CIR vs. BURROUGHS

G.R. No. L-66653 June 19, 1986

Nature: Petition for certiorari to review and set aside the Decision of CTA which ordered petitioner CIR to grant in favor of Burroughs Limited, tax credit in the sum of P172,058.90, representing erroneously overpaid branch profit remittance tax.

FACTS:

1. Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a branch office located in Metro Manila.

2. In March 1979, said branch office applied with the Central Bank for authority to remit to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the amount of P6,499,999.30.

3. Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax (P7,647,058.00), respondent filed for refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax.

4. Petitioner contends that respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980.

ISSUE:

W/O respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980.

HELD:

No. Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal Revenue Code.

The prejudice that would result to private respondent Burroughs Limited by a retroactive application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.

CIR vs.WILLIAM J. SUTER

G.R. No. L-25532             February 28, 1969

NATURE: The present case is a petition for review, filed by the CIR, for the decision of the CTA, which court rendered a decision reversing the tax court's determination of a deficiency income tax against respondent Suter.

FACTS:

1. A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners.

2. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership.

3. On 1 October 1947, the limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among other activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and amusement machines, their parts and accessories. It had an office and held itself out as a limited partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation with the Central Bank.

4. In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.

5. The limited partnership had been filing its income tax returns as a corporation,until in 1959 the CIR, in an assessment, consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.

6. Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance with law, but his request was denied. On appeal the CTA reverse the CIR decision.

ISSUES:

1. W/O the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a single taxable unit; and

2. W/O the partnership was dissolved after the marriage of the partners, respondent William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited partnership, and if they did not, the fiction of juridical personality of the partnership should be disregarded for income tax purposes because the spouses have exclusive ownership and control of the business; consequently the income tax return of respondent Suter for the years in question should have included his and his wife's individual incomes and that of the limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:

(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents, only one consolidated return for the taxable year shall be filed by either spouse to cover the income of both spouses; ....

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical personality had not been affected and since, as a limited partnership, as contra distinguished from a duly registered general partnership, it is taxable on its income similarly with corporations, Suter was not bound to include in his individual return the income of the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations to each other are prohibited from entering into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)

The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947), a universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else "all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not such a

universal partnership, since the contributions of the partners were fixed sums of MONEY , P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article 1677 of the Civil Code of 1889.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their respective separate property under the Spanish Civil Code (Article 1396):

The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; ....

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common property of both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct and separate from that of its partners (unlike American and English law that does not recognize such separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited partnership's separate individuality makes it impossible to equate its income with that of the component members. True, section 24 of the Internal Revenue Code merges registered general co-partnerships (compañias colectivas) with the personality of the individual partners for income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal personality of the corporations involved therein are not applicable to the present case. In the cited cases, the corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so would exempt the limited partnership from income taxation but would throw the tax burden upon the partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was organized for legitimate business purposes; it conducted its own dealings with its customers prior to appellee's marriage, and had been filing its own income tax returns as such independent entity. The change in its membership, brought about by the marriage of the partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that income to be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compañia colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compañias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nêt

But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the

fruits of the wife's parapherna become conjugal only when no longer needed to defray the expenses for the administration and preservation of the paraphernal capital of the wife. Then again, the appellant's argument erroneously confines itself to the question of the legal personality of the limited partnership, which is not essential to the income taxability of the partnership since the law taxes the income of even joint accounts that have no personality of their own.  1 Appellant is, likewise, mistaken in that it assumes that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions in the business partnership are not the same.

The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.

IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME ‘OZAETA, ROMULO, ETC.

Facts: Two petitions were filed, one by the surviving partners of Atty. Herminio Ozaeta and the other by the surviving partners of Atty. Alexander Sycip praying that they be allowed to continue using the names of partners who had passed away in their firm names. Both petitions were consolidated.

Petitioners Arguments:

Under the law, a partnership is not prohibited from continuing its business under a firm name which includes the name of a deceased partner. In fact, art. 1840 of the civil code explicitly sanctions the practice.

In regulating other professions, such as accountancy and engineering, the legislature has authorized the adoption of firm names without any restriction as to the use, in such firm name, of the name of the deceased partner, the legislative authorization given to those engaged in the practice of accountancy – a profession requiring the same degree of trust and confidence in respect of clients as that implicit in the relationship of attorney and client – to acquire and use a trade name, strongly indicates that there us no fundamental policy that is offended by the continued use by a firm of professionals of a firm name which included the name of a deceased partner, at least where such firm name has acquired the characteristics of a ‘trade name’

The Canon of Professional Ethics are not transgressed by the continued use of the name of a deceased partner in the firm name of a law partnership as declared by Canon 33 adopted by American Bar Association declaring that ‘The continued use of the name of a deceased or former partner when permissible by local custom, is not unethical, but care should be taken that no imposition or deception is practiced through this use.’

There is no possibility of imposition or deception because the deaths of their respective deceased partners were well – publicized in all newspapers of general circulation for several days.

No local custom prohibits the continued use of a deceased partner’s name in a professional firm name; and

The continued use of a deceased partner’s name in the firm name of law partnerships has been consistently allowed by U.S. Courts and is an accepted practice in legal profession of most countries in the world.

Issue: Whether or not a firm name engaged in the legal profession should continue using the name of partners who had passed away.

SC ruling: No.

The use in partnership names of the names of deceased partners will run counter to Article 1825 of the CC which provides that names in a firm name of a partnership must either be those of living partners and, in the case of non – partners, should be living persons who can be subjected to liability. In fact, art. 1825 prohibits a third person from including his name in the firm name under pain of assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm particularly where they are non-lawyers. With regard to art. 1840, it treats more of a commercial partnership with a good will to protect rather than a professional partnership, with no saleable good will but whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a commercial partnership and cannot arise in a professional partnership consisting of lawyers.

A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. For one thing, the law on accountancy specifically allows the use of a trade name in connection with the practice of accountancy. ‘A partnership for the practice of law is not a legal entity. It is a mere relationship or association for a particular purpose.’ It is not a partnership formed for the purpose of carrying in a trade or business or of holding property. Thus, it has been stated that the used of an assumed or trade name in law practice is improper.

The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise. It is limited to persons of good moral character with special qualifications duly ascertained and certified. The right does not only presuppose in its possessor integrity, legal standing and attainment but also the exercise of a special privilege, highly personal and partaking of the nature of a public trust.

The continued use of a deceased or former partner’s name in the firm names of law partnerships not sanctioned by local custom due to the possibility of deception upon the public where the name of a deceased partner continues to be used. The possibility of deception upon the public, real or consequential, where the name of a deceased partner continues to be used cannot be ruled out. A person in search of legal counsel might be guided by the familiar ring of a distinguished name appearing in a firm title. In addition, there’s no local custom within our jurisdiction that sanctions the practice of continued use of a deceased partner’s name. Courts take no judicial notice of custom. A local custom as a source of right cannot be considered by a court of justice unless such custom is properly established by competent evidence like any other fact. Merely because something is done as a matter of practice does not mean that Courts can rely on the same for purposes of adjudication as a juridical custom. Juridical custom must be differentiated from social custom. The former can supplement statutory law or be applied in the absence of such statute. Not so with the latter.

ESTANISLAO, JR. VS. COURT OF APPEALS

Facts: The petitioner and private respondents are brothers and sisters who are co-owners of certain lots at the in Quezon City which were then being leased to SHELL. They agreed to open and operate a gas station thereat to be known as Estanislao Shell Service Station with an initial investment of PhP15,000.00 to be taken from the advance rentals due to them from SHELL for the occupancy of the said lots owned in common by them. A joint affidavit was executed by them on April 11, 1966. The respondents agreed to help their brother, petitioner therein, by allowing him to operate and manage the gasoline service station of the family. In order not to run counter to the company’s policy of appointing

only one dealer, it was agreed that petitioner would apply for the dealership. Respondent Remedios helped in co-managing the business with petitioner from May 1966 up to February 1967.

On May 1966, the parties entered into an Additional Cash Pledge Agreement with SHELL wherein it was reiterated that the P15,000.00 advance rental shall be deposited with SHELL to cover advances of fuel to petitioner as dealer with a proviso that said agreement “cancels and supersedes the Joint Affidavit.”

For sometime, the petitioner submitted financial statement regarding the operation of the business to the private respondents, but thereafter petitioner failed to render subsequent accounting. Hence , the private respondents filed a complaint against the petitioner praying among others that the latter be ordered:

(1) To execute a public document embodying all the provisions of the partnership agreement they entered into;

(2) To render a formal accounting of the business operation veering the period from May 6, 1966 up to December 21, 1968, and from January 1, 1969 up to the time the order is issued and that the same be subject to proper audit;

(3) To pay the plaintiffs their lawful shares and participation in the net profits of the business; and(4) To pay the plaintiffs attorney’s fees and costs of the suit.

Issue: Can a partnership exist between members of the same family arising from their joint ownership of certain properties?

Trial Court: The complaint (of the respondents) was dismissed. But upon a motion for reconsideration of the decision, another decision was rendered in favor of the respondents.

CA: Affirmed in toto

Petitioner: The CA erred in interpreting the legal import of the Joint Affidavit vis-à-vis the Additional Cash Pledge Agreement. Because of the stipulation cancelling and superseding the Joint Affidavit, whatever partnership agreement there was in said previous agreement had thereby been abrogated. Also, the CA erred in declaring that a partnership was established by and among the petitioner and the private respondents as regards the ownership and /or operation of the gasoline service station business.

Held: There is no merit in the petitioner’s contention that because of the stipulation cancelling and superseding the previous joint affidavit, whatever partnership agreement there was in said previous agreement had thereby been abrogated. Said cancelling provision was necessary for the Joint Affidavit speaks of P15,000.00 advance rental starting May 25, 1966 while the latter agreement also refers to advance rentals of the same amount starting May 24, 1966. There is therefore a duplication of reference to the P15,000.00 hence the need to provide in the subsequent document that it “cancels and supercedes” the previous none. Indeed, it is true that the latter document is silent as to the statement in the Join Affidavit that the value represents the “capital investment” of the parties in the business and it speaks of the petitioner as the sole dealer, but this is as it should be for in the latter document, SHELL was a signatory and it would be against their policy if in the agreement it should be stated that the business is a partnership with private respondents and not a sole proprietorship of the petitioner.

