BUSORG

CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

[G.R. No. 127405. October 4, 2000]

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs. COURT OF APPEALS and NENITA
A. ANAY, respondents.

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No.
41616,[1] affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case
No. 88-509.[2]

Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private
respondent Nenita A. Anay met petitioner William T. Belo, then the vice-president for
operations of Ultra Clean Water Purifier, through her former employer in Bangkok. Belo
introduced Anay to petitioner Marjorie Tocao, who conveyed her desire to enter into a joint
venture with her for the importation and local distribution of kitchen cookwares. Belo
volunteered to finance the joint venture and assigned to Anay the job of marketing the product
considering her experience and established relationship with West Bend Company, a
manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture, Belo acted as
capitalist, Tocao as president and general manager, and Anay as head of the marketing
department and later, vice-president for sales. Anay organized the administrative staff and
sales force while Tocao hired and fired employees, determined commissions and/or salaries of
the employees, and assigned them to different branches. The parties agreed that Belos name
should not appear in any documents relating to their transactions with West Bend
Company. Instead, they agreed to use Anays name in securing distributorship of cookware
from that company. The parties agreed further that Anay would be entitled to: (1) ten percent
(10%) of the annual net profits of the business; (2) overriding commission of six percent (6%)
of the overall weekly production; (3) thirty percent (30%) of the sales she would make; and (4)
two percent (2%) for her demonstration services. The agreement was not reduced to writing
on the strength of Belos assurances that he was sincere, dependable and honest when it came
to financial commitments.

Anay having secured the distributorship of cookware products from the West Bend Company
and organized the administrative staff and the sales force, the cookware business took off
successfully. They operated under the name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712 Rufino Building, Ayala Avenue, Makati
City. Belo made good his monetary commitments to Anay. Thereafter, Roger Muencheberg of
West Bend Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach,
California, U.S.A., from July 25-26, 1987. Anay accepted the invitation with the consent of
Marjorie Tocao who, as president and general manager of Geminesse Enterprise, even wrote a
letter to the Visa Section of the U.S. Embassy in Manila on July 13, 1987. A portion of the letter
reads:

Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty
(20) years now, acquired the distributorship of Royal Queen cookware for Geminesse
Enterprise, is the Vice President Sales Marketing and a business partner of our company, will
attend in response to the invitation. (Italics supplied.)[3]

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving
the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On
August 31, 1987, she received a plaque of appreciation from the administrative and sales

people through Marjorie Tocao[4] for her excellent job performance. On October 7, 1987, in the
presence of Anay, Belo signed a memo[5] entitling her to a thirty-seven percent (37%)
commission for her personal sales "up Dec 31/87. Belo explained to her that said commission
was apart from her ten percent (10%) share in the profits. On October 9, 1987, Anay learned
that Marjorie Tocao had signed a letter[6]addressed to the Cubao sales office to the effect that
she was no longer the vice-president of Geminesse Enterprise. The following day, October 10,
she received a note from Lina T. Cruz, marketing manager, that Marjorie Tocao had barred her
from holding office and conducting demonstrations in both Makati and Cubao offices.[7] Anay
attempted to contact Belo. She wrote him twice to demand her overriding commission for the
period of January 8, 1988 to February 5, 1988 and the audit of the company to determine her
share in the net profits. When her letters were not answered, Anay consulted her lawyer, who,
in turn, wrote Belo a letter. Still, that letter was not answered.
Anay still received her five percent (5%) overriding commission up to December 1987. The
following year, 1988, she did not receive the same commission although the company netted a
gross sales of P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with
damages[8] against Marjorie D. Tocao and William Belo before the Regional Trial Court of
Makati, Branch 140.

In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5,
1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The
plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of
its business operation until she was illegally dismissed to determine her ten percent (10%)
share in the net profits. She further prayed that she be paid the five percent (5%) overriding
commission on the remaining 150 West Bend cookware sets before her dismissal.
In their answer,[9] Marjorie Tocao and Belo asserted that the alleged agreement with Anay
that was neither reduced in writing, nor ratified, was either unenforceable or void or
inexistent. As far as Belo was concerned, his only role was to introduce Anay to Marjorie
Tocao. There could not have been a partnership because, as Anay herself admitted, Geminesse
Enterprise was the sole proprietorship of Marjorie Tocao. Because Anay merely acted as
marketing demonstrator of Geminesse Enterprise for an agreed remuneration, and her
complaint referred to either her compensation or dismissal, such complaint should have been
lodged with the Department of Labor and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of ill-
will and resentment because Marjorie Tocao did not allow her to lord it over in the Geminesse
Enterprise. Anay had acted like she owned the enterprise because of her experience and
expertise. Hence, petitioners were the ones who suffered actual damages including unreturned
and unaccounted stocks of Geminesse Enterprise, and serious anxiety, besmirched reputation
in the business world, and various damages not less than P500,000.00. They also alleged that,
to vindicate their names, they had to hire counsel for a fee of P23,000.00.

At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled
to damages.[10]

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ATTY. MENDOZA

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
business. He, however, admitted that the two had agreed that Anay would receive a three to
four percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to
the business or receiving a share in its profits as he merely served as a guarantor of Marjorie
Tocao, who was new in the business. He attended and/or presided over business meetings of
the venture in his capacity as a guarantor but he never participated in decision-making. He
claimed that he wrote the memo granting the plaintiff thirty-seven percent (37%) commission
upon her dismissal from the business venture at the request of Tocao, because Anay had no
other income.

For her part, Marjorie Tocao denied having entered into an oral partnership agreement with
Anay. However, she admitted that Anay was an expert in the cookware business and hence,
they agreed to grant her the following commissions: thirty-seven percent (37%) on personal
sales; five percent (5%) on gross sales; two percent (2%) on product demonstrations, and two
percent (2%) for recruitment of personnel. Marjorie denied that they agreed on a ten percent
(10%) commission on the net profits. Marjorie claimed that she got the capital for the business
out of the sale of the sewing machines used in her garments business and from Peter Lo, a
Singaporean friend-financier who loaned her the funds with interest. Because she treated Anay
as her co-equal, Marjorie received the same amounts of commissions as her. However, Anay
failed to account for stocks valued at P200,000.00.

On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for
the years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten
percent (10%) share of plaintiff in the net profits of the cookware business;
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred
and fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded
from the partnership by defendants;
3. Ordering defendants to pay plaintiff overriding commission on the total production which for
the period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary
damages, and
5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as costs of suit.
SO ORDERED.

The trial court held that there was indeed an oral partnership agreement between the plaintiff
and the defendants, based on the following: (a) there was an intention to create a partnership;
(b) a common fund was established through contributions consisting of money and industry,
and (c) there was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anays
cousin and the administrative officer of Geminesse Enterprise from August 21, 1986 until it was
absorbed by Royal International, Inc., buttressed the fact that a partnership existed between the
parties. The letter of Roger Muencheberg of West Bend Company stating that he awarded the
distributorship to Anay and Marjorie Tocao because he was convinced that with Marjories
financial contribution and Anays experience, the combination of the two would be invaluable
to the partnership, also supported that conclusion. Belos claim that he was merely a
guarantor has no basis since there was no written evidence thereof as required by Article
2055 of the Civil Code. Moreover, his acts of attending and/or presiding over meetings of

Geminesse Enterprise plus his issuance of a memo giving Anay 37% commission on personal
sales belied this. On the contrary, it demonstrated his involvement as a partner in the business.
The trial court further held that the payment of commissions did not preclude the existence of
the partnership inasmuch as such practice is often resorted to in business circles as an impetus
to bigger sales volume. It did not matter that the agreement was not in writing because Article
1771 of the Civil Code provides that a partnership may be constituted in any form. The fact
that Geminesse Enterprise was registered in Marjorie Tocaos name is not determinative of
whether or not the business was managed and operated by a sole proprietor or a partnership.
What was registered with the Bureau of Domestic Trade was merely the business name or style
of Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an
innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the
partnership as well as damages or share in the profits realized from the appropriation of the
partnership business and goodwill. An innocent partner thus possesses pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled.

Petitioners appeal to the Court of Appeals[11] was dismissed, but the amount of damages
awarded by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as
exemplary damages. Their Motion for Reconsideration was denied by the Court of Appeals for
lack of merit.[12] Petitioners Belo and Marjorie Tocao are now before this Court on a petition for
review on certiorari, asserting that there was no business partnership between them and
herein private respondent Nenita A. Anay who is, therefore, not entitled to the damages
awarded to her by the Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a
partnership existed between them and private respondent Anay because Geminesse Enterprise
came into being exactly a year before the alleged partnership was formed, and that it was
very unlikely that petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao
contributing nothing, without any memorandum whatsoever regarding the alleged
partnership.[13]

The issue of whether or not a partnership exists is a factual matter which are within the
exclusive domain of both the trial and appellate courts. This Court cannot set aside factual
findings of such courts absent any showing that there is no evidence to support the conclusion
drawn by the court a quo.[14] In this case, both the trial court and the Court of Appeals are one in
ruling that petitioners and private respondent established a business partnership. This Court
finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or
more persons bind themselves to contribute money, property or industry to a common fund;
and (2) intention on the part of the partners to divide the profits among themselves.[15] It may
be constituted in any form; a public instrument is necessary only where immovable property or
real rights are contributed thereto.[16] This implies that since a contract of partnership is
consensual, an oral contract of partnership is as good as a written one. Where no immovable
property or real rights are involved, what matters is that the parties have complied with the
requisites of a partnership. The fact that there appears to be no record in the Securities and
Exchange Commission of a public instrument embodying the partnership agreement pursuant

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ATTY. MENDOZA

to Article 1772 of the Civil Code[17] did not cause the nullification of the partnership. The
pertinent provision of the Civil Code on the matter states:

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of article 1772, first
paragraph.

