8/31/2016 G.R.No.

L25043

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.L25043April26,1968

ANTONIOROXAS,EDUARDOROXASandROXASYCIA.,intheirownrespectivebehalfandasjudicialco
guardiansofJOSEROXAS,petitioners,
vs.
COURTOFTAXAPPEALSandCOMMISSIONEROFINTERNALREVENUE,respondents.

Leido,Andrada,PerezandAssociatesforpetitioners.
OfficeoftheSolicitorGeneralforrespondents.

BENGZON,J.P.,J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary
successionthefollowingproperties:

(1)Agriculturallandswithatotalareaof19,000hectares,situatedinthemunicipalityofNasugbu,Batangas
province

(2)AresidentialhouseandlotlocatedatWrightSt.,Malate,Manilaand

(3)Sharesofstocksindifferentcorporations.

To manage the abovementioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose
Roxas,formedapartnershipcalledRoxasyCompania.

AGRICULTURALLANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for
generationsexpressedtheirdesiretopurchasefromRoxasyCia.theparcelswhichtheyactuallyoccupied.For
its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and
apportion them among landless tenantsfarmers, persuaded the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell
13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus
P300,000.00forsurveyandsubdivisionexpenses.

It turned out however that the Government did not have funds to cover the purchase price, and so a special
arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of
P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly
amortizationspaidbythefarmers.

In1953and1955RoxasyCia.derivedfromsaidinstallmentpaymentsanetgainofP42,480.83andP29,500.71.
Fiftypercentofsaidnetgainwasreportedforincometaxpurposesasgainonthesaleofcapitalassetheldfor
morethanoneyearpursuanttoSection34oftheTaxCode.

RESIDENTIALHOUSE

DuringtheirbachelordaystheRoxasbrotherslivedintheresidentialhouseatWrightSt.,Malate,Manila,which
they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else
leavingonlyJoseintheoldhouse.Infairnesstohisbrothers,JosepaidtoRoxasyCia.rentalsforthehousein
thesumofP8,000.00ayear.

ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real
estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and
P150.00taxfordealersofsecuritiesfor1952plusP10.00compromisepenaltyforlatepayment.Theassessment
forrealestatedealer'staxwasbasedonthefactthatRoxasyCia.receivedhouserentalsfromJoseRoxasinthe
amountofP8,000.00.PursuanttoSec.194oftheTaxCode,anownerofarealestatewhoderivesayearlyrental
incometherefromintheamountofP3,000.00ormoreisconsideredarealestatedealerandisliabletopaythe
correspondingfixedtax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against
RoxasyCia.,onthefactthatsaidpartnershipmadeprofitsfromthepurchaseandsaleofsecurities.

Inthesameassessment,theCommissionerassesseddeficiencyincometaxesagainsttheRoxasBrothersforthe
years1953and1955,asfollows:

1953 1955
AntonioRoxas P7,010.00 P5,813.00
EduardoRoxas 7,281.00 5,828.00
JoseRoxas 6,323.00 5,588.00
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ThedeficiencyincometaxesresultedfromtheinclusionasincomeofRoxasyCia.oftheunreported50%ofthe
net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the
disallowanceofdeductionsfromgrossincomeofvariousbusinessexpensesandcontributionsclaimedbyRoxas
yCia.andtheRoxasbrothers.ForthereasonthatRoxasyCia.subdivideditsNasugbufarmlandsandsoldthem
tothefarmersoninstallment,theCommissionerconsideredthepartnershipasengagedinthebusinessofreal
estate,hence,100%oftheprofitsderivedtherefromwastaxed.

Thefollowingdeductionsweredisallowed:

ROXASYCIA.:
1953

TicketsforBanquetinhonorof
P40.00
S.Osmea
GiftsofSanMiguelbeer 28.00
Contributionsto

PhilippineAirForce
Chapel
100.00
ManilaPoliceTrust
Fund 150.00

PhilippinesHerald's
fundforManila's
neediestfamilies
100.00
1955
ContributionstoContributionto
OurLadyofFatimaChapel,
FEU 50.00
ANTONIOROXAS:

1953
Contributionsto
PasayCityFiremen
ChristmasFund
25.00
PasayCityPoliceDept.
X'masfund
50.00

1955
Contributionsto
BaguioCityPolice
Christmasfund
25.00
PasayCityFiremen
Christmasfund
25.00
PasayCityPolice
Christmasfund
50.00
EDUARDOROXAS:

1953
Contributionsto
HijasdeJesus'Retiro
deManresa
450.00
PhilippinesHerald's
fundforManila's
neediestfamilies
100.00
1955
ContributionstoPhilippines
Herald'sfundforManila's
neediestfamilies 120.00
JOSEROXAS:

1955

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ContributionstoPhilippines
Herald'sfundforManila's
neediestfamilies 120.00

TheRoxasbrothersprotestedtheassessmentbutinasmuchassaidprotestwasdenied,theyinstitutedanappeal
intheCourtofTaxAppealsonJanuary9,1961.TheTaxCourtheardtheappealandrenderedjudgmentonJuly
31,1965sustainingtheassessmentexceptthedemandforthepaymentofthefixedtaxondealerofsecurities
and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus'
RetirodeManresa.TheTaxCourt'sjudgmentreads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas,
EduardoRoxas,andJoseRoxaswhoareherebyorderedtopaytherespondentCommissionerofInternal
RevenuetheamountsofP12,808.00,P12,887.00andP11,857.00,respectively,asdeficiencyincometaxes
fortheyears1953and1955,plus5%surchargeand1%monthlyinterestasprovidedforinSec.51(a)of
the Revenue Code and modified with respect to the partnership Roxas y Cia. in the sense that it should
payonlyP150.00,asrealestatedealer'stax.Withcostsagainstpetitioners.

Notsatisfied,RoxasyCia.andtheRoxasbrothersappealedtothisCourt.TheCommissionerofInternalRevenue
didnotappeal.

Theissues:

(1)IsthegainderivedfromthesaleoftheNasugbufarmlandsanordinarygain,hence100%taxable?

(2)Arethedeductionsforbusinessexpensesandcontributionsdeductible?

(3)IsRoxasyCia.liableforthepaymentofthefixedtaxonrealestatedealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer
because it engaged in the business of selling real estate. The business activity alluded to was the act of
subdividing the Nasugbu farm lands and selling them to the farmersoccupants on installment. To bolster his
standonthepoint,hecitesoneofthepurposesofRoxasyCia.ascontainedinitsarticlesofpartnership,quoted
below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el
futuro,alquilandolesporlosplazosydemascondiciones,estimeconvenientesyvendiendoaquellasquea
juiciodesusgerentesnodebenconservarse

Theabovequotedpurposenotwithstanding,thepropositionoftheCommissionerofInternalRevenuecannotbe
favorablyacceptedbyUsinthisisolatedtransactionwithitspeculiarcircumstancesinspiteofthefactthatthere
were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten
years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the tenyear
amortizationperiod.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for
generationswasnotonlyinconsonancewith,butmoreinobediencetotherequestandpursuanttothepolicyof
ourGovernmenttoallocatelandstothelandless.ItwastheboundendutyoftheGovernmenttopaytheagreed
compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them
amongthefarmersatveryreasonabletermsandprices.However,theGovernmentcouldnotcomplywithitsduty
forlackoffunds.Obligingly,RoxasyCia.shoulderedtheGovernment'sburden,wentoutofitswayandsoldlands
directly to the farmers in the same way and under the same terms as would have been the case had the
Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution
expressingthepeople'sgratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
cautiontominimizeinjurytotheproprietaryrightsofataxpayer.Itmustbeexercisedfairly,equallyanduniformly,
lestthetaxcollectorkillthe"henthatlaysthegoldenegg".And,inordertomaintainthegeneralpublic'strustand
confidenceintheGovernmentthispowermustbeusedjustlyandnottreacherously.ItdoesnotconformwithOur
sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and
laterontopenalizehimfordulyansweringtheurgentcall.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to
Section34oftheTaxCodethelandssoldtothefarmersarecapitalassets,andthegainderivedfromthesale
thereofiscapitalgain,taxableonlytotheextentof50%.

DISALLOWEDDEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of
SergioOsmenaandP28.00forSanMiguelbeergivenasgiftstovariouspersons.Thedeductionwereclaimedas
representationexpenses.Representationexpensesaredeductiblefromgrossincomeasexpendituresincurredin
carryingonatradeorbusinessunderSection30(a)oftheTaxCodeprovidedthetaxpayerprovesthattheyare
reasonableinamount,ordinaryandnecessary,andincurredinconnectionwithhisbusiness.Inthecaseatbar,
theevidencedoesnotshowsuchlinkbetweentheexpensesandthebusinessofRoxasyCia.Thefindingsofthe
CourtofTaxAppealsmustthereforebesustained.

ThepetitionersalsoclaimdeductionsforcontributionstothePasayCityPolice,PasayCityFiremen,andBaguio
CityPoliceChristmasfunds,ManilaPoliceTrustFund,PhilippinesHerald'sfundforManila'sneediestfamiliesand
OurLadyofFatimachapelatFarEasternUniversity.