Furthermore, there are other evidences in the record which show that there was in fact such partnership agreement between parties. The petitioner submitted to the private respondents periodic accounting of the business and gave a written authority to the private respondent Remedios Estanislao to examine and audit the books of their “common business” (aming negosyo). The respondent Remedios, on the other hand, assisted in the running of the business. Indeed, the parties hereto formed a partnership when they bound themselves to contribute money in a common fund with the intention of dividing the profits among themselves.

Campos Rueda & Co v Pacific Commercial (44 Phil 916)

Facts:

Campos, Rueda & Co., a limited partnership, is indebted to the appellants: Pacific Commercial Co. , Asiatic Petroleum Co, and International Banking Corporation amounting to not less than P1,000.00 (which were not paid more than 30 days prior to the date of the filing by petitioners of the application for voluntary insolvency).

The trial court denied their petition on the ground that it was not proven, nor alleged, that the members of the firm were insolvent at the time the application was filed. It also held that the partners are personally and solidarily liable for the consequences of the transactions of the partnership.

Issue:

Whether or not a limited partnership may be held to have committed an act of insolvency.

Held:

Yes. A limited partnership’s juridical personality is different from the personality of its members. On general principle, the limited partnership must answer for and suffer the consequence of its acts. Under our Insolvency Law, one of the acts of bankruptcy upon w/c an adjudication of involuntary insolvency can be predicated is the failure to pay obligations.

The failure of Campos, Rueda & Co., to pay its obligations constitutes an act w/c is specifically provided for in the Insolvency Law for declaration of involuntary insolvency. The petitioners have a right to a judicial decree declaring the involuntary insolvency of said partnership.

Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-18703             August 28, 1922

INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en C., appellee, vs.PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO., and INTERNATIONAL BANKING CORPORATION,petitioners-appellants.

Jose Yulo, Ross and Lawrence and J. A. Wolfson for appellants.Antonio Sanz for appellee.

ROMUALDEZ, J.:

The record of this proceeding having been transmitted to this court by virtue of an appeal taken herein, a motion was presented by the appellants praying this court that this case be considered purely a moot question now, for the reason that subsequent to the decision appealed from, the partnership Campos Rueda & Co., voluntarily filed an application for a judicial decree adjudging itself insolvent, which is just what the herein petitioners and appellants tried to obtain from the lower court in this proceeding.

The motion now before us must be, and is hereby, denied even under the facts stated by the appellants in their motion aforesaid. The question raised in this case is not purely moot one; the fact that a man was insolvent on a certain day does not justify an inference that he was some time prior thereto.

Proof that a man was insolvent on a certain day does not justify an inference that he was on a day some time prior thereto. Many contingencies, such as unwise INVESTMENTS , losing contracts, misfortune, or accident, might happen to reduce a person from a state of solvency within a short space of time. (Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep., 767.)

A decree of insolvency begins to operate on the date it is issued. It is one thing to adjudge Campos Rueda & Co. insolvent in December, 1921, as prayed for in this case, and another to declare it insolvent in July, 1922, as stated in the motion.

Turning to the merits of this appeal, we find that this limited partnership was, and is, indebted to the appellants in various sums amounting to not less than P1,000, payable in the Philippines, which were not paid more than thirty days prior to the date of the filing by the petitioners of the application for involuntary insolvency now before us. These facts were sufficient established by the evidence.

The trial court denied the petition on the ground that it was not proven, nor alleged, that the members of the aforesaid firm were insolvent at the time the application was filed; and that was said partners are personally and solidarily liable for the consequence of the transactions of the partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven to be insolvent. From this judgment the petitioners appeal to this court, on the ground that this finding of the lower court is erroneous.

The fundamental question that presents itself for decision is whether or not a limited partnership, such as the appellee, which has failed to pay its obligation with three creditors for more than thirty days, may be held to have committed an act of insolvency, and thereby be adjudged insolvent against its will.

Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical personality of a limited partnership being different from that of its members, it must, on general principle, answer for, and suffer, the consequence of its acts as such an entity capable of being the subject of rights and obligations. If, as in the instant case, the limited partnership of Campos Rueda & Co. Failed to pay its obligations with three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary insolvency can be predicated, this partnership must suffer the consequences of such a failure, and must be adjudged insolvent. We are not unmindful of the fact that some courts of the United States have held that a partnership may not be adjudged insolvent in an involuntary insolvency proceeding unless all of its members are insolvent, while others have maintained a contrary view. But it must be borne in mind that under the American

common law, partnerships have no juridical personality independent from that of its members; and if now they have such personality for the purpose of the insolvency law, it is only by virtue of general law enacted by the Congress of the United States on July 1, 1898, section 5, paragraph (h), of which reads thus:

In the event of one or more but not all of the members of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit, and account for the interest of the partner or partners adjudged bankrupt.

The general consideration that these partnership had no juridical personality and the limitations prescribed in subsection (h) above set forth gave rise to the conflict noted in American decisions, as stated in the case of In reSamuels (215 Fed., 845), which mentions the two apparently conflicting doctrines, citing one from In reBertenshaw (157 Fed., 363), and the other from Francis vs. McNeal (186 Fed., 481).

But there being in our insolvency law no such provision as that contained in section 5 of said Act of Congress of July 1, 1898, nor any rule similar thereto, and the juridical personality of limited partnership being recognized by our statutes from their formation in all their acts and contracts the decision of American courts on this point can have no application in this jurisdiction, nor we see any reason why these partnerships cannot be adjudged bankrupt irrespective of the solvency or insolvency of their members, provided the partnership has, as such, committed some of the acts of insolvency provided in our law. Under this view it is unnecessary to discuss the other points raised by the parties, although in the particular case under consideration it can be added that the liability of the limited partners for the obligations and losses of the partnership is limited to the amounts paid or promised to be paid into the common fund except when a limited partner should have included his name or consented to its inclusion in the firm name (arts. 147 and 148, Code of Commerce).

Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than thirty days to pay its obligations to the petitioners the Pacific Commercial Co. the Asiatic Petroleum Co. and the International Banking

Corporation, the case comes under paragraph 11 of section 20 of Act No. 1956, and consequently the petitioners have the right to a judicial decree declaring the involuntary insolvency of said partnership.

Wherefore, the judgment appealed from is reversed, and it is adjudged that the limited partnership Campos Rueda & Co. is and was on December 28, 1921, insolvent and liable for having failed for more than thirty days to meet its obligations with the three petitioners herein, and it is ordered that this proceeding be remanded to the Court of First Instance of Manila with instruction to said court to issue the proper decrees under section 24 of Act No. 1956, and proceed therewith until its final disposition.

It is so ordered without special finding as to costs.

Araullo, C. J., Johnson, Street, Malcolm, Avanceña, Villamor, Ostrand, and Johns, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-8576             February 11, 1915

VARGAS and COMPANY, plaintiff-appellee, vs.CHAN HANG CHIU, ET AL., defendants-appellants.

Rohde and Wright for appellants. Escaler and Salas for appellee.

MORELAND, J.:

This is an action brought to set aside a judgment of the justice's court of Manila on the ground that the plaintiff here, the defendant in the action in which the judgment was secured, was not served with summons and that, therefore, the justice's court acquired no jurisdiction to render the judgment was that the same

is null and void. Judgment was entered in favor of plaintiff declaring the judgment in controversy void and setting it aside. This appeal is from that judgment.

It appears from the record that the plaintiff is a merchantile association duly organized under the laws of the Philippine Islands and presumably registered as required by law. On the 19th day of August, 1911, an action was begun by Chan Hang Chiu against the plaintiff in this case to recover a sum of money. The summons and complaint were placed in the hands of the sheriff, who certified that on the 19th day of August, 1911, he served the same on Vargas & Co. by delivering to and leaving with one Jose Macapinlac personally true copies thereof, he being the managing agent of said Vargas & Co. at the time of such service. On July 2. 1912, the justice's court rendered judgment against Vargas & Co. for the sum of 372.28. Thereafter execution was duly issued and the property of Vargas & Co. levied on for the payment thereof. Thereupon Vargas & Co. paid the amount of the judgment and costs under protest, with notice that it would sue to recover the amount paid. The execution was returned satisfied and there the matter rested until the present action was brought.

The contention of plaintiff is, and that contention is supported by the decision of the court below, that Vargas & Co. being a partnership, it is necessary, in bringing an action against it, to serve the summons on all of the partners, delivering to each one of them personally a copy thereof; and that the summons in this case having been served on the managing agent of the company only, the service was of no effect as against the company and the members thereof and the judgment entered by virtue of such a service was void.

Plaintiff also contends, and this contention is likewise supported by the court below, that, even admitting that service on the managing agent of the plaintiff is sufficient service, as a matter of fact no service was really made on the managing agent of the company but, rather, on an employee or salesman of the company, who had no powers of management or supervision and who was not competent to receive service on behalf of the company within the provisions of section 396 of the Code of Civil Procedure.

We are of the opinion that neither of these contentions can be sustained. As to the first, we may say that it has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridicial entities

and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company specified by the section of the Code of Civil Procedure referred to. This very action is an illustration of the practice in vogue in the Philippine Islands. The plaintiff brings this action in the company name and not in the name of the members of the firm. Actions against companies of the class to which plaintiff belongs are brought, according to the uninterrupted practice, against such companies in their company names and not against the individual partners constituting the firm. In the States, in which the individual members of the firm must be separately served with process, the rule also prevails that they must be parties to the action, either plaintiffs or defendant, and that the action cannot be brought in the name of or against the company itself. This follows naturally for the reason that, if it is necessary to serve the partners individually, they are entitled to be heard individually in the action and they must, therefore, be made parties thereto so that they can be heard. It would be idle to serve process on individual members of a partnership if the litigation were to be conducted in the name of the partnership itself and by the duly constituted officials of the partnership exclusively.