Petitioners admit that private respondent had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such expertise to the partnership
and hence, under the law, she was the industrial or managing partner. It was through her
reputation with the West Bend Company that the partnership was able to open the business of
distributorship of that companys cookware products; it was through the same efforts that the
business was propelled to financial success. Petitioner Tocao herself admitted private
respondents indispensable role in putting up the business when, upon being asked if private
respondent held the positions of marketing manager and vice-president for sales, she testified
thus:

A: No, sir at the start she was the marketing manager because there were no one to sell yet, its
only me there then her and then two (2) people, so about four (4). Now, after that when she
recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the
designation of marketing managers of which definitely Nita as superior to them would be the
Vice President.[18]

By the set-up of the business, third persons were made to believe that a partnership had indeed
been forged between petitioners and private respondents. Thus, the communication dated June
4, 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company
states:

Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations.
Marge does not have cookware experience. Nita Anay has started to gather former managers,
Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa
Lamela, Menchu Javier. They will continue to gather other key people and build up the
organization. All they need is the finance and the products to sell.[19]

On the other hand, petitioner Belos denial that he financed the partnership rings hollow in the
face of the established fact that he presided over meetings regarding matters affecting the
operation of the business. Moreover, his having authorized in writing on October 7, 1987, on a
stationery of his own business firm, Wilcon Builders Supply, that private respondent should
receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted
otherwise than that he had a proprietary interest in the business. His claim that he was merely
a guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was
indeed a guarantor of future debts of petitioner Tocao under Article 2053 of the Civil
Code,[20] he should have presented documentary evidence therefor. While Article 2055 of the
Civil Code simply provides that guaranty must be express, Article 1403, the Statute of Frauds,
requires that a special promise to answer for the debt, default or miscarriage of another be in
writing.[21]

Petitioner Tocao, a former ramp model,[22] was also a capitalist in the partnership. She claimed
that she herself financed the business. Her and petitioner Belos roles as both capitalists to the

partnership with private respondent are buttressed by petitioner Tocaos admissions that
petitioner Belo was her boyfriend and that the partnership was not their only business venture
together. They also established a firm that they called Wiji, the combination of petitioner
Belos first name, William, and her nickname, Jiji.[23] The special relationship between them
dovetails with petitioner Belos claim that he was acting in behalf of petitioner Tocao.
Significantly, in the early stage of the business operation, petitioners requested West Bend
Company to allow them to utilize their banking and trading facilities in Singapore in the
matter of importation and payment of the cookware products.[24] The inevitable conclusion,
therefore, was that petitioners merged their respective capital and infused the amount into the
partnership of distributing cookware with private respondent as the managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-
employee relationship between petitioners and private respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a
partner in the business,[25] the evidence in the case at bar controverts an employer-employee
relationship between the parties. In the first place, private respondent had a voice in the
management of the affairs of the cookware distributorship,[26]including selection of people who
would constitute the administrative staff and the sales force. Secondly, petitioner Tocaos
admissions militate against an employer-employee relationship. She admitted that, like her who
owned Geminesse Enterprise,[27] private respondent received only commissions and
transportation and representation allowances[28]and not a fixed salary.[29] Petitioner Tocao
testified:

Q: Of course. Now, I am showing to you certain documents already marked as Exhs. X and Y.
Please go over this. Exh. Y is denominated `Cubao overrides 8-21-87 with ending August 21,
1987, will you please go over this and tell the Honorable Court whether you ever came across
this document and know of your own knowledge the amount ---
A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I
quote: Overrides Marjorie Ann Tocao P21,410.50 this means that you have received this
amount?
A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing
commission, representation, advertising and promotion?
A: Yes, sir.
Q: I see. Below your name is the words and figure and I quote Nita D. Anay P21,410.50, what is
this?
A: Thats her overriding commission.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being
the same P21,410.50 is merely by coincidence?
A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a
sense because of her expertise in the business she is vital to my business. So, as part of the incentive
I offer her the same thing.
Q: So, in short you are saying that this you have shared together, I mean having gotten from the
company P21,140.50 is your way of indicating that you were treating her as an equal?
A: As an equal.
Q: As an equal, I see. You were treating her as an equal?
A: Yes, sir.

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ATTY. MENDOZA

Q: I am calling again your attention to Exh. Y Overrides Makati the other one is ---
A: That is the same thing, sir.
Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao P15,314.25 the
amount there you will acknowledge you have received that?
A: Yes, sir.
Q: Again in concept of commission, representation, promotion, etc.?
A: Yes, sir.
Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that
she received the same amount?
A: Yes, sir.
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?
A: No, sir.
Q: It is again in concept of you treating Miss Anay as your equal?
A: Yes, sir. (Italics supplied.)[30]

If indeed petitioner Tocao was private respondents employer, it is difficult to believe that they
shall receive the same income in the business. In a partnership, each partner must share in the
profits and losses of the venture, except that the industrial partner shall not be liable for the
losses.[31] As an industrial partner, private respondent had the right to demand for a formal
accounting of the business and to receive her share in the net profit.[32]

The fact that the cookware distributorship was operated under the name of Geminesse
Enterprise, a sole proprietorship, is of no moment. What was registered with the Bureau of
Domestic Trade on August 19, 1987 was merely the name of that enterprise.[33] While it is true
that in her undated application for renewal of registration of that firm name, petitioner Tocao
indicated that it would be engaged in retail of kitchenwares, cookwares, utensils,
skillet,[34] she also admitted that the enterprise was only 60% to 70% for the cookware
business, while 20% to 30% of its business activity was devoted to the sale of water sterilizer
or purifier.[35] Indubitably then, the business name Geminesse Enterprise was used only for
practical reasons - it was utilized as the common name for petitioner Tocaos various business
activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00.[36]Obviously a ploy to
offset the damages awarded to private respondent, that claim, more than anything else, proves
the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:
The best evidence of the existence of the partnership, which was not yet terminated (though in
the winding up stage), were the unsold goods and uncollected receivables, which were
presented to the trial court. Since the partnership has not been terminated, the petitioner and
private complainant remained as co-partners. x x x.[37]

It is not surprising then that, even after private respondent had been unceremoniously booted
out of the partnership in October 1987, she still received her overriding commission until
December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership
to reap for herself and/or for petitioner Belo financial gains resulting from private respondents
efforts to make the business venture a success. Thus, as petitioner Tocao became adept in the
business operation, she started to assert herself to the extent that she would even shout at

private respondent in front of other people.[38] Her instruction to Lina Torda Cruz, marketing
manager, not to allow private respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private respondent was no longer necessary in
the business operation,[39] and resulted in a falling out between the two. However, a mere
falling out or misunderstanding between partners does not convert the partnership into a sham
organization.[40] The partnership exists until dissolved under the law. Since the partnership
created by petitioners and private respondent has no fixed term and is therefore a partnership
at will predicated on their mutual desire and consent, it may be dissolved by the will of a
partner. Thus:

x x x. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partners capability to give it, and the absence
of cause for dissolution provided by the law itself. Verily, any one of the partners may, at his
sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good
faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that
it can result in a liability for damages.[41]

An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners
to have the power, although not necessarily the right to dissolve the partnership.[42]

In this case, petitioner Tocaos unilateral exclusion of private respondent from the partnership
is shown by her memo to the Cubao office plainly stating that private respondent was, as of
October 9, 1987, no longer the vice-president for sales of Geminesse Enterprise.[43] By that
memo, petitioner Tocao effected her own withdrawal from the partnership and considered
herself as having ceased to be associated with the partnership in the carrying on of the
business. Nevertheless, the partnership was not terminated thereby; it continues until the
winding up of the business.[44]

The winding up of partnership affairs has not yet been undertaken by the partnership. This is
manifest in petitioners claim for stocks that had been entrusted to private respondent in the
pursuit of the partnership business.

The determination of the amount of damages commensurate with the factual findings upon
which it is based is primarily the task of the trial court.[45] The Court of Appeals may modify that
amount only when its factual findings are diametrically opposed to that of the lower court,[46] or
the award is palpably or scandalously and unreasonably excessive.[47] However, exemplary
damages that are awarded by way of example or correction for the public good,[48] should be
reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly,
the award of moral damages of P100,000.00 was excessive and should be likewise reduced to
P50,000.00. Similarly, attorneys fees that should be granted on account of the award of
exemplary damages and petitioners evident bad faith in refusing to satisfy private
respondents plainly valid, just and demandable claims,[49] appear to have been excessively
granted by the trial court and should therefore be reduced to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect
the winding up and liquidation of the partnership pursuant to the pertinent provisions of the

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ATTY. MENDOZA

Civil Code. This case is remanded to the Regional Trial Court for proper proceedings relative to
said dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals
are AFFIRMED with MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the
partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in
order to determine private respondents ten percent (10%) share in the net profits of the
partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
overriding commission for the one hundred and fifty (150) cookware sets available for
disposition since the time private respondent was wrongfully excluded from the partnership by
petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding
commission on the total production which, for the period covering January 8, 1988 to February
5, 1988, amounted to P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in
the amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorneys fees
in the amount of P25,000.00.

SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

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ATTY. MENDOZA

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA,

INC., vs. QUIRINO BOLAOS,

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to
recover possesion of registered land situated in barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and description of the
land sought to be recovered. The original complaint described the land as a portion of a lot
registered in plaintiff's name under Transfer Certificate of Title No. 37686 of the land record of
Rizal Province and as containing an area of 13 hectares more or less. But the complaint was
amended by reducing the area of 6 hectares, more or less, after the defendant had indicated the
plaintiff's surveyors the portion of land claimed and occupied by him. The second amendment
became necessary and was allowed following the testimony of plaintiff's surveyors that a
portion of the area was embraced in another certificate of title, which was plaintiff's Transfer
Certificate of Title No. 37677. And still later, in the course of trial, after defendant's surveyor
and witness, Quirino Feria, had testified that the area occupied and claimed by defendant was
about 13 hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court, amended its
complaint to make its allegations conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous,
exclusive and public and notorious possession (of land in dispute) under claim of ownership,
adverse to the entire world by defendant and his predecessor in interest" from "time in-
memorial". The answer further alleges that registration of the land in dispute was obtained by
plaintiff or its predecessors in interest thru "fraud or error and without knowledge (of) or
interest either personal or thru publication to defendant and/or predecessors in interest." The
answer therefore prays that the complaint be dismissed with costs and plaintiff required to
reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without
any right to the land in question and ordering him to restore possession thereof to plaintiff and
to pay the latter a monthly rent of P132.62 from January, 1940, until he vacates the land, and
also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes
the following assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case was not brought
by the real property in interest.
II. The trial court erred in admitting the third amended complaint.
III. The trial court erred in denying defendant's motion to strike.
IV. The trial court erred in including in its decision land not involved in the litigation.
V. The trial court erred in holding that the land in dispute is covered by transfer certificates of
Title Nos. 37686 and 37677.
Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the
land.
VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of
P132.62 monthly from January, 1940, until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant.

