,
on its arrival in Manila. All invoices and cases should be marked "THIS EQUIPMENT FOR RIZAL heating and heat transfer equipment. Accordingly, the inspectors insisted that this equipment was
CEMENT CO." being imported for air conditioning purposes. To date, we have not been able to clear the shipment
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter dated and it is possible that we will be required to pay heavy taxes on equipment.
March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.) The purpose of this letter is to request that in the future, no documents of any kind should be sent
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh. "3-1" with the order that indicate in any way that the equipment could possibly be used for air
pp. 147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term 'air conditioning.
conditioning' and to describe the goods on order as Fiberglass pipe and pipe fitting insulation It is realized that this a broad request and fairly difficult to accomplish and administer, but we
instead. Likewise on April 30, 1953, Engineering threatened to discontinue the forwarding service of believe with proper caution it can be executed. Your cooperation and close supervision concerning
Universal Transcontinental Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.): these matters will be appreciated. (Emphasis supplied)
It will be noted that the Universal Transcontinental Corporation is not following through on the The aforequoted communications are strongly indicative of the fraudulent intent of Engineering to
instructions which have been covered by the above correspondence, and which indicates the misdeclare its importation of air conditioning units and spare parts or accessories thereof to evade
necessity of discontinuing the use of the term "Air conditioning Machinery or Air Coolers". Our payment of the 30% tax. And since the commission of fraud is altogether too glaring, We cannot
instructions concerning this general situation have been sent to you in ample time to have avoided agree with the Court of Tax Appeals in absolving Engineering from the 50% fraud surcharge,
this error in terminology, and we will ask that on receipt of this letter that you again write to otherwise We will be giving premium to a plainly intolerable act of tax evasion. As aptly stated by
Universal Transcontinental Corp. and inform them that, if in the future, they are unable to then Solicitor General, now Justice, Antonio P. Barredo: 'this circumstance will not free it from the
50% surcharge because in any case whether it is subject to advance sales tax or compensating tax, it
is required by law to truly declare its importation in the import entries and internal revenue reveals that Engineering did file a tax return or declaration with the Bureau of Customs before it
declarations before the importations maybe released from customs custody. The said entries are paid the advance sales tax of 7%. And the declaration filed reveals that it did in fact misdeclare its
the very documents where the nature, quantity and value of the imported goods declared and importations. Section 332 of the Tax Code which provides:
where the customs duties, internal revenue taxes, and other fees or charges incident to the
importation are computed. These entries, therefore, serve the same purpose as the returns Section 332. — Exceptions as to period of limitation of assessment and collection of taxes. —
required by Section 183(a) of the Code.' (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return,
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax the tax may be assessed, or a proceeding in court for the collection of such tax may be begun
Appeals and hold Engineering liable for the same. As held by the lower court: without assessment at any time within ten years after the discovery of the falsity, fraud or omission.

At first blush it would seem that the contention of petitioner that it is not subject to the is applicable, considering the preponderance of evidence of fraud with the intent to evade the
delinquency, surcharge of 25% is sound, valid and tenable. However, a serious study and critical higher rate of percentage tax due from Engineering. The, tax assessment was made within the
analysis of the historical provisions of Section 190 of the Tax Code dealing on compensating tax in period prescribed by law and prescription had not set in against the Government.
relation to Section 183(a) of the same Code, will show that the contention of petitioner is without WHEREFORE, the decision appealed from is affirmed with the modification that Engineering is
merit. The original text of Section 190 of Commonwealth Act 466, otherwise known as the National hereby also made liable to pay the 50% fraud surcharge.
Internal Revenue Code, as amended by Commonwealth Act No. 503, effective on October 1, 1939,
does not provide for the filing of a compensation tax return and payment of the 25 % surcharge for SO ORDERED.
late payment thereof. Under the original text of Section 190 of the Tax Code as amended by
Commonwealth Act No. 503, the contention of the petitioner that it is not subject to the 25%
surcharge appears to be legally tenable. However, Section 190 of the Tax Code was subsequently
amended by the Republic Acts Nos. 253, 361, 1511 and 1612 effective October 1, 1946, July 1, 1948,
June 9, 1949, June 16, 1956 and August 24, 1956 respectively, which invariably provides among
others, the following:

... If any article withdrawn from the customhouse or the post office without payment of the
compensating tax is subsequently used by the importer for other purposes, corresponding entry
should be made in the books of accounts if any are kept or a written notice thereof sent to the
Collector of Internal Revenue and payment of the corresponding compensating tax made within 30
days from the date of such entry or notice and if tax is not paid within such period the amount of
the tax shall be increased by 25% the increment to be a part of the tax.

Since the imported air conditioning units-and spare parts or accessories thereof are subject to the
compensating tax of 30% as the same were used in the construction business of Engineering, it is
incumbent upon the latter to comply with the aforequoted requirement of Section 190 of the Code,
by posting in its books of accounts or notifying the Collector of Internal Revenue that the imported
articles were used for other purposes within 30 days. ... Consequently; as the 30% compensating tax
was not paid by petitioner within the time prescribed by Section 190 of the Tax Code as amended, it
is therefore subject to the 25% surcharge for delinquency in the payment of the said tax. (pp. 224-
226 CTA rec.)