From what has been said it is apparent that the plaintiff in this action is acting contrary to its own contention by bringing the action in the name of the company be served with process, then the action should be brought in the individual names of the partners and not in the name of the company itself.

Article 35 of the Civil Code provides:

The following are judicial persons:

1. The corporation, associations, and institutions of public interest recognized by law.

2. The associations of private interest, be they civil, commercial, or industrial, to which the law grants proper personality, independent of that of each member thereof.

Article 38 provides: "Judicial persons may acquire and possess property of all kinds, as well as contract obligations and institute civil or criminal actions in accordance with the laws and rules of their establishment."

Article 116 of the Code of Commerce provides in part: "After a commercial association has been established, it shall have legal representation in all its acts and contracts."

These provisions have been the foundation of the practice followed without interruption for many years that association of the class to which plaintiff belongs have an independent and separate legal entity sufficient to permit them to sue and be sued in the company name and to be served with process through the chief officer or managing agent thereof or any other official of the company specified by law.

As to the second contention, we may say that the presumption is that a judgment rendered by a justice's court is a valid and enforceable judgment where the record discloses that all of the steps necessary to confer jurisdiction on the court have been taken. In the case before us it affirmatively appears that the service of process was made on the person the sheriff certified was the managing agent of the defendant company. The sheriff's certificate serves as prima facie evidence of the existence of the facts stated therein. The record, therefore, discloses, so far as the fact of service is concerned, that it was duly made on the managing agent of the company as required by section 396, paragraph 1, of the Code of Civil Procedure. In attacking the judgement on the ground that service was not made on the managing agent of the company, it is incumbent on the plaintiff to overcome the presumption arising from the sheriff's certificate before the attack will succeed. Endeavoring to overcome the presumption referred to, plaintiff offered as a witness one Tomas O. Segovia, an employee of the plaintiff company. He testified that he was a bookkeeper and that as such he was well acquainted with the business of the company and that the person Macapinlac referred to in the sheriff's certificate as managing agent of the plaintiff company was an agent for the sale of plows, of which the plaintiff company was a manufacturer; and that he had no other relations with the company than that stated. During the course of the examination this question was put to and answer elicited from this witness:

How do you know that they were not summoned, or that they did not know of this case brought before the justice of the peace of the city of Manila?

I being the bookkeeper and the general attorney-in-fact to Vargas & Co., in Iloilo, ought to know whether they have been notified or summoned, but I only knew about it when the sheriff appeared in our office to make the levy.

This is the only witness who testified in the case. It does not appear when he became the bookkeeper of the company, or that he was in such a position that he could know or did know personally the acts of the company and its relations to Macapinlac. He does not testify of his own knowledge to the essential facts necessary to controvert the statements contained it the sheriff's certificate of service. His testimony is rather negative than positive, it being at all times possible, in spite of his evidence, indeed, in strict accord therewith, that Vargas & Co., of which the witness was neither official nor manager, could have appointed a managing agent for the company or could have removed him without the personal knowledge of the witness. The witness had no personal knowledge of the relation between the company and Macapinlac. He never saw the contract existing between them. He did not hear the agreement between them nor did he know of his own knowledge what the relations between the company and Macapinlac were. His testimony besides being negative in character has in it many of the elements of hearsay and is not at all satisfactory. It would have been very easy to present one of the members of the company, or all of them, who engaged Macapinlac, who know the relations between him and the company, to testify as to what those relations were and to deny, if that were the fact, that Macapinlac was such an agent or official of the company as is within the purview of section 396 above referred to. The facts stated in the certificate of the sheriff will not be considered as overcome and rebutted except on clear evidence showing the contrary. The evidence of the bookkeeper, who is the only witness for the company, is not satisfactory in any sense and is quite insufficient to overcome the presumption established by the sheriff's certificate.

In view of these considerations it is not necessary to consider the question presented by the payment by the plaintiff company of the judgment.

The judgment appealed from is reversed and the complaint dismissed on the merits, without costs in this instance. So ordered.

Arellano, C.J., Torres, Johnson and Araullo, JJ., concur. 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-48113             April 7, 1947

NGO TIAN TEK and NGO HAY, petitioner, vs.PHILIPPINE EDUCATION CO., INC., respondent.

Tansinsin and Yatco for petitioner.Marcial Esposo for respondent.

PARAS, J.:

The plaintiff, Philippine Education Co., Inc., instituted in the Court of First Instance of Manila an action against the defendants, Vicente Tan alias Chan Sy and the partnership of Ngo Tian Tek and Ngo Hay, for the recovery of some P16,070.14, unpaid cost of merchandise purchased by Lee Guan Box Factory from the plaintiff and five other corporate entities which, though not parties to the action, had previously assigned their credits to the plaintiff, together with attorney's fees, interest and costs. /by agreement of the parties, the case was heard before a referee, Attorney Francisco Dalupan, who in due time submitted his report holding the defendants jointly and severally liable to the plaintiff for the sum of P16,070.14 plus attorney's fees and interest at the rates specified in the report. On March 6, 1939, the Court of First Instance of Manila rendered judgment was affirmed by the Court of Appeals in its decision of January 31, 1941, now the subject of our review at the instance of the partnership Ngo Tian Tek and Ngo Hay, petitioner herein.

"It appears that," quoting from the decision of the Court of Appeals whose findings of fact are conclusive, "as far back as the year 1925, the Modern Box Factory was established at 603 Magdalena Street, Manila. It was at first owned by Ngo Hay, who three years later was joined by Ngo Tian Tek as a junior partner. The modern Box Factory dealt in pare and similar merchandise and purchased goods from the plaintiff and its assignors in the names of the Modern Box Factory, Ngo Hay and Co., Go Hay Box Factory, or Go Hay. Then about the year 1930, the Lee Guan Box Factory was established a few meters from the Modern Box Factory, under the management of Vicente Tan. When that concern, through Vicente Tan, sought credit with the plaintiff and its assignors, Ngo Hay, in conversations and interviews with their officers and employees, represented that he was the principal owner of such factory, that the Lee Guan Box Factory and the Modern

Box Factory belonged to the same owner, and that the Lee Guan Box Factory was a subsidiary of the Modern Box Factory. There is evidence that many goods purchased in the name of the Lee Guan Box Factory were delivered to the Modern Box Factory by the employees of the plaintiff and its assignors upon the express direction of Vicente Tan. There is also evidence that the collectors of the sellers were requested by Vicente Tan to collect — and did collect — from the Modern Box Factory the bills against the Lee Guan Box Factory. In the fact the record shows many checks signed by Ngo Hay or Ngo Tian Tek in payment of accounts of the Lee Guan Box Factory. Furthermore, — and this seems to be conclusive-Ngo Hay, testifying for the defense, admitted that 'he' was the owner of the Lee Guan Box Factory in and before the year 1934, but that in January, 1935, 'he' sold it, by the contract of sale Exhibit 7, to Vicente Tan, who had been his manager of the business. Tan declared also that before January, 1935, the Lee Guan Box Factory pertained to Ngo Hay and Ngo Tian Tek. The contract Exhibit 7 was found by the referee, to be untrue and simulated, for various convincing reasons that need no repetition here. And the quoted statements serve effectively to confirm the evidence for the plaintiff that it was Ngo Hay's representations of ownership of, and responsibility for, Lee Guan Box Factory that induced them to open credit for that concern. It must be stated that in this connection — to answer appellant's fitting observation — that the plaintiff and the assignors have considered Ngo Hay, the Modern Box Factory and Ngo Hay and Co. as one and the same, through the acts of the partners themselves, and that the proof as to Ngo Hay's statements regarding the ownership of Lee Guan Box Factory must be taken in that view. Ngo Hay was wont to say 'he' owned the Modern Box Factory, meaning that he was the principal owner, his other partner being Ngo Tian Tek. Now, it needs no demonstration — for appellant does not deny it — that the obligations of the Lee Guan Box Factory must rest upon its known owner. And that owner in Ngo Tian Tek and Ngo Hay."

We must overrule petitioner's contention that the Court of Appeals erred in holding that Lee Guan Box Factory was a subsidiary of the Modern Box Factory and in disregarding the fact that the contracts evidencing the debts in question were signed by Vicente Tan alias Chan Sy, without any indication that tended to involve the Modern Box Factory or the petitioner. In the first place, we are concluded by the finding of the Court of Appeals regarding the ownership by the petitioner of Lee Guan Box Factory. Secondly, the circumstances that Vicente Tan alias Chan Sy acted in his own name cannot save the petitioner, in view of said ownership, and because contracts entered into by a factor of a commercial

establishment known to belong to a well known enterprise or association, shall be understood as made for the account of the owner of such enterprise or association, even when the factor has not so stated at the time of executing the same, provided that such contracts involve objects comprised in the line and business of the establishment. (Article 286, Code of Commerce.) The fact that Vicente Tan did not have any recorded power of attorney executed by the petitioner will not operate to prejudice third persons, like the respondent Philippine Education Co., Inc., and its assignors. (3 Echavarri, 133.)

Another defense set up by the petitioner is that prior to the transactions which gave rise to this suit, Vicente Tan had purchased Lee Guan Box Factory from Ngo Hay under the contract, Exhibit 7; and the petitioner assails, under the second assignment of error, the conclusion of the Court of Appeals that said contract is simulated. This contention is purely factual and must also be overruled.

The petitioner questions the right of the respondent Philippine Education Co., Inc., to sue for the credits assigned by the five entities with which Lee Guan Box Factory originally contracted, it being argued that the assignment, intended only for purposes of collection, did not make said respondent the real party in interest. The petitioner has cited 5 Corpus Juris, section 144, page 958, which points out that "under statutes authorizing only a bona fideassignee of choses in action to sue thereon in his own name, an assignee for collection merely is not entitled to sue in his own name."