As to the first assigned error, there is nothing to the contention that the present action is not
brought by the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of
Court require is that an action be brought in the name of, but not necessarily by, the real party in
interest. (Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that
is to file the complaint, in the name of the plaintiff. That practice appears to have been followed
in this case, since the complaint is signed by the law firm of Araneta and Araneta, "counsel for
plaintiff" and commences with the statement "comes now plaintiff, through its undersigned
counsel." It is true that the complaint also states that the plaintiff is "represented herein by its
Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one
corporation being represented by another person, natural or juridical, in a suit in court. The
contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the
theory that it is illegal for two corporations to enter into a partnership is without merit, for the
true rule is that "though a corporation has no power to enter into a partnership, it may
nevertheless enter into a joint venture with another where the nature of that venture is in line
with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L.
R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the
venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is
not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended complaint, may be
answered by mere reference to section 4 of Rule 17, Rules of Court, which sanctions such
amendment. It reads:

Sec. 4. Amendment to conform to evidence. When issues not raised by the pleadings are tried
by express or implied consent of the parties, they shall be treated in all respects, as if they had
been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause
them to conform to the evidence and to raise these issues may be made upon motion of any
party at my time, even of the trial of these issues. If evidence is objected to at the trial on the
ground that it is not within the issues made by the pleadings, the court may allow the pleadings
to be amended and shall be so freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court that the admission of such
evidence would prejudice him in maintaining his action or defense upon the merits. The court
may grant a continuance to enable the objecting party to meet such evidence.
Under this provision amendment is not even necessary for the purpose of rendering judgment
on issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran
says in this Rules of Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled
that where the facts shown entitled plaintiff to relief other than that asked for, no amendment
to the complaint is necessary, especially where defendant has himself raised the point on which
recovery is based, and that the appellate court treat the pleadings as amended to conform to the
evidence, although the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed.,
389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit..

Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the
trial, that the land in dispute "is that described or represented in Exhibit A and in Exhibit B
enclosed in red pencil with the name Quirino Bolaos," defendant later changed his lawyer and
also his theory and tried to prove that the land in dispute was not covered by plaintiff's

BUSORG CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

certificate of title. The evidence, however, is against defendant, for it clearly establishes that
plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon City, with
an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No.
37686 of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio,
having an area of 74,789 square meters, more or less, covered by transfer certificate of title No.
37677 of the land records of the same province, both lots having been originally registered on
July 8, 1914 under original certificate of title No. 735. The identity of the lots was established by
the testimony of Antonio Manahan and Magno Faustino, witnesses for plaintiff, and the identity
of the portion thereof claimed by defendant was established by the testimony of his own
witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the
portion claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-
B-4, and is well within the area covered by the two transfer certificates of title already
mentioned. This fact also appears admitted in defendant's answer to the third amended
complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in
1914, the decree of registration can no longer be impugned on the ground of fraud, error or lack
of notice to defendant, as more than one year has already elapsed from the issuance and entry
of the decree. Neither court the decree be collaterally attacked by any person claiming title to,
or interest in, the land prior to the registration proceedings. (Sorogon vs. Makalintal,1 45 Off.
Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner,
be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse,
notorious and continuous possession under claim of ownership for the period fixed by law is
ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9,
p. 43.) And it is likewise settled that the right to secure possession under a decree of
registration does not prescribed. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent
decision of this Court on this point is that rendered in the case of Jose Alcantara et al., vs.
Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant
should be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the
premises.' But it appears from the record that that reasonable compensation for the use and
occupation of the premises, as stipulated at the hearing was P10 a month for each hectare and
that the area occupied by defendant was 13.2619 hectares. The total rent to be paid for the area
occupied should therefore be P132.62 a month. It is appears from the testimony of J. A. Araneta
and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment had already been
filed against defendant. And it cannot be supposed that defendant has been paying rents, for he
has been asserting all along that the premises in question 'have always been since time
immemorial in open, continuous, exclusive and public and notorious possession and under
claim of ownership adverse to the entire world by defendant and his predecessors in interest.'

This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further
consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion
to dismiss alleging that there is pending before the Court of First Instance of Rizal another
action between the same parties and for the same cause and seeking to sustain that allegation

with a copy of the complaint filed in said action. But an examination of that complaint reveals
that appellant's allegation is not correct, for the pretended identity of parties and cause of
action in the two suits does not appear. That other case is one for recovery of ownership, while
the present one is for recovery of possession. And while appellant claims that he is also
involved in that order action because it is a class suit, the complaint does not show that such is
really the case. On the contrary, it appears that the action seeks relief for each individual
plaintiff and not relief for and on behalf of others. The motion for dismissal is clearly without
merit.

Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.


ALFREDO N. AGUILA, JR, , vs. HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR,

This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated
November 29, 1990, which reversed the decision of the Regional Trial Court, Branch 273,
Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed the petition for
declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de Abrogar
against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending
activities. Private respondent and her late husband, Ruben M. Abrogar, were the registered
owners of a house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina,
Metro Manila. On April 18, 1991, private respondent, with the consent of her late husband, and
A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of Agreement,
which provided:

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described property
from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this agreement, a Deed of
Absolute Sale shall be executed by the FIRST PARTY conveying the property to the SECOND
PARTY for and in consideration of the sum of Two Hundred Thousand Pesos (P200,000.00),
Philippine Currency;

(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the said
property within a period of ninety (90) days from the execution of this memorandum of
agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY THOUSAND
PESOS (P230,000.00);

(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said
property within a period of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully
the possession of the property to the SECOND PARTY within fifteen (15) days after the
expiration of the said 90 day grace period;

(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or
whatever claims on the property nor shall be cause the annotation of say claim at the back of
the title to the said property;

BUSORG CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her ownership
of the property and shall defend the rights of the SECOND PARTY against any party whom may
have any interests over the property;

(6) All expenses for documentation and other incidental expenses shall be for the account of
the FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND
PARTY after the expiration of the 15-day grace period given in paragraph 3 above, the FIRST
PARTY shall pay an amount equivalent to Five Percent of the principal amount of TWO
HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and liquidated
damages;

(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety
(90) days period above-mentioned, this memorandum of agreement shall be deemed cancelled
and the Deed of Absolute Sale, executed by the parties shall be the final contract considered as
entered between the parties and the SECOND PARTY shall proceed to transfer ownership of the
property above described to its name free from lines and encumbrances.[2]

On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale,[3] dated
June 11, 1991, wherein private respondent, with the consent of her late husband, sold the
subject property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000.00. In a
special power of attorney dated the same day, April 18, 1991, private respondent authorized
petitioner to cause the cancellation of TCT No. 195101 and the issuance of a new certificate of
title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject
property as provided in the Memorandum of Agreement.[4]

Private respondent failed to redeem the property within the 90-day period as provided in the
Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned
above, petitioner caused the cancellation of TCT No. 195101 and the issuance of a new
certificate of title in the name of A.C. Aguila and Sons, Co.[5]

Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C.
Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15
days after receipt of the letter and surrender its possession peacefully to A.C. Aguila & Sons,
Co. Otherwise, the latter would bring the appropriate action in court.[6]

Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co.
filed an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro
Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C.
Aguila & Sons, Co. on the ground that private respondent did not redeem the subject property
before the expiration of the 90-day period provided in the Memorandum of Agreement. Private
respondent appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to
the Court of Appeals, and later to this Court, but she lost in all the cases.

Private respondent then filed a petition for declaration of nullity of a deed of sale with the
Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged

that the signature of her husband on the deed of sale was a forgery because he was already
dead when the deed was supposed to have been executed on June 11, 1991.

It appears, however, that private respondent had filed a criminal complaint for falsification
against petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a
resolution, dated February 14, 1994.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they could not
personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her
husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution of
the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center
recuperating from wounds which she suffered at the same vehicular accident on May 8, 1991,
cannot be sustained. The Court is convinced that the three required documents, to wit: the
Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were
all signed by the parties on the same date on April 18, 1991. It is a common and accepted
business practice of those engaged in money lending to prepare an undated absolute deed of
sale in loans of money secured by real estate for various reasons, foremost of which is the
evasion of taxes and surcharges. The plaintiff never questioned receiving the sum of
P200,000.00 representing her loan from the defendant. Common sense dictates that an
established lending and realty firm like the Aguila & Sons, Co. would not part with P200,000.00
to the Abrogar spouses, who are virtual strangers to it, without the simultaneous
accomplishment and signing of all the required documents, more particularly the Deed of
Absolute Sale, to protect its interest.
. . . .
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED
DISMISSED, with costs against the plaintiff.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and defendant-
appellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong
application in the case at bar in the light of the following circumstances.

First: The purchase price for the alleged sale with right to repurchase is unusually inadequate.
The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of
plaintiff-appellant stands. The property is inside a subdivision/village. The property is
situated in Marikina which is already part of Metro Manila. The alleged sale took place in 1991
when the value of the land had considerably increased.

For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square
meter for both the land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant
is obliged to deliver peacefully the possession of the property to the SECOND PARTY within
fifteen (15) days after the expiration of the said ninety (90) day grace period. Otherwise stated,
plaintiff-appellant is to retain physical possession of the thing allegedly sold.

BUSORG CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

In fact, plaintiff-appellant retained possession of the property sold as if they were still the
absolute owners. There was no provision for maintenance or expenses, much less for payment
of rent.

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property
sold. It is well-known that payment of taxes accompanied by actual possession of the land
covered by the tax declaration, constitute evidence of great weight that a person under whose
name the real taxes were declared has a claim of right over the land.

It is well-settled that the presence of even one of the circumstances in Article 1602 of the New
Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable
mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate,
has retained possession of the subject property and has continued paying the realty taxes over
the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the
New Civil Code), it must be conclusively presumed that the transaction the parties actually
entered into is an equitable mortgage, not a sale with right to repurchase. The factors cited are
in support to the finding that the Deed of Sale/Memorandum of Agreement with right to
repurchase is in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by
reason of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan
being the same with the amount of the purchase price.

Since the real intention of the party is to secure the payment of debt, now deemed to be
repurchase price: the transaction shall then be considered to be an equitable mortgage.

Being a mortgage, the transaction entered into by the parties is in the nature of a pactum
commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article 2088
of the New Civil Code reads:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1)
that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way
of security for the payment of principal obligation; and (2) that there should be a stipulation for
an automatic appropriation by the creditor of the thing pledged and mortgaged in the event of
non-payment of the principal obligation within the stipulated period.

In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant
secured by a mortgage on the property of plaintiff-appellant. The loan was payable within
ninety (90) days, the period within which plaintiff-appellant can repurchase the
property. Plaintiff-appellant will pay P230,000.00 and not P200,000.00, the P30,000.00 excess
is the interest for the loan extended. Failure of plaintiff-appellee to pay the P230,000,00 within
the ninety (90) days period, the property shall automatically belong to defendant-appellee by
virtue of the deed of sale executed.

Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so declare to
be invalid, for being violative of law.

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET
ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in favor
of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendant-appellee
pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby
ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby
ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety (90)
days from the finality of this decision. In case of failure to pay the amount of P230,000.00 from
the period therein stated, the property shall be sold at public auction to satisfy the mortgage
debt and costs and if there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co.,
against which this case should have been brought; (2) the judgment in the ejectment case is a
bar to the filing of the complaint for declaration of nullity of a deed of sale in this case; and (3)
the contract between A.C. Aguila & Sons, Co. and private respondent is a pacto de retro sale and
not an equitable mortgage as held by the appellate court.