III

Lastly the question of prescription of the tax assessment has been put in issue. Engineering
contends that it was not guilty of tax fraud in effecting the importations and, therefore, Section
332(a) prescribing ten years is inapplicable, claiming that the pertinent prescriptive period is five
years from the date the questioned importations were made. A review of the record however
G.R. No. L-11491 August 23, 1918 ART. 2. In compensation for the expenses of advertisement which, for the benefit of both
contracting parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the
ANDRES QUIROGA, plaintiff-appellant, obligation to offer and give the preference to Mr. Parsons in case anyone should apply for the
vs. exclusive agency for any island not comprised with the Visayan group.
PARSONS HARDWARE CO., defendant-appellee.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant. the towns of the Archipelago where there are no exclusive agents, and shall immediately report
Crossfield & O'Brien for appellee. such action to Mr. Quiroga for his approval.
AVANCEÑA, J.: ART. 4. This contract is made for an unlimited period, and may be terminated by either of the
On January 24, 1911, in this city of manila, a contract in the following tenor was entered into by and contracting parties on a previous notice of ninety days to the other party.
between the plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute
present defendant later subrogated itself), as party of the second part: the subject matter of this appeal and both substantially amount to the averment that the defendant
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH MERCHANTS violated the following obligations: not to sell the beds at higher prices than those of the invoices; to
ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS. have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public
exhibition, and to pay for the advertisement expenses for the same; and to order the beds by the
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J. dozen and in no other manner. As may be seen, with the exception of the obligation on the part of
Parsons under the following conditions: the defendant to order the beds by the dozen and in no other manner, none of the obligations
imputed to the defendant in the two causes of action are expressly set forth in the contract. But the
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that said
Iloilo, and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, obligations are implied in a contract of commercial agency. The whole question, therefore, reduced
shall make and allowance of a discount of 25 per cent of the invoiced prices, as commission on the itself to a determination as to whether the defendant, by reason of the contract hereinbefore
sale; and Mr. Parsons shall order the beds by the dozen, whether of the same or of different styles. transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days In order to classify a contract, due regard must be given to its essential clauses. In the contract in
from the date of their shipment. question, what was essential, as constituting its cause and subject matter, is that the plaintiff was to
(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight, furnish the defendant with the beds which the latter might order, at the price stipulated, and that
insurance, and cost of unloading from the vessel at the point where the beds are received, shall be the defendant was to pay the price in the manner stipulated. The price agreed upon was the one
paid by Mr. Parsons. determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per
cent, according to their class. Payment was to be made at the end of sixty days, or before, at the
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional
made shall be considered as a prompt payment, and as such a deduction of 2 per cent shall be made discount was to be allowed for prompt payment. These are precisely the essential features of a
from the amount of the invoice. contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the
beds, and, on the part of the defendant, to pay their price. These features exclude the legal
The same discount shall be made on the amount of any invoice which Mr. Parsons may deem conception of an agency or order to sell whereby the mandatory or agent received the thing to sell
convenient to pay in cash. it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the
thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in
contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily
price which he may plan to make in respect to his beds, and agrees that if on the date when such
obliged to pay their price within the term fixed, without any other consideration and regardless as
alteration takes effect he should have any order pending to be served to Mr. Parsons, such order
to whether he had or had not sold the beds.
shall enjoy the advantage of the alteration if the price thereby be lowered, but shall not be affected
by said alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the It would be enough to hold, as we do, that the contract by and between the defendant and the
obligation to invoice the beds at the price at which the order was given. plaintiff is one of purchase and sale, in order to show that it was not one made on the basis of a
commission on sales, as the plaintiff claims it was, for these contracts are incompatible with each
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.
other. But, besides, examining the clauses of this contract, none of them is found that substantially In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by
supports the plaintiff's contention. Not a single one of these clauses necessarily conveys the idea of the contract, the effect of its breach would only entitle the plaintiff to disregard the orders which
an agency. The words commission on sales used in clause (A) of article 1 mean nothing else, as the defendant might place under other conditions; but if the plaintiff consents to fill them, he
stated in the contract itself, than a mere discount on the invoice price. The word agency, also used waives his right and cannot complain for having acted thus at his own free will.
in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's
beds in the Visayan Islands. With regard to the remaining clauses, the least that can be said is that For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the
they are not incompatible with the contract of purchase and sale. defendant was one of purchase and sale, and that the obligations the breach of which is alleged as a
cause of action are not imposed upon the defendant, either by agreement or by law.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the
defendant corporation and who established and managed the latter's business in Iloilo. It appears The judgment appealed from is affirmed, with costs against the appellant. So ordered.
that this witness, prior to the time of his testimony, had serious trouble with the defendant, had
maintained a civil suit against it, and had even accused one of its partners, Guillermo Parsons, of
falsification. He testified that it was he who drafted the contract Exhibit A, and, when questioned as
to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for his
beds and to collect a commission on sales. However, according to the defendant's evidence, it was
Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even supposing
that Ernesto Vidal has stated the truth, his statement as to what was his idea in contracting with the
plaintiff is of no importance, inasmuch as the agreements contained in Exhibit A which he claims to
have drafted, constitute, as we have said, a contract of purchase and sale, and not one of
commercial agency. This only means that Ernesto Vidal was mistaken in his classification of the
contract. But it must be understood that a contract is what the law defines it to be, and not what it
is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell;
that, without previous notice, it forwarded to the defendant the beds that it wanted; and that the
defendant received its commission for the beds sold by the plaintiff directly to persons in Iloilo. But
all this, at the most only shows that, on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no right to have the contract
considered, not as the parties stipulated it, but as they performed it. Only the acts of the
contracting parties, subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such interpretation is necessary, but
not when, as in the instant case, its essential agreements are clearly set forth and plainly show that
the contract belongs to a certain kind and not to another. Furthermore, the return made was of
certain brass beds, and was not effected in exchange for the price paid for them, but was for other
beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with
respect to said beds, which shows that it was not considered that the defendant had a right, by
virtue of the contract, to make this return. As regards the shipment of beds without previous notice,
it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for
this very reason, the plaintiff agreed to their return. And with respect to the so-called commissions,
we have said that they merely constituted a discount on the invoice price, and the reason for
applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the
defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's
beds, such sales were to be considered as a result of that advertisement.