The finding of the Court of Appeals that there is nothing "simulated in the assignment," precludes us from ruling that respondent company is not a bona fide assignee. Even assuming, however, that said assignment was only for collection, we are not prepared to say that, under section 114 of the Code of Civil Procedure, in force at the time this action was instituted, ours is not one of those jurisdictions following the rule that "when a choose, capable of legal assignment, is assigned absolutely to one, but the assignment is made for purpose of collection, the legal title thereto vests in the assignee, and it is no concern of the debtor that the equitable title is in another, and payment to the assignee discharges the debtor." (5 C. J., section 144, p. 958.) No substantial right of the petitioner could indeed be prejudiced by such assignment, because section 114 of the Code of Civil Procedure reserves to it "'any set-off or other defense existing at the time of or before notice of the assignment.'"

Petitioner's allegation that "fraud in the inception of the debt is personal to the contracting parties and does not follow assignment," and that the contracts assigned to the respondent company "are immoral and against public policy and therefore void," constitute defenses on the merits, but do not affect the efficacy of the assignment. It is obvious that, apart from the fact that the petitioner can not invoke fraud of its authorship to evade liability, the appealed decision is founded on an obligation arising, not from fraud, but from the very contracts under which merchandise had been purchased by Lee Guan Box Factory.

The fourth and fifth assignments of error relate to the refusal of the Court of Appeals to hold that the writ of attachment is issued at the commencement of this action by the Court of First Instance is illegal, and to award in favor of the petitioner damages for such wrongful attachment. For us to sustain petitioner's contention will amount to an unauthorized reversal of the following conclusion of fact of the Court of Appeals: "The stereotyped manner in which defendants obtained goods on credit from the six companies, Vicente Tan's sudden disappearance, the execution of the fake sale Exhibit 7 to throw the whole responsibility upon the absent or otherwise insolvent Tan, defendant's mercurial and unbelievable theories as to the ownership of the Modern Box Factory and Lee Guan Box Factory — obviously adopted in a vain effort to meet or explain away the evidentiary force of plaintiff's documentary evidence — are much too significant to permit a declaration that the attachment was not justified."

Regarding the suggestion in petitioner's memorandum that this case should be dismissed because of the death of Ngo Hay, it is sufficient to state that the petitioner Ngo Tian Tek and Ngo Hay is sued as a partnership possessing a personality distinct from any of the partners.

The appealed decision is affirmed, with costs against the petitioner. So ordered.

Moran, C.J., Pablo, Perfecto, Hilado, Briones, Hontiveros, and Tuason, JJ., concur.

Separate Opinions

FERIA, J., concurring and dissenting:

I concur in the majority except that portion thereof which deals with the question whether an assignee for collection merely is entitled to sue in his own name, which need not be discussed, in view of the finding of the Court of Appeals that there is nothing "simulated in the assignment" which according to the very opinion of the majority "precludes us from ruling that the respondent company is not a bona fide assignee;" because such being the conclusion of fact of the Court of Appeals, this Supreme Court can not modify or reverse that conclusion and find that respondent Philippine Education Co. was not a bona fide assignee, and the assignment was not absolute, but made merely for collection in order that said respondent may sue in its own name.

But I dissent from the majority opinion when it further says:

Even assuming, however, that said assignment was only for collection, we are not prepared to say that, under section 114 of the Code of Civil Procedure, in force at the time this action was instituted, ours is not one of those jurisdictions following the rule that "when a choose, capable of legal assignment, is assigned absolutely to one, but the assignment is made for purpose of collection, the legal title thereto vests in the assignee, and it is no concern of the debtor that the equitable title is in another, and payment to the assignee discharges the debtor." (5 C. J., section 114, p. 958.) No substantial right of the petitioner could indeed be prejudiced by such assignment, because section 114 of the Code of Civil Procedure reserves to it "any set-off or other defense exiting at the time of or before notice of the assignment."

The reason for my dissenting is that, after quoting the finding of the Court of Appeals and stating that said conclusion precludes this Court "from ruling that the respondent company is not a bona fide assignee," the majority should have stopped then and there. But having preferred to adduce an additional ratio decidendi, and assume that the assignment was for collection only and not an absolute and bona fide one, in order to meet the latter's argument, because the Court of Appeals' conclusion is that the assignment was not simulated, that is, absolute and bona fide, the majority should have quoted and discussed the second and third sentences of paragraph 144, page 958, of the Corpus Juris, quoted and relied on by the petitioner, which refers to an assignment that is not absolutely and bona fide made. However the majority opinion did not do so, and 

quotes and bases its conclusion to the contrary on the first sentence of said paragraph, not relied on by the petitioner, and which deals with absolute and bona fide assignment, and to the provision of section 114 of the Code of Civil Procedure on set-off and defenses which defendant may set up to an action instituted by a bona fide assignee.

To clearly show the error, we transcribe below section 144, page 958, of Corpus Juris quoted and underlined by the petitioner in his brief:

144. G. Assignments for Collection. — When a chose, capable of legal assignment, is assigned absolutely to one, but the assignment is made for purpose of collection, the legal title thereto vests in the assignee, and it is no concern of the debtor that the equitable title is in another, and payment to the assignee discharges the debtor. Under the statutes of most jurisdictions, the assignee may prosecute an action thereon in his own name as the real party in interest or as a trustee of an express trust; but, under statutes authorizing only a bona fide assignee of choses in action to sue thereon in his own name, an assignee for collection merely is not entitled to sue in his own name. An assignment merely for collection does not transfer the beneficial ownership to the assignee.

It is not only convenient but necessary to point this error in the present concurring and dissenting opinion, for the conclusion set forth in the above quoted portion of the majority decision is misleading; because it apparently lays down the ruling that an assignee not bona fide to whom a credit was assigned, not absolutely, but for collection merely may sue in his own name (a debatable question which has not yet been passed upon squarely by this Court [ Annotation; 64 L. R. A., 585]), but the premise on which the majority's conclusion or ruling is predicated in said portion of the Corpus Juris quoted in the opinion, which is a wrong premise laid down, not by the petitioner, 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-17295             July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants, vs.SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

Felicisimo E. Escaran for plaintiffs-appellants.Office of the Solicitor General for defendant-appellee.

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company, Ang Pue and Tan Siong against the Secretary of Commerce and Industry to secure judgment "declaring that plaintiffs could extend for five years the term of the partnership pursuant to the provisions of plaintiffs' Amendment to the Article of Co-partnership."

The answer filed by the defendant alleged, in substance, that the extension for another five years of the term of the plaintiffs' partnership would be in violation of the provisions of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the partnership Ang Pue & Company for a term of five years from May 1, 1953, extendible by their mutual consent. The purpose of the partnership was "to maintain the business of general merchandising, buying and selling at wholesale and retail, particularly of lumber, hardware and other construction materials for commerce, either native or foreign." The corresponding articles of partnership (Exhibit B) were registered in the Office of the Securities & Exchange Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided, among other things, that, after its enactment, a partnership not wholly formed by Filipinos could continue to engage in the retail business until the expiration of its term.

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang Pue & Company, but after the enactment of the Republic Act 1180, the partners already mentioned amended the original articles of part ownership (Exhibit B) so as to extend the term of life of the partnership to another five years. When the amended articles were presented for registration in the Office of the Securities & Exchange Commission on April 16, 1958, registration was refused upon the ground that the extension was in violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed this appeal.

The question before us is too clear to require an extended discussion. To organize a corporation or a partnership that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. That the State, through Congress, and in the manner provided by law, had the right to enact Republic Act No. 1180 and to provide therein that only Filipinos and concerns wholly owned by Filipinos may engage in the retail business can not be seriously disputed. That this provision was clearly intended to apply to partnership already existing at the time of the enactment of the law is clearly showing by its provision giving them the right to continue engaging in their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely affect appellants herein, is to erroneously assume that the aforesaid provision constitute a property right of which the partners can not be deprived without due process or without their consent. The agreement contain therein must be deemed subject to the law existing at the time when the partners came to agree regarding the extension. In the present case, as already stated, when the partners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and there can be not the slightest doubt that the right claimed by appellants to extend the original term of their partnership to another five years would be in violation of the clear intent and purpose of the law aforesaid.

WHEREFORE, the judgment appealed from is affirmed, with costs.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

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

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

 

GANCAYCO, J.:

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:

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)

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.

Cruz, Griño-Aquino and Medialdea, JJ., concur.

Narvasa, J., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19342 May 25, 1972

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

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.

 

BARREDO, J.:p

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 Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña 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. Oña 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 Oña, were still minors when the project of partition was approved, Lorenzo T. Oña, 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.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oña, 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. Oña 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:

Y INVES La Bu

ear

TMENT

nd ilding

Account

Account

Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(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. Oña 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.

Oña 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 ............................... 8,042.0025% surcharge .............................................. 2,010.50Compromise for non-filing .......................... 50.00Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.0025% surcharge .............................................. 3,462.25Compromise for non-filing .......................... 50.00Total ............................................................... 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 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 Buñales 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. Oña, 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. Oña 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. Oña 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. Oña.

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. Oña, 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. Oña 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 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 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.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-45425             April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs.THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.Office of the Solicitor-General Tuason for appellee.

IMPERIAL, J.:

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;

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.

NameExhibit 

No.Purchase 

PricePrice Won

ExpensesNet 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

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 by Beatriz Guzman .......

D-8 .13 3,150 240 2,910

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

D-9 .13 3,325 360 2,965

10. Maria C. D-10 .16 4,100 960 3,140

Legaspi ......................................

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

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

2.00 50,000

<="" td="" style="font-size: 14px; text-decoration: none; color: rgb(0, 0, 128); font-family: arial, verdana;">

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 (compañias 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.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-47045 November 22, 1988

NOBIO SARDANE, petitioner, vs.THE COURT OF APPEALS and ROMEO J. ACOJEDO, respondents.

Y.G. Villaruz & Associates for petitioner.

Pelagio R. Lachica for private respondent.

 

REGALADO, J.:

The extensive discussion and exhaustive disquisition in the decision 1 of the respondent Court 2 should have written finis to this case without further recourse to Us. The assignment of errors and arguments raised in the respondent Court by herein private respondent, as the petitioner therein, having been correctly and justifiedly sustained by said court without any reversible error in its conclusions, the present petition must fail.