The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case was filed,
provided that every action must be prosecuted and defended in the name of the real party in
interest. A real party in interest is one who would be benefited or injured by the judgment, or
who is entitled to the avails of the suit.[7] This ruling is now embodied in Rule 3, 2 of the 1997
Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real
party in interest in the case cannot be executed.[8] Hence, a complaint filed against such a
person should be dismissed for failure to state a cause of action.[9]

Under Art. 1768 of the Civil Code, a partnership has a juridical personality separate and
distinct from that of each of the partners. The partners cannot be held liable for the obligations
of the partnership unless it is shown that the legal fiction of a different juridical personality is
being used for fraudulent, unfair, or illegal purposes.[10] In this case, private respondent has not
shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent,
unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C.
Aguila & Sons, Co. and the Memorandum of Agreement was executed between private
respondent, with the consent of her late husband, and A. C. Aguila & Sons, Co., represented by
petitioner. Hence, it is the partnership, not its officers or agents, which should be impleaded in
any litigation involving property registered in its name. A violation of this rule will result in the
dismissal of the complaint.[11]We cannot understand why both the Regional Trial Court and the
Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this action should
be prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint
against petitioner is DISMISSED.
SO ORDERED.

BUSORG CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

MARIANO
P.
PASCUAL
and
RENATO
P.
DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al.
and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the
tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National Internal Revenue
Code 1 that the unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual income tax;
and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax
liability of the unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as
CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners which like a corporation was subject to corporate
income tax distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of
the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT
AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID
DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13,
Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with
their own personal funds they used in buying several real properties. They appointed their
brother to manage their properties with full power to lease, collect, rent, issue receipts, etc.
They had the real properties rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded
the payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for
in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation
and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies
colectivas).

Article 1767 of the Civil Code of the Philippines provides:

10

BUSORG CASES 1
FOR NOVEMBER 18, 2014
ATTY. MENDOZA

By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement
to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of
all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was
to engage in real estate transactions for monetary gain and then divide the same among
themselves, because:

1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots
for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a pattern
or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in February, 1943.
In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on

the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not
in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the
profits among themselves. Respondent commissioner and/ or his representative just assumed
these conditions to be present on the basis of the fact that petitioners purchased certain parcels
of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the
same nor make any improvements thereon. In 1966, they bought another three (3) parcels of
land from one seller. It was only 1968 when they sold the two (2) parcels of land after which
they did not make any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15) years.
None of the circumstances are present in the case at bar. The co-ownership started only in 1965
and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-
ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the others (Padilla,
Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

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It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain the
title to their respective contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in the business itself
which the proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed.,
section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor
does an agreement to share the profits and losses on the sale of land create a partnership; the
parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed.,
1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between
the three parties, whatever their relation may have been as to third parties. (Magee vs. Magee
123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the
same a few years thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have formed an
unregistered partnership, which is thereby liable for corporate income tax, as the respondent
commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for this unpaid obligation of the

partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as

individual taxpayers in these transactions, they are thereby relieved of any further tax liability
arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs. SO ORDERED.


LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B.
OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have constituted an unregistered partnership and
are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total
sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958,
subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said
court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April
14, 1949, the administrator submitted the project of partition, which was approved by the
Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and
Lorenzo, Jr., all surnamed Oa, were still minors when the project of partition was approved,
Lorenzo T. Oa, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the persons and property of the
aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of
P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount
to be collected from the War Damage Commission. Later, they received from said Commission
the amount of P50,000.00, more or less. This amount was not divided among them but was
used in the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten
parcels of land aforementioned, two were acquired after the death of the decedent with money
borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit
3, pp. 31-34 BIR rec.).

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The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oa who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the
following year-end balances:
Land

Building

Account

Account

P87,860.00

P17,590.00

128,566.72

96,076.26

120,349.28

110,605.11

87,065.28

152,674.39

84,925.68

161,463.83

99,001.20

167,962.04

120,249.78

169,262.52

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests
(see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the
books of account kept by Lorenzo T. Oa where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax
purposes their shares in the net income derived from said properties and securities and/or
from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did
not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income
was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in
real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided
that petitioners formed an unregistered partnership and therefore, subject to the corporate
income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he
assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR
rec.). Petitioners protested against the assessment and asked for reconsideration of the ruling
of respondent that they have formed an unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net
income
as
per
investigation
................ P40,209.89

Income
tax
due
thereon
...............................
8,042.00
25%
surcharge
..............................................
2,010.50
Compromise
for
non-filing
.......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income
tax
due
thereon
...............................
13,849.00
25%
surcharge
..............................................
3,462.25
Compromise
for
non-filing
.......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6,
1958, so that the questioned assessment refers solely to the income tax proper for the years
1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring to the
compromise in lieu of the criminal liability for failure of petitioners to file the corporate income
tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:

I. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II. THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);
III. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV. ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS
RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V . ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT
OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS

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ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF
THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts
found by the Court of Tax Appeals, should petitioners be considered as co-owners of the
properties inherited by them from the deceased Julia Buales and the profits derived from
transactions involving the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code?
(2) Assuming they have formed an unregistered partnership, should this not be only in the
sense that they invested as a common fund the profits earned by the properties owned by them
in common and the loans granted to them upon the security of the said properties, with the
result that as far as their respective shares in the inheritance are concerned, the total income
thereof should be considered as that of co-owners and not of the unregistered partnership? And
(3) assuming again that they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on
their respective shares of the profits accruing from the properties they owned in common be
deducted from the deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as May 16, 1949, and presumably
petitioners have been holding their respective shares in their inheritance since those dates
admittedly under the administration or management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We
believe this point to be important because, apparently, at the start, or in the years 1944 to 1954,
the respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable
to corporate tax, and it was only from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason how it could be
otherwise, it is easily understandable why petitioners' position that they are co-owners and not
unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed
earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said properties and investments
steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building
account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from Lorenzo T. Oa and
instead, they allowed him to continue using said shares as part of the common fund for their
ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said Lorenzo T. Oa.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the

material years herein involved, some of the said properties were sold at considerable profit,
and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were
divided among petitioners proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from the moment petitioners
allowed not only the incomes from their respective shares of the inheritance but even the
inherited properties themselves to be used by Lorenzo T. Oa as a common fund in undertaking
several transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the
above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status
as co-owners continues until the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for
holding the appellants therein to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the
co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed in
an extrajudicial settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a joint or common right or interest in any property from

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which the returns are derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of
partnerships under the Civil Code from that of unregistered partnerships which are considered
as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr.
Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in confirmity with the usual requirements of the law on partnerships, in order that
one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above
stated, "duly registered general co-partnerships" which are possessed of the aforementioned
personality have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx

Similarly, the American Law... provides its own concept of a partnership. Under the term
"partnership" it includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization which carries on any
business, financial operation, or venture, and which is not, within the meaning of the Code, a
trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789;
emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on. ... . (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a
theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of
the corporate taxes in question, of their inherited properties from those acquired by them

subsequently, We consider as justified the following ratiocination of the Tax Court in denying
their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the properties
inherited by petitioners. In other words, the taxable income of the partnership should be
limited to the income derived from the acquisition and sale of real properties and corporate
securities and should not include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived therefrom were used in the
business of buying and selling other real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate
is not distributed or, at least, partitioned, but the moment their respective known shares are
used as part of the common assets of the heirs to be used in making profits, it is but proper that
the income of such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein petitioners have
formed an unregistered partnership and, therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual income tax returns reported their shares of the
profits of the unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective shares of the
unregistered partnership should be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7, Memorandum for the Petitioner
in Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must
be reduced by the amounts of income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way around. The partnership profits
distributable to the partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question, but the income tax due from the
partnership has been correctly assessed. Since the individual income tax liabilities of
petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the
same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might
have paid as individual income tax cannot be credited as part payment of the taxes herein in
question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do not agree. As We see it, the case of

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ATTY. MENDOZA

petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate.
Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the
law is very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case of
herein petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the corporate taxes legally due from
them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons
who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.

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FOR NOVEMBER 18, 2014
ATTY. MENDOZA

GATCHALIAN VS CIR

The plaintiff brought this action to recover from the defendant Collector of Internal Revenue
the sum of P1,863.44, with legal interest thereon, which they paid under protest by way of
income tax. They appealed from the decision rendered in the case on October 23, 1936 by the
Court of First Instance of the City of Manila, which dismissed the action with the costs against
them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned
attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the
following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is
the Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:

1. Jose Gatchalian ....................................................................................................

P0.18

2. Gregoria Cristobal ...............................................................................................

.18

3. Saturnina Silva ....................................................................................................

.08

4. Guillermo Tapia ...................................................................................................

.13

5. Jesus Legaspi ......................................................................................................

.15

6. Jose Silva .............................................................................................................

.07

7. Tomasa Mercado ................................................................................................

.08

8. Julio Gatchalian ...................................................................................................

.13

9. Emiliana Santiago ................................................................................................

.13

10. Maria C. Legaspi ...............................................................................................

.16

11. Francisco Cabral ...............................................................................................

.13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

14. Buenaventura Guzman ......................................................................................

.13

15. Mariano Santos .................................................................................................

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the
said ticket was registered in the name of Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-
mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and
that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the
National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the
Philippine National Bank, which check was cashed during the latter part of December, 1934 by
Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo
David to file the corresponding income tax return covering the prize won by Jose Gatchalian &
Company and that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy
of which return is enclosed as Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &
Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of
Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which
to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is enclosed and
made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a
copy of which marked Exhibit C is attached and made a part hereof, requesting exemption from
payment of the income tax to which reply there were enclosed fifteen (15) separate individual
income tax returns filed separately by each one of the plaintiffs, copies of which returns are
attached and marked Exhibit D-1 to D-15, respectively, in order of their names listed in the
caption of this case and made parts hereof; a statement of sale signed by Jose Gatchalian
showing the amount put up by each of the plaintiffs to cover up the attached and marked as
Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is
enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax
and reiterated his demand for the payment of the sum of P1,499.94 as income tax and gave
plaintiffs until February 10, 1935 within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs through
their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on
May 13, 1935 issued a warrant of distraint and levy against the property of the plaintiffs, a copy
of which warrant marked Exhibit I is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the
said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi,
paid under protest the sum of P601.51 as part of the tax and penalties to the municipal
treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is attached
and marked Exhibit J and made a part hereof, and requested defendant that plaintiffs be
allowed to pay under protest the balance of the tax and penalties by monthly installments;

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BUSORG CASES 1
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ATTY. MENDOZA

11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant
subject to the condition that plaintiffs file the usual bond secured by two solvent persons to
guarantee prompt payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed
and made a part hereof, to guarantee the payment of the balance of the alleged tax liability by
monthly installments at the rate of P118.70 a month, the first payment under protest to be
effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum
of P602.51, a copy of which protest is attached and marked Exhibit L, but that defendant in his
letter dated August 1, 1935 overruled the protest and denied the request for refund of the
plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance
with the terms and conditions of bond filed by them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of
Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against the
plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria
Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan,
Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and penalties
demanded by defendant as evidenced by income tax receipt No. 35811 which is attached and
marked Exhibit N and made a part hereof; and that on September 3, 1936, the plaintiffs
formally protested to the defendant against the payment of said amount and requested the
refund thereof, copy of which is attached and marked Exhibit O and made part hereof; but that
on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy
of which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight
hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them
but that defendant refused and still refuses to refund the said amount notwithstanding the
plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th
day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the
amount indicated below and the part of may share remaining is also shown to wit:

Purchaser

Amount

Address

1. Mariano Santos ...........................................

P0.14

Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00

Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize
that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
Name

Exhibit
No.