ThecontributionstotheChristmasfundsofthePasayCityPolice,PasayCityFiremenandBaguioCityPoliceare
notdeductibleforthereasonthattheChristmasfundswerenotspentforpublicpurposesbutasChristmasgifts
to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is
deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On
the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund
belongstotheManilaPolice,agovernmententity,intendedtobeusedexclusivelyforitspublicfunctions.

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The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground
thatthePhilippinesHeraldisnotacorporationoranassociationcontemplatedinSection30(h)oftheTaxCode.
ItshouldbenotedhoweverthatthecontributionswerenotmadetothePhilippinesHeraldbuttoagroupofcivic
spiritedcitizensorganizedbythePhilippinesHeraldsolelyforcharitablepurposes.Thereisnoquestionthatthe
membersofthisgroupofcitizensdonotreceiveprofits,forallthefundstheyraisedwereforManila'sneediest
families. Such a group of citizens may be classified as an association organized exclusively for charitable
purposesmentionedinSection30(h)oftheTaxCode.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the
Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within
thepremisesoftheuniversity,thechapelinquestionhasnotbeenshowntobelongtotheCatholicChurchorany
religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University,
contributionstowhicharenotdeductibleunderSection30(h)oftheTaxCodeforthereasonthatthenetincome
ofsaiduniversityinjurestothebenefitofitsstockholders.Thedisallowanceshouldbesustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it
earnedarentalincomeofP8,000.00perannumin1952,saidrentalincomecamefromJoseRoxas,oneofthe
partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving
rentalsofatleastP3,000.00ayear,doesnotprovideanyqualificationastothepersonspayingtherentals.The
law,whichstates: 1 w p h 1 . t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as principal and holding himself out as a full or parttime
dealer in real estate or as an owner of rental property or properties rented or offered to rent for an
aggregateamountofthreethousandpesosormoreayear:...(Emphasissupplied).

istooclearandexplicittoadmitconstruction.ThefindingsoftheCourtofTaxAppealsor,thispointissustained. 1 w p h 1 . t

ToSummarize,nodeficiencyincometaxisduefor1953fromAntonioRoxas,EduardoRoxasandJoseRoxas.
For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively,
computedasfollows:*

ANTONIOROXAS
Netincomeperreturn P315,476.59

Add:1/3share,profitsinRoxasy
P153,249.15
Cia.
Lessamountdeclared 146,135.46

Amountunderstated P7,113.69

Contributionsdisallowed 115.00

P7,228.69

Less1/3shareofcontributions
amountingtoP21,126.06disallowed
frompartnershipbutallowedto
partners 7,042.02 186.67

Netincomeperreview P315,663.26
Less:Exemptions 4,200.00

Nettaxableincome P311,463.26

Taxdue 154,169.00
Taxpaid 154,060.00

Deficiency P109.00
==========
EDUARDOROXAS

Netincomeperreturn P304,166.92
Add:1/3share,profitsinRoxasyCia P153,249.15

Lessprofitsdeclared 146,052.58

Amountunderstated P7,196.57
Less1/3shareincontributions
amountingtoP21,126.06disallowed
frompartnershipbutallowedto
partners 7,042.02 155.55

Netincomeperreview P304,322.47

Less:Exemptions 4,800.00

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Nettaxableincome P299,592.47

TaxDue P147,250.00
Taxpaid 147,159.00

Deficiency P91.00
===========
JOSEROXAS

Netincomeperreturn P222,681.76

Add:1/3share,profitsinRoxasy
P153,429.15
Cia.

Lessamountreported 146,135.46

Amountunderstated 7,113.69
Less1/3shareofcontributions
disallowedfrompartnershipbut
allowedasdeductionstopartners 7,042.02 71.67

Netincomeperreview P222,753.43
Less:Exemption 1,800.00

Netincomesubjecttotax P220,953.43

Taxdue P102,763.00
Taxpaid 102,714.00

Deficiency P49.00
===========

WHEREFORE,thedecisionappealedfromismodified.RoxasyCia.isherebyorderedtopaythesumofP150.00
asrealestatedealer'sfixedtaxfor1952,andAntonioRoxas,EduardoRoxasandJoseRoxasareorderedtopay
therespectivesumsofP109.00,P91.00andP49.00astheirindividualdeficiencyincometaxallcorrespondingfor
theyear1955.Nocosts.Soordered.

Reyes,J.B.L.,Dizon,Makalintal,Sanchez,Castro,AngelesandFernando,JJ.,concur.
Zaldivar,J.,tooknopart.
Concepcion,C.J.,isonleave.

Footnotes
*SeeBIRRecords,p.387.

TheLawphilProjectArellanoLawFoundation

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