The assailed decision details the facts and proceedings which spawned the present controversy as follows:

Petitioner brought an action in the City Court of Dipolog for collection of a sum of P5,217.25 based on promissory notes executed by the herein private respondent Nobio Sardane in favor of the herein petitioner. Petitioner bases his right to collect on Exhibits B, C, D, E, F, and G executed on different dates and signed by private respondent Nobio Sardane. Exhibit B is a printed promissory note involving Pl,117.25 and dated May 13, 1972. Exhibit C is likewise a printed promissory note and denotes on its face that the sum loaned was Pl,400.00. Exhibit D is also a printed promissory note dated May 31, 1977 involving an amount of P100.00. Exhibit E is what is commonly known to the layman as 'vale' which reads: 'Good for: two hundred pesos (Sgd) Nobio Sardane'. Exhibit F is stated in the following tenor: 'Received from Mr. Romeo Acojedo the sum Pesos: Two Thousand Two Hundred (P2,200.00) ONLY, to be paid on or before December 25, 1975. (Sgd) Nobio Sardane.' Exhibit G and H are both vales' involving the same amount of one hundred pesos, and dated August 25, 1972 and September 12, 1972 respectively.

It has been established in the trial court that on many occasions, the petitioner demanded the payment of the total amount of P5,217.25. The failure of the private respondent to pay the said amount prompted the petitioner to seek the services of lawyer who made a letter (Exhibit 1) formally demanding the return of the sum loaned. Because of the failure of the private respondent to heed the demands extrajudicially made by the petitioner, the latter was constrained to bring an action for collection of sum of MONEY .

During the scheduled day for trial, private respondent failed to appear and to file an answer. On motion by the petitioner, the City Court of Dipolog issued an order dated May 18, 1976 declaring the private respondent in default and allowed the petitioner to present his evidence ex-parte. Based on petitioner's evidence, the City Court of Dipolog rendered judgment by default in favor of the petitioner.

Private respondent filed a motion to lift the order of default which was granted by the City Court in an order dated May 24, 1976, taking into consideration that the answer was filed within two hours after the hearing of the evidence presented ex-parte by the petitioner.

After the trial on the merits, the City Court of Dipolog rendered its decision on September 14, 1976, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:

(a) Ordering the defendant to pay unto the plaintiff the sum of Five Thousand Two Hundred Seventeen Pesos and Twenty-five centavos (P5,217.25) plus legal interest to commence from April 23, 1976 when this case was filed in court; and

(b) Ordering the defendant to pay the plaintiff the sum of P200.00 as attorney's fee and to pay the cost of this proceeding. 3

Therein defendant Sardane appealed to the Court of First Instance of Zamboanga del Norte which reversed the decision of the lower court by dismissing the complaint and ordered the plaintiff-appellee Acojedo to pay said defendant-appellant P500.00 each for actual damages, moral damages, exemplary damages and attorney's fees, as WELL  as the costs of suit. Plaintiff-appellee then sought the review of said decision by petition to the respondent Court.

The assignment of errors in said petition for review can be capsulized into two decisive issues, firstly, whether the oral testimony for the therein private respondent Sardane that a partnership existed between him and therein

petitioner Acojedo are admissible to vary the meaning of the abovementioned promissory notes; and, secondly, whether because of the failure of therein petitioner to cross-examine therein private respondent on his sur-rebuttal testimony, there was a waiver of the presumption accorded in favor of said petitioner by Section 8, Rule 8 of the Rules of Court.

On the first issue, the then Court of First Instance held that "the pleadings of the parties herein put in issue the imperfection or ambiguity of the documents in question", hence "the appellant can avail of the parol evidence rule to prove his side of the case, that is, the said amount taken by him from appellee is or was not his personal debt to appellee, but expenses of the partnership between him and appellee."

Consequently, said trial court concluded that the promissory notes involved were merely receipts for the contributions to said partnership and, therefore, upheld the claim that there was ambiguity in the promissory notes, hence parol evidence was allowable to vary or contradict the terms of the represented loan contract.

The parol evidence rule in Rule 130 provides:

Sec. 7. Evidence of written agreements.—When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing except in the following cases:

(a) Where a mistake or imperfection of the writing or its failure to express the the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings;

(b) When there is an intrinsic ambiguity in the writing.

As correctly pointed out by the respondent Court the exceptions to the rule do not apply in this case as there is no ambiguity in the writings in question, thus:

In the case at bar, Exhibits B, C, and D are printed promissory notes containing a promise to pay a sum certain in money, payable on

demand and the promise to bear the costs of litigation in the event of the private respondent's failure to pay the amount loaned when demanded extrajudicially. Likewise, the vales denote that the private respondent is obliged to return the sum loaned to him by the petitioner. On their face, nothing appears to be vague or ambigous, for the terms of the promissory notes clearly show that it was incumbent upon the private respondent to pay the amount involved in the promissory notes if and when the petitioner demands the same. It was clearly the intent of the parties to enter into a contract of loan for how could an educated man like the private respondent be deceived to sign a promissory note yet intending to make such a writing to be mere receipts of the petitioner's supposed contribution to the alleged partnership existing between the parties?

It has been established in the trial court that, the private respondent has been engaged in business for quite a long period of time--as owner of the Sardane Trucking Service, entering into contracts with the government for the construction of wharfs and seawall; and a member of the City Council of Dapitan (TSN, July 20, 1976, pp. 57-58).<äre||anº•1àw> It indeed puzzles us how the private respondent could have been misled into signing a document containing terms which he did not mean them to be. ...

xxx xxx xxx

The private respondent admitted during the cross-examination made by petitioner's counsel that he was the one who was responsible for the printing of Exhibits B, C, and D (TSN, July 28, 1976, p. 64). How could he purportedly rely on such a flimsy pretext that the promissory notes were receipts of the petitioner's contribution? 4

The Court of Appeals held, and We agree, that even if evidence aliunde other than the promissory notes may be admitted to alter the meaning conveyed thereby, still the evidence is insufficient to prove that a partnership existed between the private parties hereto.

As manager of the basnig Sarcado naturally some degree of control over the operations and maintenance thereof had to be exercised by herein petitioner. The fact that he had received 50% of the net profits does not conclusively establish that he was a partner of the private respondent herein. Article 1769(4) of the Civil Code is explicit that while the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, no such inference shall be drawn if such profits were received in payment as wages of an employee. Furthermore, herein petitioner had no voice in the management of the affairs of the basnig. Under similar facts, this Court in the early case of Fortis vs. Gutierrez Hermanos, 5 in denying the claim of the plaintiff therein that he was a partner in the business of the defendant, declared:

This contention cannot be sustained. It was a mere contract of employment. The plaintiff had no voice nor vote in the management of the affairs of the company. The fact that the compensation received by him was to be determined with reference to the profits made by the defendant in their business did not in any sense make him a partner therein. ...

The same rule was reiterated in Bastida vs. Menzi & Co., Inc., et al. 6 which involved the same factual and legal milieu.

There are other considerations noted by respondent Court which negate herein petitioner's pretension that he was a partner and not a mere employee indebted to the present private respondent. Thus, in an action for damages filed by herein private respondent against the North Zamboanga Timber Co., Inc. arising from the operations of the business, herein petitioner did not ask to be joined as a party plaintiff. Also, although he contends that herein private respondent is the treasurer of the alleged partnership, yet it is the latter who is demanding an accounting. The advertence of the Court of First Instance to the fact that the casco bears the name of herein petitioner disregards the finding of the respondent Court that it was just a concession since it was he who obtained the engine used in the Sardaco from the Department of Local Government and Community Development. Further, the use by the parties of the pronoun "our" in referring to "our basnig, our catch", "our deposit", or "our boseros" was merely indicative of the camaraderie and not evidentiary of a partnership, between them.

The foregoing factual findings, which belie the further claim that the aforesaid promissory notes do not express the true intent and agreement of the parties, are binding on Us since there is no showing that they fall within the exceptions to the rule limiting the scope of appellate review herein to questions of law.

On the second issue, the pertinent rule on actionable documents in Rule 8, for ready reference, reads:

Sec. 8. How to contest genuineness of such documents.—When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear to be a party to the instrument or when compliance with an order for the inspection of the original instrument is refused.

The record shows that herein petitioner did not deny under oath in his answer the authenticity and due execution of the promissory notes which had been duly pleaded and attached to the complaint, thereby admitting their genuineness and due execution. Even in the trial court, he did not at all question the fact that he signed said promissory notes and that the same were genuine. Instead, he presented parol evidence to vary the import of the promissory notes by alleging that they were mere receipts of his contribution to the alleged partnership.

His arguments on this score reflect a misapprehension of the rule on parol evidence as distinguished from the rule on actionable documents. As the respondent Court correctly explained to herein petitioner, what he presented in the trial Court was testimonial evidence that the promissory notes were receipts of his supposed contributions to the alleged partnership which testimony, in the light of Section 7, Rule 130, could not be admitted to vary or alter the explicit meaning conveyed by said promissory notes. On the other hand, the presumed genuineness and due execution of said promissory notes were not affected, pursuant to the provisions of Section 8, Rule 8, since such aspects were not at all questioned but, on the contrary, were admitted by herein petitioner.

Petitioner's invocation of the doctrines in Yu Chuck, et al. vs. Kong Li Po, 7 which was reiterated in Central Surety & Insurance Co. vs. C. N. Hodges, et al. 8 does not sustain his thesis that the herein private respondent had "waived the mantle of protection given him by Rule 8, Sec. 8". It is true that such implied admission of genuineness and due execution may be waived by a party but only if he acts in a manner indicative of either an express or tacit waiver thereof. Petitioner, however, either overlooked or ignored the fact that, as held in Yu Chuck, and the same is true in other cases of Identical factual settings, such a finding of waiver is proper where a case has been tried in complete disregard of the rule and the plaintiff having pleaded a document by copy, presents oral evidence to prove the due execution of the document and no objections are made to the defendant's evidence in refutation. This situation does not obtain in the present case hence said doctrine is obviously inapplicable.

Neither did the failure of herein private respondent to cross-examine herein petitioner on the latter's sur-rebuttal testimony constitute a waiver of the aforesaid implied admission. As found by the respondent Court, said sur-rebuttal testimony consisted solely of the denial of the testimony of herein private respondent and no new or additional matter was introduced in that sur-rebuttal testimony to exonerate herein petitioner from his obligations under the aforesaid promissory notes.