Purchase
Price

Price
Won

Expenses

Net
prize

1.
Jose
Gatchalian
..........................................

D-1

P0.18

P4,425

P 480

3,945

2.
Gregoria
Cristobal
......................................

D-2

.18

4,575

2,000

2,575

3.
Saturnina
Silva
.............................................

D-3

.08

1,875

360

1,515

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ATTY. MENDOZA

4.
Guillermo
Tapia
..........................................

D-4

.13

3,325

360

2,965

5. Jesus Legaspi by Maria

Cristobal .........

D-5

.15

3,825

720

3,105

6.
Jose
Silva
....................................................

D-6

.08

1,875

360

1,515

7.
Tomasa
Mercado
.......................................

D-7

.07

1,875

360

1,515

8. Julio Gatchalian
Beatriz Guzman .......

D-8

.13

3,150

240

2,910

9.
Emiliana
Santiago
......................................

D-9

.13

3,325

360

2,965

10. Maria C. Legaspi

......................................

D-10

.16

4,100

960

3,140

11.
Francisco
......................................

D-11

.13

3,325

360

2,965

12.
Gonzalo
Javier
..........................................

D-12

.14

3,325

360

2,965

13.
Maria
Santiago
..........................................

D-13

.17

4,350

360

3,990

14. Buenaventura Guzman

...........................

D-14

.13

3,325

360

2,965

15.
Mariano
Santos
........................................

D-15

.14

3,325

360

2,965

50,000

by

Cabral

2.00

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced
to the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of
property without a personality of its own; in the first case it is admitted that the partnership
thus formed is liable for the payment of income tax, whereas if there was merely a community
of property, they are exempt from such payment; and (2) whether they should pay the tax
collectively or whether the latter should be prorated among them and paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:

SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association or insurance
company, organized in the Philippine Islands, no matter how created or organized, but not
including duly registered general copartnership (compaias colectivas), a tax of three per
centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding calendar year from all sources within the
Philippine Islands by every corporation, joint-stock company, partnership, joint account
(cuenta en participacion), association, or insurance company organized, authorized, or existing
under the laws of any foreign country, including interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise: Provided, however, That nothing in this
section shall be construed as permitting the taxation of the income derived from dividends or
net profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association, or insurance
company, or property, real, personal, or mixed, shall be ascertained in accordance with
subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred and thirty-
three, as amended by Act Numbered Twenty-nine hundred and twenty-six.

The foregoing tax rate shall apply to the net income received by every taxable corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
insurance company in the calendar year nineteen hundred and twenty and in each year
thereafter.

There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulation facts the
plaintiffs organized a partnership of a civil nature because each of them put up money to buy a
sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as
they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not
only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-
partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner, in the same capacity, collected the said check. All
these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one
bound to pay the income tax which the defendant collected under the aforesaid section 10 (a)
of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's
contention that the tax should be prorated among them and paid individually, resulting in their
exemption from the tax.

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.

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FOR NOVEMBER 18, 2014
ATTY. MENDOZA

OBILLOS VS CIR

This case is about the income tax liability of four brothers and sisters who sold two parcels of
land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with
areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he
transferred his rights to his four children, the petitioners, to enable them to build their
residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A
and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were
co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to
the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh.
C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.
They treated the profit as a capital gain and paid an income tax on one-half thereof or of
P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the
Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on
the total profit of P134,336 in addition to individual income tax on their shares thereof He
assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as
42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as
a " taxable in full (not a mere capital gain of which is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the
accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by
them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article
1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves. To regard the petitioners as
having formed a taxable unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership

and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the high cost of construction, then
they had no choice but to resell the same to dissolve the co-ownership. The division of the profit
was merely incidental to the dissolution of the co-ownership which was in the nature of things
a temporary state. It had to be terminated sooner or later. Castan Tobeas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y
existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun
y favorecer su conservacion. Reflejo de este criterio es la sentencia de 15 de Octubre de 1940,
en la que se dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de
fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion aparte del
origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los
interesados: lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la
comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right
or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15
persons contributed small amounts to purchase a two-peso sweepstakes ticket with the
agreement that they would divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures
for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in
questionpro-indiviso from their deceased parents; they did not contribute or invest additional '
capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in their
tax returns their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by respondent, 'to
preserve its (the 'hacienda') value and to continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise,
would
be
to
subject
the
income
of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does

20

BUSORG CASES 1
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ATTY. MENDOZA

not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738,
September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198,
where father and son purchased a lot and building, entrusted the administration of the building
to an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real
property which they leased to various tenants and derived rentals therefrom. Clearly, the
petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the
father donated the two lots to the petitioners and whether he paid the donor's tax (See
Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs. SO ORDERED.

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BUSORG CASES 1
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ATTY. MENDOZA

EVANGELISTA VS CIR

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista,
for review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of P6,878.34, which is hereby
affirmed and the petition for review filed by petitioner is hereby dismissed with costs against
petitioners.

It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as
of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista
to 'manage their properties with full power to lease; to collect and receive rents; to issue
receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to
sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and
checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same
rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which
amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental
income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of
P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed, according to assessment made
by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

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BUSORG CASES 1
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ATTY. MENDOZA

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on

December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals,
with a prayer that "the decision of the respondent contained in his letter of demand dated
September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in
question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied,
the case is now before Us for review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation"
and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compaias
colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations or insurance companies, but does not include duly registered general
copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute
money and property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances surrounding the
case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition
of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot
for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the
brief interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in February,
1943. In other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one person, namely
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business and
enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.

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6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence
of the acts performed by them, a legal entity, with a personality independent of that of its
members, did not come into existence, and some of the characteristics of partnerships are
lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that
one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above
stated, "duly registered general copartnerships" which are possessed of the aforementioned
personality have been expressly excluded by law (sections 24 and 84 [b] from the
connotation of the term "corporation" It may not be amiss to add that petitioners' allegation to
the effect that their liability in connection with the leasing of the lots above referred to, under
the management of one person even if true, on which we express no opinion tends
to increase the similarity between the nature of their venture and that corporations, and is,
therefore, an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations,
joint-stock companies and insurance companies." However, the term "association" is not used
in the aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction of
designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is created
by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary
association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a

'common law' trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership association, and
any other type of organization (by whatever name known) which is not, within the meaning of
the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation, p.
788; emphasis supplied.).

Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes
not only a partnership as known at common law but, as well, a syndicate, group,
pool, joint venture or other unincorporated organizations which carries on any
business financial operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income
taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax for
corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay
an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed
one thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership,
joint account (cuentas en participacion), association or insurance company, no matter how
created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84
(b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was
approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act
No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used
in both statutes with substantially the same meaning. Consequently, petitioners are subject,
also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties
above mentioned for a period of over twelve years, and that the yearly gross rentals of said
properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to
the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate
dealers," inasmuch as, pursuant to section 194 (s) thereof:

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'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself out
as a full or part time dealer in real estate or as an owner of rental property or properties rented
or offered to rent for an aggregate amount of three thousand pesos or more a year. . . (emphasis
supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs
against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.


BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually contributed money to a common fund
with express purpose of engaging in real estate business for profit. The series of transactions
which they had undertaken attest to this. This appears in the following portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state for
P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner in February,
1943, In other words, we cannot but perceive a character of habitually peculiar
to business transactions engaged in for purposes of gain.

I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish partnership, whether or not the
person sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co-ownership shared or
do not share any profits made by the use of property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or
interest in the property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the clear intent to
form a partnership, the existence of a judicial personality different from that of the individual
partners, and the freedom to transfer or assign any interest in the property by one with the
consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-
636).

It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain the
title to their respective contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in the business itself
which the proceeds derived. (Elements of the law of Partnership by Floyd R. Mechem, 2n Ed.,
section 83, p. 74.)

A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto;
nor does not agreement to share the profits and loses on the sale of land create a partnership;
the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed.,
1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of reality,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiff's commissions, no partnership existed as between
the parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N. E.
6763, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally a participating in both profits and losses; (c) and such a community of interest, as far
as third persons are concerned as enables each party to make contract, manage the business,
and dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for purpose of making gains; and they may, without becoming partners,
agree among themselves as to the management and use of such property and the application of
the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.)

This is impliedly recognized in the following portion of the decision: "Although, taken singly,
they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances (referring to the series of transactions) such as to leave
no room for doubt on the existence of said intent in petitioners herein."

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AFISCO INSURANCE CORPORATION VS. CA

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company. May the clearing house or insurance pool so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pools remittances to the member companies and to the said
foreign firm be taxable as dividends? Under the facts of this case, has the governments right to
assess and collect said tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing
the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which dismissed
petitioners appeal of the October 19, 1992 Decision[3] of the Court of Tax Appeals[4] (CTA)
which had previously sustained petitioners liability for deficiency income tax, interest and
withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioners.[5]
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws
of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion
and Contractors All Risk insurance policies, the petitioners on August 1, 1965 entered into a
Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on
the basis of which it was assessed by the Commissioner of Internal Revenue deficiency
corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 andP89,438.68 on dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered
the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest,
and with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========

Dividend paid to Munich

Reinsurance Company P3,728,412.00
===========
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00
===========
10% withholding tax at
source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the
address given in the information return filed. Hence, this Petition for Review before us.[9]
The Issues
Before this Court, petitioners raise the following issues:
1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance,
were dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House had
already prescribed.[10]
The Courts Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
prescribed.