On the foregoing premises and considerations, the respondent Court correctly reversed and set aside the appealed decision of the Court of First Instance of Zamboanga del Norte and affirmed in full the decision of the City Court of Dipolog City in Civil Case No. A-1838, dated September 14, 1976.

Belatedly, in his motion for reconsideration of said decision of the respondent Court, herein petitioner, as the private respondent therein, raised a third unresolved issue that the petition for review therein should have been dismissed for lack of jurisdiction since the lower Court's decision did not affirm in full the judgment of the City Court of Dipolog, and which he claimed was a sine qua non for such a petition under the law then in force. He raises the same point in his present appeal and We will waive the procedural technicalities in order to put this issue at rest.

Parenthetically, in that same motion for reconsideration he had sought affirmative relief from the respondent Court praying that it sustain the decision of the trial

Court, thereby invoking and submitting to its jurisdiction which he would now assail. Furthermore, the objection that he raises is actually not one of jurisdiction but of procedure. 9

At any rate, it will be noted that petitioner anchors his said objection on the provisions of Section 29, Republic Act 296 as amended by Republic Act 5433 effective September 9, 1968. Subsequently, the procedure for appeal to the Court of Appeals from decisions of the then courts of first instance in the EXERCISE  of their appellate jurisdiction over cases originating from the municipal courts was provided for by Republic Act 6031, amending Section 45 of the Judiciary Act effective August 4, 1969. The requirement for affirmance in full of the inferior court's decision was not adopted or reproduced in Republic Act 6031. Also, since Republic Act 6031 failed to provide for the procedure or mode of appeal in the cases therein contemplated, the Court of Appeals en bancprovided thereof in its Resolution of August 12, 1971, by requiring a petition for review but which also did not require for its availability that the judgment of the court of first instance had affirmed in full that of the lower court. Said mode of appeal and the procedural requirements thereof governed the appeal taken in this case from the aforesaid Court of First Instance to the Court of Appeals in 1977. 10 Herein petitioner's plaint on this issue is, therefore, devoid of merit.

WHEREFORE, the judgment of the respondent Court of Appeals is AFFIRMED, with costs against herein petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-47045 November 22, 1988

NOBIO SARDANE, petitioner, vs.THE COURT OF APPEALS and ROMEO J. ACOJEDO, respondents.

Y.G. Villaruz & Associates for petitioner.

Pelagio R. Lachica for private respondent.

 

REGALADO, J.:

The extensive discussion and exhaustive disquisition in the decision 1 of the respondent Court 2 should have written finis to this case without further recourse to Us. The assignment of errors and arguments raised in the respondent Court by herein private respondent, as the petitioner therein, having been correctly and justifiedly sustained by said court without any reversible error in its conclusions, the present petition must fail.

The assailed decision details the facts and proceedings which spawned the present controversy as follows:

Petitioner brought an action in the City Court of Dipolog for collection of a sum of P5,217.25 based on promissory notes executed by the herein private respondent Nobio Sardane in favor of the herein petitioner. Petitioner bases his right to collect on Exhibits B, C, D, E, F, and G executed on different dates and signed by private respondent Nobio Sardane. Exhibit B is a printed promissory note involving Pl,117.25 and dated May 13, 1972. Exhibit C is likewise a printed promissory note and denotes on its face that the sum loaned was Pl,400.00. Exhibit D is also a printed promissory note dated May 31, 1977 involving an amount of P100.00. Exhibit E is what is commonly known to the layman as 'vale' which reads: 'Good for: two hundred pesos (Sgd) Nobio Sardane'. Exhibit F is stated in the following tenor: 'Received from Mr. Romeo Acojedo the sum Pesos: Two Thousand Two Hundred (P2,200.00) ONLY, to be paid on or before December 25, 1975. (Sgd) Nobio Sardane.' Exhibit G and H are both vales' involving the same amount of one hundred pesos, and dated August 25, 1972 and September 12, 1972 respectively.

It has been established in the trial court that on many occasions, the petitioner demanded the payment of the total amount of P5,217.25.

The failure of the private respondent to pay the said amount prompted the petitioner to seek the services of lawyer who made a letter (Exhibit 1) formally demanding the return of the sum loaned. Because of the failure of the private respondent to heed the demands extrajudicially made by the petitioner, the latter was constrained to bring an action for collection of sum of MONEY .

During the scheduled day for trial, private respondent failed to appear and to file an answer. On motion by the petitioner, the City Court of Dipolog issued an order dated May 18, 1976 declaring the private respondent in default and allowed the petitioner to present his evidence ex-parte. Based on petitioner's evidence, the City Court of Dipolog rendered judgment by default in favor of the petitioner.

Private respondent filed a motion to lift the order of default which was granted by the City Court in an order dated May 24, 1976, taking into consideration that the answer was filed within two hours after the hearing of the evidence presented ex-parte by the petitioner.

After the trial on the merits, the City Court of Dipolog rendered its decision on September 14, 1976, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:

(a) Ordering the defendant to pay unto the plaintiff the sum of Five Thousand Two Hundred Seventeen Pesos and Twenty-five centavos (P5,217.25) plus legal interest to commence from April 23, 1976 when this case was filed in court; and

(b) Ordering the defendant to pay the plaintiff the sum of P200.00 as attorney's fee and to pay the cost of this proceeding. 3

Therein defendant Sardane appealed to the Court of First Instance of Zamboanga del Norte which reversed the decision of the lower court by dismissing the complaint and ordered the plaintiff-appellee Acojedo to pay said defendant-

appellant P500.00 each for actual damages, moral damages, exemplary damages and attorney's fees, as WELL  as the costs of suit. Plaintiff-appellee then sought the review of said decision by petition to the respondent Court.

The assignment of errors in said petition for review can be capsulized into two decisive issues, firstly, whether the oral testimony for the therein private respondent Sardane that a partnership existed between him and therein petitioner Acojedo are admissible to vary the meaning of the abovementioned promissory notes; and, secondly, whether because of the failure of therein petitioner to cross-examine therein private respondent on his sur-rebuttal testimony, there was a waiver of the presumption accorded in favor of said petitioner by Section 8, Rule 8 of the Rules of Court.

On the first issue, the then Court of First Instance held that "the pleadings of the parties herein put in issue the imperfection or ambiguity of the documents in question", hence "the appellant can avail of the parol evidence rule to prove his side of the case, that is, the said amount taken by him from appellee is or was not his personal debt to appellee, but expenses of the partnership between him and appellee."

Consequently, said trial court concluded that the promissory notes involved were merely receipts for the contributions to said partnership and, therefore, upheld the claim that there was ambiguity in the promissory notes, hence parol evidence was allowable to vary or contradict the terms of the represented loan contract.

The parol evidence rule in Rule 130 provides:

Sec. 7. Evidence of written agreements.—When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing except in the following cases:

(a) Where a mistake or imperfection of the writing or its failure to express the the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings;

(b) When there is an intrinsic ambiguity in the writing.

As correctly pointed out by the respondent Court the exceptions to the rule do not apply in this case as there is no ambiguity in the writings in question, thus:

In the case at bar, Exhibits B, C, and D are printed promissory notes containing a promise to pay a sum certain in MONEY , payable on demand and the promise to bear the costs of litigation in the event of the private respondent's failure to pay the amount loaned when demanded extrajudicially. Likewise, the vales denote that the private respondent is obliged to return the sum loaned to him by the petitioner. On their face, nothing appears to be vague or ambigous, for the terms of the promissory notes clearly show that it was incumbent upon the private respondent to pay the amount involved in the promissory notes if and when the petitioner demands the same. It was clearly the intent of the parties to enter into a contract of loan for how could an educated man like the private respondent be deceived to sign a promissory note yet intending to make such a writing to be mere receipts of the petitioner's supposed contribution to the alleged partnership existing between the parties?

It has been established in the trial court that, the private respondent has been engaged in business for quite a long period of time--as owner of the Sardane Trucking Service, entering into contracts with the government for the construction of wharfs and seawall; and a member of the City Council of Dapitan (TSN, July 20, 1976, pp. 57-58).<äre||anº•1àw> It indeed puzzles us how the private respondent could have been misled into signing a document containing terms which he did not mean them to be. ...

xxx xxx xxx

The private respondent admitted during the cross-examination made by petitioner's counsel that he was the one who was responsible for the printing of Exhibits B, C, and D (TSN, July 28, 1976, p. 64). How could he purportedly rely on such a flimsy pretext

that the promissory notes were receipts of the petitioner's contribution? 4

The Court of Appeals held, and We agree, that even if evidence aliunde other than the promissory notes may be admitted to alter the meaning conveyed thereby, still the evidence is insufficient to prove that a partnership existed between the private parties hereto.

As manager of the basnig Sarcado naturally some degree of control over the operations and maintenance thereof had to be EXERCISED  by herein petitioner. The fact that he had received 50% of the net profits does not conclusively establish that he was a partner of the private respondent herein. Article 1769(4) of the Civil Code is explicit that while the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, no such inference shall be drawn if such profits were received in payment as wages of an employee. Furthermore, herein petitioner had no voice in the management of the affairs of the basnig. Under similar facts, this Court in the early case of Fortis vs. Gutierrez Hermanos, 5 in denying the claim of the plaintiff therein that he was a partner in the business of the defendant, declared:

This contention cannot be sustained. It was a mere contract of EMPLOYMENT . The plaintiff had no voice nor vote in the management of the affairs of the company. The fact that the compensation received by him was to be determined with reference to the profits made by the defendant in their business did not in any sense make him a partner therein. ...

The same rule was reiterated in Bastida vs. Menzi & Co., Inc., et al. 6 which involved the same factual and legal milieu.

There are other considerations noted by respondent Court which negate herein petitioner's pretension that he was a partner and not a mere employee indebted to the present private respondent. Thus, in an action for damages filed by herein private respondent against the North Zamboanga Timber Co., Inc. arising from the operations of the business, herein petitioner did not ask to be joined as a party plaintiff. Also, although he contends that herein private respondent is the treasurer of the alleged partnership, yet it is the latter who is demanding an accounting. The advertence of the Court of First Instance to the fact that the casco

bears the name of herein petitioner disregards the finding of the respondent Court that it was just a concession since it was he who obtained the engine used in the Sardaco from the Department of Local Government and Community Development. Further, the use by the parties of the pronoun "our" in referring to "our basnig, our catch", "our deposit", or "our boseros" was merely indicative of the camaraderie and not evidentiary of a partnership, between them.

The foregoing factual findings, which belie the further claim that the aforesaid promissory notes do not express the true intent and agreement of the parties, are binding on Us since there is no showing that they fall within the exceptions to the rule limiting the scope of appellate review herein to questions of law.

On the second issue, the pertinent rule on actionable documents in Rule 8, for ready reference, reads:

Sec. 8. How to contest genuineness of such documents.—When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear to be a party to the instrument or when compliance with an order for the inspection of the original instrument is refused.

The record shows that herein petitioner did not deny under oath in his answer the authenticity and due execution of the promissory notes which had been duly pleaded and attached to the complaint, thereby admitting their genuineness and due execution. Even in the trial court, he did not at all question the fact that he signed said promissory notes and that the same were genuine. Instead, he presented parol evidence to vary the import of the promissory notes by alleging that they were mere receipts of his contribution to the alleged partnership.

His arguments on this score reflect a misapprehension of the rule on parol evidence as distinguished from the rule on actionable documents. As the respondent Court correctly explained to herein petitioner, what he presented in the trial Court was testimonial evidence that the promissory notes were receipts of his supposed contributions to the alleged partnership which testimony, in the

light of Section 7, Rule 130, could not be admitted to vary or alter the explicit meaning conveyed by said promissory notes. On the other hand, the presumed genuineness and due execution of said promissory notes were not affected, pursuant to the provisions of Section 8, Rule 8, since such aspects were not at all questioned but, on the contrary, were admitted by herein petitioner.

Petitioner's invocation of the doctrines in Yu Chuck, et al. vs. Kong Li Po, 7 which was reiterated in Central Surety & Insurance Co. vs. C. N. Hodges, et al. 8 does not sustain his thesis that the herein private respondent had "waived the mantle of protection given him by Rule 8, Sec. 8". It is true that such implied admission of genuineness and due execution may be waived by a party but only if he acts in a manner indicative of either an express or tacit waiver thereof. Petitioner, however, either overlooked or ignored the fact that, as held in Yu Chuck, and the same is true in other cases of Identical factual settings, such a finding of waiver is proper where a case has been tried in complete disregard of the rule and the plaintiff having pleaded a document by copy, presents oral evidence to prove the due execution of the document and no objections are made to the defendant's evidence in refutation. This situation does not obtain in the present case hence said doctrine is obviously inapplicable.

Neither did the failure of herein private respondent to cross-examine herein petitioner on the latter's sur-rebuttal testimony constitute a waiver of the aforesaid implied admission. As found by the respondent Court, said sur-rebuttal testimony consisted solely of the denial of the testimony of herein private respondent and no new or additional matter was introduced in that sur-rebuttal testimony to exonerate herein petitioner from his obligations under the aforesaid promissory notes.

On the foregoing premises and considerations, the respondent Court correctly reversed and set aside the appealed decision of the Court of First Instance of Zamboanga del Norte and affirmed in full the decision of the City Court of Dipolog City in Civil Case No. A-1838, dated September 14, 1976.

Belatedly, in his motion for reconsideration of said decision of the respondent Court, herein petitioner, as the private respondent therein, raised a third unresolved issue that the petition for review therein should have been dismissed for lack of jurisdiction since the lower Court's decision did not affirm in full the judgment of the City Court of Dipolog, and which he claimed was a sine qua non for

such a petition under the law then in force. He raises the same point in his present appeal and We will waive the procedural technicalities in order to put this issue at rest.

Parenthetically, in that same motion for reconsideration he had sought affirmative relief from the respondent Court praying that it sustain the decision of the trial Court, thereby invoking and submitting to its jurisdiction which he would now assail. Furthermore, the objection that he raises is actually not one of jurisdiction but of procedure. 9

At any rate, it will be noted that petitioner anchors his said objection on the provisions of Section 29, Republic Act 296 as amended by Republic Act 5433 effective September 9, 1968. Subsequently, the procedure for appeal to the Court of Appeals from decisions of the then courts of first instance in the EXERCISE  of their appellate jurisdiction over cases originating from the municipal courts was provided for by Republic Act 6031, amending Section 45 of the Judiciary Act effective August 4, 1969. The requirement for affirmance in full of the inferior court's decision was not adopted or reproduced in Republic Act 6031. Also, since Republic Act 6031 failed to provide for the procedure or mode of appeal in the cases therein contemplated, the Court of Appeals en bancprovided thereof in its Resolution of August 12, 1971, by requiring a petition for review but which also did not require for its availability that the judgment of the court of first instance had affirmed in full that of the lower court. Said mode of appeal and the procedural requirements thereof governed the appeal taken in this case from the aforesaid Court of First Instance to the Court of Appeals in 1977. 10 Herein petitioner's plaint on this issue is, therefore, devoid of merit.

WHEREFORE, the judgment of the respondent Court of Appeals is AFFIRMED, with costs against herein petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-21906      December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees, vs.NICANOR CASTEEL and JUAN DEPRA, defendants, NICANOR CASTEEL, defendant-appellant.

Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.Ruiz Law Offices for defendant-appellant.

CASTRO, J.:

This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May 21, 1956, all of the Court of First Instance of Davao, in civil case 629. The basic action is for specific performance, and damages resulting from an alleged breach of contract.

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of Malalag (now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken thereon by the authorities concerned. During the Japanese occupation, he filed another fishpond application for the same area, but because of the conditions then prevailing, it was not acted upon either. On December 12, 1945 he filed a third fishpond application for the same area, which, after a survey, was found to contain 178.76 hectares. Upon investigation conducted by a representative of the Bureau of Forestry, it was discovered that the area applied for was still needed for firewood production. Hence on May 13, 1946 this third application was disapproved.

Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While this motion was pending resolution, he was advised by the district forester of Davao City that no further action would be taken on his motion, unless he filed a new application for the area concerned. So he filed on May 27, 1947 his fishpond application 1717.

Meanwhile, several applications were submitted by other persons for portions of the area covered by Casteel's application.

On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land found inside the area applied for by Casteel; he was later granted fishpond permit F-289-C covering 9.3 hectares certified as available for fishpond purposes by the Bureau of Forestry.

Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land applied for by Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946, was given due course on December 9, 1947 with the issuance to him of fishpond permit F-539-C to develop 30 hectares of land comprising a portion of the area applied for by Casteel, upon certification of the Bureau of Forestry that the area was likewise available for fishpond purposes. On November 17, 1948 Felipe Deluao filed his own fishpond application for the area covered by Casteel's application.

Because of the threat poised upon his position by the above applicants who entered upon and spread themselves within the area, Casteel realized the urgent necessity of expanding his occupation thereof by constructing dikes and cultivating marketable fishes, in order to prevent old and new squatters from usurping the land. But lacking financial resources at that time, he sought financial aid from his uncle Felipe Deluao who then extended loans totalling more or less P27,000 with which to finance the needed improvements on the fishpond. Hence, a wide productive fishpond was built.

Moreover, upon learning that portions of the area applied for by him were already occupied by rival applicants, Casteel immediately filed the corresponding protests. Consequently, two administrative cases ensued involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C, Alejandro Cacam, Permittees-Respondents."

However, despite the finding made in the investigation of the above administrative cases that Casteel had already introduced improvements on portions of the area applied for by him in the form of dikes, fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's application on October 25, 1949, required him to remove all the improvements which he had introduced on the land, and ordered that the land be leased through public auction. Failing to secure

a favorable resolution of his motion for reconsideration of the Director's order, Casteel appealed to the Secretary of Agriculture and Natural Resources.

In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our discussion of the appellant's third assignment of error.

On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor Casteel as party of the second part, executed a contract — denominated a "contract of service" — the salient provisions of which are as follows:

That the Party of the First Part in consideration of the mutual covenants and agreements made herein to the Party of the Second Part, hereby enter into a contract of service, whereby the Party of the First Part hires and EMPLOYS  the Party of the Second Part on the following terms and conditions, to wit:

That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders only his services for the construction and improvements of a fishpond at Barrio Malalag, Municipality of Padada, Province of Davao, Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that will be produced from said fishpond;

That the Party of the First Part will be the administrator of the same she having financed the construction and improvement of said fishpond;

That this contract was the result of a verbal agreement entered into between the Parties sometime in the month of November, 1947, with all the above-mentioned conditions enumerated; ...

On the same date the above contract was entered into, Inocencia Deluao executed a special power of attorney in favor of Jesus Donesa, extending to the latter the authority "To represent me in the administration of the fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines, which has been applied for fishpond permit by Nicanor Casteel, but rejected by the Bureau of Fisheries, and to

supervise, demand, receive, and collect the value of the fish that is being periodically realized from it...."

On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the two administrative cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the application of Nicanor Casteel over the subject fishpond. However, by letter dated March 15, 1950 sent to the Secretary of Commerce and Agriculture and Natural Resources (now Secretary of Agriculture and Natural Resources), Deluao withdrew his petition for reinvestigation.

On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in DANR Case 353, the dispositive portion of which reads as follows:

In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel should be, as hereby it is, reinstated and given due course for the area indicated in the sketch drawn at the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.

On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion stating as follows:

WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C of Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to pay the improvements introduced thereon by said permittees in accordance with the terms and dispositions contained elsewhere in this decision....

Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the fishpond, and ejected the latter's representative (encargado), Jesus Donesa, from the premises.

Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and Nicanor Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of First Instance of Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who, they alleged, instigated Casteel to violate his contract), praying inter alia, (a) that Casteel be ordered to respect and abide by the terms and conditions of said

contract and that Inocencia Deluao be allowed to continue administering the said fishpond and collecting the proceeds from the sale of the fishes caught from time to time; and (b) that the defendants be ordered to pay jointly and severally to plaintiffs the sum of P20,000 in damages.