First Issue: Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point
out that the reinsurance policies were written by them individually and separately, and that

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ATTY. MENDOZA

their liability was limited to the extent of their allocated share in the original risks thus
reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited
to its principal function of allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their ability
to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as
records, maintenance, collection and custody of funds, etc.[13]

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability;[14] (2) there was no common fund;[15] (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation;[16] and (4) the pool or clearing house was not and could
not possibly have engaged in the business of reinsurance from which it could have derived
income for itself.[17]

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax laws, is accorded much weight and even finality,
when there is no showing that it is patently wrong,[18] particularly in this case where the
findings and conclusions of the internal revenue commissioner were subsequently affirmed by
the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the
Court of Appeals.[19] Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise
of its authority.[20]

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as
worded in the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax
is hereby imposed upon the taxable net income received during each taxable year
from all sources by every corporation organized in, or existing under the laws of
the
Philippines,
no
matter
how
created
or
organized, but not including duly registered general co-partnership
(compaias colectivas), general professional partnerships, private educational
institutions, and building and loan associations xxx.

Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRCs inclusion of such entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997,[21] which amended the Tax Code. Pertinent provisions of the new law read
as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation, as
defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. General
professional partnerships are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in
any trade or business.
xxx xxx xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members.[23] The Court of Appeals astutely
applied Evangelista:[24]

xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on. * * * (8 Mertens Law of Federal Income Taxation, p. 562 Note 63)

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when
two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.[25] Its
requisites are: (1) mutual contribution to a common stock, and (2) a joint interest in
the profits.[26] In other words, a partnership is formed when persons contract to devote
to a common purpose either money, property, or labor with the intention of dividing the
profits between themselves.[27] Meanwhile, an association implies associates who enter
into a joint enterprise x x x for the transaction of business.[28]

In the case before us, the ceding companies entered into a Pool Agreement[29] or an
association[30] that would handle all the insurance businesses covered under their quota-
share reinsurance treaty[31] and surplus reinsurance treaty[32]with Munich. The
following unmistakably indicates a partnership or an association covered by Section 24
of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.[33] This common fund pays for the
administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the business of
the ceding companies and Munich, because without it they would not have received their
premiums. The ceding companies share in the business ceded to the pool and in the
expenses according to a Rules of Distribution annexed to the Pool

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BUSORG CASES 1
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ATTY. MENDOZA

Agreement.[36] Profit motive or business is, therefore, the primordial reason for the
pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to] the
transaction of the business. x x x If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was apportioned among the
members, this is only a matter of consequence, as it implies that profit actually resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts obtaining
therein are not on all fours with the present case. In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions.[39] The
Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:
Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the same
taxpayer.[40]Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add
that even if such remittances were treated as dividends, they would have been exempt under
the previously mentioned sections of the 1977 NIRC,[42] as well as Article 7 of paragraph
1[43] and Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]

Petitioners are clutching at straws. Double taxation means taxing the same property twice
when it should be taxed only once. That is, xxx taxing the same person twice by the same
jurisdiction for the same thing.[46] In the instant case, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.[47] Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the income tax paid by the
former as their own.

On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it cannot
be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties which
required the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance
Treaty and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty. The foregoing
interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construedstrictissimi juris, and the statutory exemption claimed must be expressed in a
language too plain to be mistaken.[53]

Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool
for corporate taxes on the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect.[54] Although petitioners omitted in
their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984.[55]

Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an
assessment.[56]

We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC,[57] because the
taxpayer cannot be located at the address given in the information return filed and for
which reason there was delay in sending the assessment.[58] Indeed, whether the
governments right to collect and assess the tax has prescribed involves facts which have
been ruled upon by the lower courts. It is axiomatic that in the absence of a clear
showing of palpable error or grave abuse of discretion, as in this case, this Court must
not overturn the factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return
filed in 1980 indicated therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October
11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.

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LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC

A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that
they have not contributed any capital of their own to a "common fund." Their contribution may
be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they
are all liable for debts incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation may lie in a
person who may not have directly transacted on its behalf, but reaped benefits from that
contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed
by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and circumstances
and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9,
1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13,
1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19,
1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance
in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid
price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the
total amount of P600,045.00, this Court noted that these items were attached to guarantee any
judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and,
to avoid further deterioration of the nets during the pendency of this case, it was ordered sold
at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the

amount of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public
auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff
until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for
the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount
replaced the attached nets and floats. Considering, however, that the total judgment obligation
as computed above would amount to only P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who are not entitled to damages and who did not
put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are not
the owners of the nets and floats. For this reason, the defendants are hereby relieved from any
and all liabilities arising from the monetary judgment obligation enumerated above and for
plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory
to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of
floats worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent
corporation as shown by a Certification from the Securities and Exchange Commission.[5] On
September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of
the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to
have waived his right to cross-examine witnesses and to present evidence on his behalf,
because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed
an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of
Attachment.[6] The trial court maintained the Writ, and upon motion of private respondent,
ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won
the bidding and deposited with the said court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent.[8]

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The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three[9]in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit
and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a such for the fishing nets and floats purchased
by and for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. By a contract of partnership, two or
more persons bind themselves to contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves (Article 1767, New Civil Code).[13]
Hence, petitioner brought this recourse before this Court.[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT
THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS
WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats purchased
from respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and
Yao could be deemed to have entered into a partnership.

This Courts Ruling: The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not
a partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he
had merely leased to the two the main asset of the purported partnership -- the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower
courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing
to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale
over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the
loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking
and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB
Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between
the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed
by a loan secured from Jesus Lim who was petitioners brother. In their Compromise
Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss. These boats, the

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purchase and the repair of which were financed with borrowed money, fell under the term
common fund under Article 1767. The contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry. That the parties agreed that any loss or
profit from the sale and operation of the boats would be divided equally among them also
shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also
to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim
to involve himself so much in buying the boat but not in the acquisition of the aforesaid
equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the
main assets of the partnership, and they agreed that the proceeds from the sales and operations
thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to
the rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes
beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was entered
into only to end the dispute among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution.

A proper adjudication of claimants rights mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts have done so and have found, correctly, a
preexisting partnership among the parties. In implying that the lower courts have decided on
the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC
delved into the history of the document and explored all the possible consequential
combinations in harmony with law, logic and fairness. Verily, the two lower courts factual
findings mentioned above nullified petitioners argument that the existence of a partnership
was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to
Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the
sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be

divided among the three of them. No lessor would do what petitioner did. Indeed, his consent
to the sale proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua
and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading
of the vessels which would be used in their fishing business. The sale of the boats, as well as the
division among the three of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an
asset of the partnership. It is not uncommon to register the properties acquired from a loan in
the name of the person the lender trusts, who in this case is the petitioner himself. After all, he
is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship among the three of them was merely that of
lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and
appropriate for itself the power and attributes of a corporation as provided by law; it cannot
create agents or confer authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at their own risk. And as it is
an elementary principle of law that a person who acts as an agent without authority or without
a principal is himself regarded as the principal, possessed of all the right and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and obligations and becomes personally liable
for contracts entered into or for other acts performed as such agent.[17]

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to

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be sued to evade its responsibility for a contract it entered into and by virtue of which
it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be
paid for the nets it sold. The only question here is whether petitioner should be held
jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only those
who dealt in the name of the ostensible corporation should be held liable. Since his name does
not appear on any of the contracts and since he never directly transacted with the respondent
corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does
not preclude the liabilities of the three as contracting parties in representation of it. Clearly,
under the law on estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had
an existing relationship, he is deemed to be part of said association and is covered by the scope of
the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v.
Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the
subtle art of movement and position , entraps and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of
procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won
by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his partners owed. The nets and
the floats were specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ
to assure the payment of the price stipulated in the invoices is proper. Besides, by specific

agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full
payment thereof. WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner. SO ORDERED.

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AGAD VS MABATO AND AGAD CO.

In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First
Instance of Davao, we are called upon to determine the applicability of Article 1773 of our Civil
Code to the contract of partnership on which the complaint herein is based.

Alleging that he and defendant Severino Mabato are pursuant to a public instrument dated
August 29, 1952, copy of which is attached to the complaint as Annex "A" partners in a
fishpond business, to the capital of which Agad contributed P1,000, with the right to receive
50% of the profits; that from 1952 up to and including 1956, Mabato who handled the
partnership funds, had yearly rendered accounts of the operations of the partnership; and that,
despite repeated demands, Mabato had failed and refused to render accounts for the years
1957 to 1963, Agad prayed in his complaint against Mabato and Mabato & Agad Company, filed
on June 9, 1964, that judgment be rendered sentencing Mabato to pay him (Agad) the sum of
P14,000, as his share in the profits of the partnership for the period from 1957 to 1963, in
addition to P1,000 as attorney's fees, and ordering the dissolution of the partnership, as well as
the winding up of its affairs by a receiver to be appointed therefor.

In his answer, Mabato admitted the formal allegations of the complaint and denied the
existence of said partnership, upon the ground that the contract therefor had not been
perfected, despite the execution of Annex "A", because Agad had allegedly failed to give his
P1,000 contribution to the partnership capital. Mabato prayed, therefore, that the complaint be
dismissed; that Annex "A" be declared void ab initio; and that Agad be sentenced to pay actual,
moral and exemplary damages, as well as attorney's fees.

Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no
cause of action and that the lower court had no jurisdiction over the subject matter of the case,
because it involves principally the determination of rights over public lands. After due hearing,
the court issued the order appealed from, granting the motion to dismiss the complaint for
failure to state a cause of action. This conclusion was predicated upon the theory that the
contract of partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code,
because an inventory of the fishpond referred in said instrument had not been attached thereto.
A reconsideration of this order having been denied, Agad brought the matter to us for review by
record on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed
thereto, if inventory of said property is not made, signed by the parties; and attached to the
public instrument.
The issue before us hinges on whether or not "immovable property or real rights" have
been contributed to the partnership under consideration. Mabato alleged and the lower court
held that the answer should be in the affirmative, because "it is really inconceivable how a
partnership engaged in the fishpond business could exist without said fishpond property (being)
contributed to the partnership." It should be noted, however, that, as stated in Annex "A" the
partnership was established "to operate a fishpond", not to "engage in a fishpond business".
Moreover, none of the partners contributed either a fishpond or a real right to any fishpond.
Their contributions were limited to the sum of P1,000 each. Indeed, Paragraph 4 of Annex "A"
provides:

That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine
Currency, of which One Thousand (P1,000.00) pesos has been contributed by Severino Mabato
and One Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.
x x x x x x x x x
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership.
Neither said fishpond nor a real right thereto was contributed to the partnership or became
part of the capital thereof, even if a fishpond or a real right thereto could become part of its
assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order
appealed from should be, as it is hereby set aside and the case remanded to the lower court for
further proceedings, with the costs of this instance against defendant-appellee, Severino
Mabato. It is so ordered.


BENJAMIN YU VS. NLRC

Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying
and export business operated by a registered partnership with the firm name of "Jade Mountain
Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28
June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen
Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as limited partners. The
partnership business consisted of exploiting a marble deposit found on land owned by the Sps.
Ricardo and Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement
dated 26 June 1984 with the Cruz spouses. 1 The partnership had its main office in Makati,
Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise
of the partners that the balance would be paid when the firm shall have secured additional
operating funds from abroad. Benjamin Yu actually managed the operations and finances of the
business; he had overall supervision of the workers at the marble quarry in Bulacan and took
charge of the preparation of papers relating to the exportation of the firm's products.

Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the partnership to private respondent
Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and
transferred his interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and
himself, private respondent Willy Co acquired the great bulk of the partnership interest. The
partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old
firm name of Jade Mountain, though they moved the firm's main office from Makati to
Mandaluyong, Metropolitan Manila. A Supplement to the Memorandum Agreement relating to
the operation of the marble quarry was entered into with the Cruz spouses in February of
1988. 2 The actual operations of the business enterprise continued as before. All the employees
of the partnership continued working in the business, all, save petitioner Benjamin Yu as it
turned out.

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On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there
met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the
latter had bought the business from the original partners and that it was for him to decide
whether or not he was responsible for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade
Mountain business enterprise. His unpaid salaries remained unpaid. 3

On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of
unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages
and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu
was never hired as an employee by the present or new partnership. 4

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner
had been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his
claim for unpaid salaries, backwages and attorney's fees. 5

On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the
Labor Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990.
The NLRC held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta
had bought the Jade Mountain business, that the new partnership had not retained petitioner
Yu in his original position as Assistant General Manager, and that there was no law requiring
the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore,
had not been illegally dismissed by the new partnership which had simply declined to retain
him in his former managerial position or any other position. Finally, the NLRC held that
Benjamin Yu's claim for unpaid wages should be asserted against the original members of the
preceding partnership, but these though impleaded had, apparently, not been served with
summons in the proceedings before the Labor Arbiter. 6

Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set
aside and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting
to lack or excess of jurisdiction.

The basic contention of petitioner is that the NLRC has overlooked the principle that a
partnership has a juridical personality separate and distinct from that of each of its members.
Such independent legal personality subsists, petitioner claims, notwithstanding changes in the
identities of the partners. Consequently, the employment contract between Benjamin Yu and
the partnership Jade Mountain could not have been affected by changes in the latter's
membership. 7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished
and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if
indeed a new partnership had come into existence, whether petitioner Yu could nonetheless
assert his rights under his employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence of a new firm composed of
Willy Co and Emmanuel Zapanta in 1987.

The applicable law in this connection of which the NLRC seemed quite unaware is found
in the Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as
follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on as distinguished from the winding
up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the partners, where the circumstances do not
permit a dissolution under any other provision of this article, by the express will of any partner
at any time;
xxx xxx xxx
(Emphasis supplied)

In the case at bar, just about all of the partners had sold their partnership interests (amounting
to 82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record
does not show what happened to the remaining 18% of the original partnership interest. The
acquisition of 82% of the partnership interest by new partners, coupled with the retirement or
withdrawal of the partners who had originally owned such 82% interest, was enough to
constitute a new partnership.

The occurrence of events which precipitate the legal consequence of dissolution of a
partnership do not, however, automatically result in the termination of the legal personality of
the old partnership. Article 1829 of the Civil Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.

In the ordinary course of events, the legal personality of the expiring partnership persists for
the limited purpose of winding up and closing of the affairs of the partnership. In the case at
bar, it is important to underscore the fact that the business of the old partnership was simply
continued by the new partners, without the old partnership undergoing the procedures relating
to dissolution and winding up of its business affairs. In other words, the new partnership
simply took over the business enterprise owned by the preceeding partnership, and continued
using the old name of Jade Mountain Products Company Limited, without winding up the
business affairs of the old partnership, paying off its debts, liquidating and distributing its net
assets, and then re-assembling the said assets or most of them and opening a new business
enterprise. There were, no doubt, powerful tax considerations which underlay such an informal
approach to business on the part of the retiring and the incoming partners. It is not, however,
necessary to inquire into such matters.
What is important for present purposes is that, under the above described situation, not only
the retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued
the business of the old, dissolved, one, are liable for the debts of the preceding partnership.
In Singson, et al. v. Isabela Saw Mill, et al, 8 the Court held that under facts very similar to those
in the case at bar, a withdrawing partner remains liable to a third party creditor of the old

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ATTY. MENDOZA

partnership. 9 The liability of the new partnership, upon the other hand, in the set of
circumstances obtaining in the case at bar, is established in Article 1840 of the Civil Code which
reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the
person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires
and assigns (or the representative of the deceased partner assigns) his rights in partnership
property to two or more of the partners, or to one or more of the partners and one or more
third persons, if the business is continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner
assigns) their rights in partnership property to the remaining partner, who continues the
business without liquidation of partnership affairs, either alone or with others;
(3) When any Partner retires or dies and the business of the dissolved partnership is continued as
set forth in Nos. 1 and 2 of this Article, with the consent of the retired partners or the
representative of the deceased partner, but without any assignment of his right in partnership
property;
(4) When all the partners or their representatives assign their rights in partnership property to
one or more third persons who promise to pay the debts and who continue the business of the
dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners continue the
businessunder the provisions of article 1837, second paragraph, No. 2, either alone or with
others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business either alone or
with others without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the business,
under this article, to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set
forth in this article the creditors of the retiring or deceased partner or the representative of the
deceased partner, have a prior right to any claim of the retired partner or the representative of
the deceased partner against the person or partnership continuing the business on account of
the retired or deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment on the
ground of fraud.
xxx xxx xxx (Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade
Mountain which continued the business of the old one without liquidation of the partnership
affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his
claim for unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous
partner insofar as such retired partner's interest in the dissolved partnership is concerned. It is
not necessary for the Court to determine under which one or mare of the above six (6)
paragraphs, the case at bar would fall, if only because the facts on record are not detailed with
sufficient precision to permit such determination. It is, however, clear to the Court that under
Article 1840 above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as
other claims relating to his employment with the previous partnership, against the new Jade
Mountain.

It is at the same time also evident to the Court that the new partnership was entitled to appoint
and hire a new general or assistant general manager to run the affairs of the business
enterprise take over. An assistant general manager belongs to the most senior ranks of
management and a new partnership is entitled to appoint a top manager of its own choice and
confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore
constitute unlawful termination, or termination without just or authorized cause. We think that
the precise authorized cause for termination in the case at bar was redundancy. 10 The new
partnership had its own new General Manager, apparently Mr. Willy Co, the principal new
owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position as
Assistant General Manager thus became superfluous or redundant. 11 It follows that petitioner
Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of service
that he had rendered to the old partnership, a fraction of at least six (6) months being
considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its
employ, we consider that Benjamin Yu was very shabbily treated by the new partnership. The
old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously
ran the whole marble quarrying, processing and exporting enterprise. His work constituted
value-added to the business itself and therefore, the new partnership similarly benefitted from
the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest
that there was any cause consisting of some blameworthy act or omission on the part of Mr. Yu
which compelled the new partnership to terminate his services. Nonetheless, the new Jade
Mountain did not notify him of the change in ownership of the business, the relocation of the
main office of Jade Mountain from Makati to Mandaluyong and the assumption by Mr. Willy Co
of control of operations. The treatment (including the refusal to honor his claim for unpaid
wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to
amount to arbitrary, bad faith treatment, for which the new Jade Mountain may legitimately be
required to respond by paying moral damages. This Court, exercising its discretion and in view
of all the circumstances of this case, believes that an indemnity for moral damages in the
amount of P20,000.00 is proper and reasonable.

In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed
from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade
Mountain compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he
is entitled to attorney's fees in the amount of ten percent (10%) of the total amount due from
private respondent Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari,
and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A
new Decision is hereby ENTERED requiring private respondent Jade Mountain Products
Company Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of
P2,000.00 per month multiplied by thirty-six (36) months (November 1984 to December 1987)
in the total amount of P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years
of service or a total of P12,000.00;

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(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a) and (b) above,
commencing on 26 December 1989 and until fully paid; and
(e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade
Mountain.
Costs against private respondents. SO ORDERED.

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ATTY. MENDOZA

ROJAS VS MAGLANA

This is a direct appeal to this Court from a decision ** of the then Court of First Instance of
Davao, Seventh Judicial District, Branch III, in Civil Case No. 3518, dismissing appellant's
complaint.

As found by the trial court, the antecedent facts of the case are as follows:

On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit "A")
called Eastcoast Development Enterprises (EDE) with only the two of them as partners. The
partnership EDE with an indefinite term of existence was duly registered on January 21, 1955
with the Securities and Exchange Commission.

One of the purposes of the duly-registered partnership was to "apply or secure timber and/or
minor forests products licenses and concessions over public and/or private forest lands and to
operate, develop and promote such forests rights and concessions." (Rollo, p. 114).

A duly registered Articles of Co-Partnership was filed together with an application for a timber
concession covering the area located at Cateel and Baganga, Davao with the Bureau of Forestry
which was approved and Timber License No. 35-56 was duly issued and became the basis of
subsequent renewals made for and in behalf of the duly registered partnership EDE.

Under the said Articles of Co-Partnership, appellee Maglana shall manage the business affairs of
the partnership, including marketing and handling of cash and is authorized to sign all papers
and instruments relating to the partnership, while appellant Rojas shall be the logging
superintendent and shall manage the logging operations of the partnership. It is also provided
in the said articles of co-partnership that all profits and losses of the partnership shall be
divided share and share alike between the partners.

During the period from January 14, 1955 to April 30, 1956, there was no operation of said
partnership (Record on Appeal [R.A.] p. 946).

Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of
Pahamotang as industrial partner.

On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-
Partnership (Exhibit "B" and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT
ENTERPRISES (EDE). Aside from the slight difference in the purpose of the second partnership
which is to hold and secure renewal of timber license instead of to secure the license as in the
first partnership and the term of the second partnership is fixed to thirty (30) years, everything
else is the same.

The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956,
and was able to ship logs and realize profits. An income was derived from the proceeds of the
logs in the sum of P643,633.07 (Decision, R.A. 919).

On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled
"CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT
ENTERPRISE" (Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas shall

purchase the interest, share and participation in the Partnership of Pahamotang assessed in the
amount of P31,501.12. It was also agreed in the said instrument that after payment of the sum
of P31,501.12 to Pahamotang including the amount of loan secured by Pahamotang in favor of
the partnership, the two (Maglana and Rojas) shall become the owners of all equipment
contributed by Pahamotang and the EASTCOAST DEVELOPMENT ENTERPRISES, the name also
given to the second partnership, be dissolved. Pahamotang was paid in fun on August 31, 1957.
No other rights and obligations accrued in the name of the second partnership (R.A. 921).

After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas
without the benefit of any written agreement or reconstitution of their written Articles of
Partnership (Decision, R.A. 948).

On January 28, 1957, Rojas entered into a management contract with another logging
enterprise, the CMS Estate, Inc. He left and abandoned the partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly
acquired area (Decision, R.A. 948).

The equipment withdrawn were his supposed contributions to the first partnership and was
transferred to CMS Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).

On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute,
either in cash or in equipment, to the capital investments of the partnership as well as his
obligation to perform his duties as logging superintendent.

Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with the
promised contributions and he will not work as logging superintendent. Maglana then told
Rojas that the latter's share will just be 20% of the net profits. Such was the sharing from 1957
to 1959 without complaint or dispute (Decision, R.A. 949).: nad

Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter
dated February 21, 1961 (Exhibit "10") Maglana notified Rojas that he dissolved the
partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against
Maglana for the recovery of properties, accounting, receivership and damages, docketed as Civil
Case No. 3518 (Record on Appeal, pp. 1-26).

Rojas' petition for appointment of a receiver was denied (R.A. 894).

Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine the
long and voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894-895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114) was
denied by Judge Romero for want of merit (Ibid., p. 125). Judge Romero also required the
inclusion of the entire year 1961 in the report to be submitted by the commissioners (Ibid., pp.
138-143). Accordingly, the commissioners started examining the records and supporting
papers of the partnership as well as the information furnished them by the parties, which were
compiled in three (3) volumes.

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On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with
counterclaim, attaching thereto the amended answer (Ibid., pp. 26-336), which was granted on
May 22, 1964 (Ibid., p. 336).

On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid., p.
337).

On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964
approving the report of the commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues
were agreed upon to be submitted to the trial court:

(a) The nature of partnership and the legal relations of Maglana and Rojas after the dissolution
of the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the partnership
(Decision, R.A. pp. 895-896).- nad

After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of
which reads as follows:

"WHEREFORE, the above facts and issues duly considered, judgment is hereby rendered by the
Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after Pahamotang
retired from the second partnership, that is, after August 31, 1957, when Pahamotang was
finally paid his share the partnership of the defendant and the plaintiff is one of a de facto
and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation, that is the
ratio and proportion of their respective contributions, or on the basis of share and share alike
this covered by actual contributions of the plaintiff and the defendant and by their verbal
agreement; that the sharing of profits and losses is on the basis of actual contributions; that
from 1957 to 1959, the sharing is on the basis of 80% for the defendant and 20% for the
plaintiff of the profits, but from 1960 to the date of dissolution, February 23, 1961, the
plaintiff's share will be on the basis of his actual contribution and, considering his indebtedness
to the partnership, the plaintiff is not entitled to any share in the profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and placed in his or in his
wife's name were acquired with partnership funds or with funds of the defendant and the
Court declares that there is no evidence that these properties were acquired by the partnership
funds, and therefore the same should not belong to the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused them and who
should be liable for them the Court declares that neither parties is entitled to damages, for as
already stated above it is not a wise policy to place a price on the right of a person to litigate
and/or to come to Court for the assertion of the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February 23,
1961; did it dissolve the partnership or not the Court declares that the letter of the
defendant to the plaintiff dated February 23, 1961, in effect dissolved the partnership;

"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and other
merchandise to the laborers and employees of the Eastcoast Development Enterprises, the
COURT DECLARES THE SAME AS NOT BELONGING TO THE PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles David is
VALID AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED AS PART OF
MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the partnership
the amount of P69,000.00 the profits he received from the CMS Estate, Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of P85,000.00 which
according to him he is still entitled to receive from the CMS Estate, Inc. is hereby denied
considering that it has not yet been actually received, and further the receipt is merely based
upon an expectancy and/or still speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his personal
account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he should have
received as logging superintendent, and which was not paid to him, and this should be
considered as part of Maglana's contribution likewise to the partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.: rd
"SO ORDERED." Decision, Record on Appeal, pp. 985-989).

Rojas interposed the instant appeal.

The main issue in this case is the nature of the partnership and legal relationship of the
Maglana-Rojas after Pahamotang retired from the second partnership.

The lower court is of the view that the second partnership superseded the first, so that when
the second partnership was dissolved there was no written contract of co-partnership; there
was no reconstitution as provided for in the Maglana, Rojas and Pahamotang partnership
contract. Hence, the partnership which was carried on by Rojas and Maglana after the
dissolution of the second partnership was a de facto partnership and at will. It was considered
as a partnership at will because there was no term, express or implied; no period was fixed,
expressly or impliedly (Decision, R.A. pp. 962-963).

On the other hand, Rojas insists that the registered partnership under the firm name of
Eastcoast Development Enterprises (EDE) evidenced by the Articles of Co-Partnership dated
January 14, 1955 (Exhibit "A") has not been novated, superseded and/or dissolved by the
unregistered articles of co-partnership among appellant Rojas, appellee Maglana and Agustin
Pahamotang, dated March 4, 1956 (Exhibit "C") and accordingly, the terms and stipulations of
said registered Articles of Co-Partnership (Exhibit "A") should govern the relations between
him and Maglana. Upon withdrawal of Agustin Pahamotang from the unregistered partnership
(Exhibit "C"), the legally constituted partnership EDE (Exhibit "A") continues to govern the
relations between them and it was legal error to consider a de facto partnership between said
two partners or a partnership at will. Hence, the letter of appellee Maglana dated February 23,
1961, did not legally dissolve the registered partnership between them, being in contravention
of the partnership agreement agreed upon and stipulated in their Articles of Co-Partnership
(Exhibit "A"). Rather, appellant is entitled to the rights enumerated in Article 1837 of the Civil
Code and to the sharing profits between them of "share and share alike" as stipulated in the
registered Articles of Co-Partnership (Exhibit "A").

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After a careful study of the records as against the conflicting claims of Rojas and Maglana, it
appears evident that it was not the intention of the partners to dissolve the first partnership,
upon the constitution of the second one, which they unmistakably called an "Additional
Agreement" (Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except for the fact that
they took in one industrial partner; gave him an equal share in the profits and fixed the term of
the second partnership to thirty (30) years, everything else was the same. Thus, they adopted
the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes
and the capital contributions of Rojas and Maglana as stipulated in both partnerships call for
the same amounts. Just as important is the fact that all subsequent renewals of Timber License
No. 35-36 were secured in favor of the First Partnership, the original licensee. To all intents and
purposes therefore, the First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered (Brief for
Plaintiff-Appellant, p. 5). Otherwise stated, even during the existence of the second partnership,
all business transactions were carried out under the duly registered articles. As found by the
trial court, it is an admitted fact that even up to now, there are still subsisting obligations and
contracts of the latter (Decision, R.A. pp. 950-957). No rights and obligations accrued in the
name of the second partnership except in favor of Pahamotang which was fully paid by the duly
registered partnership (Decision, R.A., pp. 919-921).

On the other hand, there is no dispute that the second partnership was dissolved by common
consent. Said dissolution did not affect the first partnership which continued to exist.
Significantly, Maglana and Rojas agreed to purchase the interest, share and participation in the
second partnership of Pahamotang and that thereafter, the two (Maglana and Rojas) became
the owners of equipment contributed by Pahamotang. Even more convincing, is the fact that
Maglana on March 17, 1957, wrote Rojas, reminding the latter of his obligation to contribute
either in cash or in equipment, to the capital investment of the partnership as well as his
obligation to perform his duties as logging superintendent. This reminder cannot refer to any
other but to the provisions of the duly registered Articles of Co-Partnership. As earlier stated,
Rojas replied that he will not be able to comply with the promised contributions and he will not
work as logging superintendent. By such statements, it is obvious that Roxas understood what
Maglana was referring to and left no room for doubt that both considered themselves governed
by the articles of the duly registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of
Pahamotang can neither be considered as a De Facto Partnership, nor a Partnership at Will, for
as stressed, there is an existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the
case at bar, the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the
partnership, it is in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can
cause its dissolution by expressly withdrawing even before the expiration of the period, with or
without justifiable cause. Of course, if the cause is not justified or no cause was given, the
withdrawing partner is liable for damages but in no case can he be compelled to remain in the
firm. With his withdrawal, the number of members is decreased, hence, the dissolution. And in
whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana
shall be guided in the liquidation of the partnership by the provisions of its duly registered
Articles of Co-Partnership; that is, all profits and losses of the partnership shall be divided
"share and share alike" between the partners.

But an accounting must first be made and which in fact was ordered by the trial court and
accomplished by the commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners from
1956-1961 are as follows: Eufracio Rojas who should have contributed P158,158.00,
contributed only P18,750.00 while Maglana who should have contributed P160,984.00,
contributed P267,541.44 (Decision, R.A. p. 976). It is a settled rule that when a partner who has
undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership
for whatever he may have promised to contribute (Article 1786, Civil Code) and for interests
and damages from the time he should have complied with his obligation (Article 1788, Civil
Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a contract of partnership,
each partner must share in the profits and losses of the venture. That is the essence of a
partnership (Ibid., p. 95).

Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their
voluminous reports which was approved by the trial court, they showed that on 50-50% basis,
Rojas will be liable in the amount of P131,166.00; on 80-20%, he will be liable for P40,092.96
and finally on the basis of actual capital contribution, he will be liable for P52,040.31.

Consequently, except as to the legal relationship of the partners after the withdrawal of
Pahamotang which is unquestionably a continuation of the duly registered partnership and the
sharing of profits and losses which should be on the basis of share and share alike as provided
for in the duly registered Articles of Co-Partnership, no plausible reason could be found to
disturb the findings and conclusions of the trial court.: nad

As to whether Maglana is liable for damages because of such withdrawal, it will be recalled that
after the withdrawal of Pahamotang, Rojas entered into a management contract with another
logging enterprise, the CMS Estate, Inc., a company engaged in the same business as the
partnership. He withdrew his equipment, refused to contribute either in cash or in equipment
to the capital investment and to perform his duties as logging superintendent, as stipulated in
their partnership agreement. The records also show that Rojas not only abandoned the
partnership but also took funds in an amount more than his contribution (Decision, R.A., p.
949).
In the given situation Maglana cannot be said to be in bad faith nor can he be liable for damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao, Branch
III, is hereby MODIFIED in the sense that the duly registered partnership of Eastcoast
Development Enterprises continued to exist until liquidated and that the sharing basis of the
partners should be on share and share alike as provided for in its Articles of Partnership, in
accordance with the computation of the commissioners. We also hereby AFFIRM the decision of
the trial court in all other respects.: SO ORDERED.

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