On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction, praying among other things, that during the pendency of the case and upon their filling the requisite bond as may be fixed by the court, a preliminary injunction be issued to restrain Casteel from doing the acts complained of, and that after trial the said injunction be made permanent. The lower court on April 26, 1951 granted the motion, and, two days later, it issued a preliminary mandatory injunction addressed to Casteel, the dispositive portion of which reads as follows:

POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado y todos usu abogados, agentes, mandatarios y demas personas que obren en su ayuda, desista de impedir a la demandante Inocencia R. Deluao que continue administrando personalmente la pesqueria objeto de esta causa y que la misma continue recibiendo los productos de la venta de los pescados provenientes de dicha pesqueria, y que, asimismo, se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza al encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto de la demanda de autos.

On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he was the owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by the plaintiffs on June 15, 1951, was denied by the lower court in its order of June 26, 1961.

The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952, denying the material averments of the plaintiffs' complaint. A reply to the defendants' amended answer was filed by the plaintiffs on January 31, 1952.

The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4, 1951 the plaintiffs opposed his motion.

The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs' complaint failed to state a claim upon which relief may be granted. The motion, opposed by the plaintiffs on October 12, 1951, was denied for lack of merit by the lower court in its order of October 22, 1951. The defendants' motion for reconsideration filed on October 31, 1951 suffered the same fate when it was likewise denied by the lower court in its order of November 12, 1951.

After the issues were joined, the case was set for trial. Then came a series of postponements. The lower court (Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an order in open court, reading as follows: .

Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this case is hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.

This case was filed on April 3, 1951 and under any circumstance this Court will not entertain any other transfer of hearing of this case and if the parties will not be ready on that day set for hearing, the court will take the necessary steps for the final determination of this case. (emphasis supplied)

On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued by the office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First Instance of Davao, setting the hearing of the case for May 2 and 3, 1956 before Judge Amador Gomez of Branch II. The defendants, thru counsel, on April 26, 1956 filed a motion for postponement. Acting on this motion, the lower court (Branch II, presided by Judge Gomez) issued an order dated April 27, 1956, quoted as follows:

This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The motion is filed by the counsel for the defendants and has the conformity of the counsel for the plaintiffs.

An examination of the records of this case shows that this case was initiated as early as April 1951 and that the same has been under advisement of the Honorable Enrique A. Fernandez, Presiding Judge of

Branch No. I, since September 24, 1953, and that various incidents have already been considered and resolved by Judge Fernandez on various occasions. The last order issued by Judge Fernandez on this case was issued on March 21, 1956, wherein he definitely states that the Court will not entertain any further postponement of the hearing of this case.

CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and termination of any incident referring to this case should be referred back to Branch I, so that the same may be disposed of therein. (emphasis supplied)

A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.

On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge Fernandez presiding), when informed about the defendants' motion for postponement filed on April 26, 1956, issued an order reiterating its previous order handed down in open court on March 21, 1956 and directing the plaintiffs to introduce their evidence ex parte, there being no appearance on the part of the defendants or their counsel. On the basis of the plaintiffs' evidence, a decision was rendered on May 4, 1956 the dispositive portion of which reads as follows:

EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del demandado Nicanor Casteel:

(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;

(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad (½) del "fishpond" en cuestion con todas las mejoras existentes dentro de la misma;

(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en concepto de danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion de esta decision hasta que entregue la posesion y administracion de la porcion del "fishpond" en conflicto;

(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los pescado beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda de autos hasta el completo pago de la obligacion principal;

(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos incurridos por aquella durante la pendencia de esta causa;

(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de P2,000.00;

(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en cuanto se refiere al demandado Juan Depra;

(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;

(i) Con las costas contra del demandado, Casteel.

The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack of knowledge of the order of the court a quo setting the case for trial. The petition, however, was denied by the lower court in its order of May 21, 1956, the pertinent portion of which reads as follows:

The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case has been transferred or not, but to inquire from the presiding Judge, particularly because his motion asking the transfer of this case was not set for hearing and was not also acted upon.

Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as follows:

Upon petition of the plaintiff without any objection on the part of the defendants, the hearing of this case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the morning.

This case was filed on April 3, 1951, and under any circumstance this Court will not entertain any other transfer of the hearing of this

case, and if the parties will not be ready on the day set for hearing, the Court will take necessary steps for the final disposition of this case.

In view of the order above-quoted, the Court will not accede to any transfer of this case and the duty of Atty. Ruiz is no other than to be present in the Sala of this Court and to call the attention of the same to the existence of his motion for transfer.

Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not WELL  taken, the same is hereby denied.

Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to us for final determination on the ground that it involves only questions of law.

Casteel raises the following issues:

(1) Whether the lower court committed gross abuse of discretion when it ordered reception of the appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the appellant of his day in court and of his property without due process of law;

(2) Whether the lower court committed grave abuse of discretion when it denied the verified petition for relief from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of Court; and

(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against defendant-appellant, and in not dismissing appellees' complaint.

1. The first and second issues must be resolved against the appellant.

The record indisputably shows that in the order given in open court on March 21, 1956, the lower court set the case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated that, since the case had been pending since April 3, 1951, it would not entertain any further motion for transfer of the scheduled hearing.

An order given in open court is presumed received by the parties on the very date and time of promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March 21, 1956, given in open court, was a valid notice to the parties, and the notice of hearing dated April 21, 1956 or one month thereafter, was a superfluity. Moreover, as between the order of March 21, 1956, duly promulgated by the lower court, thru Judge Fernandez, and the notice of hearing signed by a "special deputy clerk of court" setting the hearing in another branch of the same court, the former's order was the one legally binding. This is because the incidents of postponements and adjournments are controlled by the court and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the Rules of Court.

Much less had the clerk of court the authority to interfere with the order of the court or to transfer the cage from one sala to another without authority or order from the court where the case originated and was being tried. He had neither the duty nor prerogative to re-assign the trial of the case to a different branch of the same court. His duty as such clerk of court, in so far as the incident in question was concerned, was simply to prepare the trial calendar. And this duty devolved upon the clerk of court and not upon the "special deputy clerk of court" who purportedly signed the notice of hearing.

It is of no moment that the motion for postponement had the conformity of the appellees' counsel. The postponement of hearings does not depend upon agreement of the parties, but upon the court's discretion.3

The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom had ever withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably setting the case for hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven other counsel of record. This is a well-settled rule in our jurisdiction.4

It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to appear before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have no right to presume that their motions for postponement will be granted.5 For indeed, the appellant and his 12 lawyers cannot pretend ignorance of the recorded fact that since September 24, 1953 until the trial held on May 2, 1956, the case was under the advisement of Judge Fernandez who presided over Branch I. There was, therefore, no necessity to "re-

assign" the same to Branch II because Judge Fernandez had exclusive control of said case, unless he was legally inhibited to try the case — and he was not.

There is truth in the appellant's contention that it is the duty of the clerk of court — not of the Court — to prepare the trial calendar. But the assignment or reassignment of cases already pending in one sala to another sala, and the setting of the date of trial after the trial calendar has been prepared, fall within the exclusive control of the presiding judge.

The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of court of the Court of First Instance of Davao was located directly below Branch I. If the appellant and his counsel had EXERCISED  due diligence, there was no impediment to their going upstairs to the second storey of the Court of First Instance building in Davao on May 2, 1956 and checking if the case was scheduled for hearing in the saidsala. The appellant after all admits that on May 2, 1956 his counsel went to the office of the clerk of court.

The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But he was properly accorded this right. He was notified in open court on March 21, 1956 that the case was definitely and intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot argue that, pursuant to the doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely notice of the denial of his motion for postponement. In the cited case the motion for postponement was the first one filed by the defendant; in the case at bar, there had already been a series of postponements. Unlike the case at bar, the Siochi case was not intransferably set for hearing. Finally, whereas the cited case did not spend for a long time, the case at bar was only finally and intransferably set for hearing on March 21, 1956 — after almost five years had elapsed from the filing of the complaint on April 3, 1951.

The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare for trial is unacceptable because between March 21, 1956 and May 2, 1956, they had one month and ten days to do so. In effect, the appellant had waived his right to appear at the trial and therefore he cannot be heard to complain that he has been deprived of his property without due process of law.7 Verily, the constitutional requirements of due process have been fulfilled in this case: the lower court is a competent court; it lawfully acquired jurisdiction over the person of the defendant (appellant) and the subject matter of the action;

the defendant (appellant) was given an opportunity to be heard; and judgment was rendered upon lawful hearing.8

2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex parte of a writ of preliminary injunction against him, and in not dismissing the appellee's complaint. We find this contention meritorious.

Apparently, the court a quo relied on exhibit A — the so-called "contract of service" — and the appellees' contention that it created a contract of co-ownership and partnership between Inocencia Deluao and the appellant over the fishpond in question.

Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed to know the law. It must be assumed, conformably to such rule, that the parties entered into the so-called "contract of service" cognizant of the mandatory and prohibitory laws governing the filing of applications for fishpond permits. And since they were aware of the said laws, it must likewise be assumed — in fairness to the parties — that they did not intend to violate them. This view must perforce negate the appellees' allegation that exhibit A created a contract of co-ownership between the parties over the disputed fishpond. Were we to admit the establishment of a co-ownership violative of the prohibitory laws which will hereafter be discussed, we shall be compelled to declare altogether the nullity of the contract. This would certainly not serve the cause of equity and justice, considering that rights and obligations have already arisen between the parties. We shall therefore construe the contract as one of partnership, divided into two parts — namely, a contract of partnership to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to divide the fishpond between them after such award. The first is valid, the second illegal.

It is WELL  to note that when the appellee Inocencia Deluao and the appellant entered into the so-called "contract of service" on November 25, 1949, there were two pending applications over the fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural Resources after it was disallowed by the Director of Fisheries on October 25, 1949. The other was Felipe Deluao's application over the same area which was likewise rejected by the Director of Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by letter dated March 15, 1950 to the Secretary of Agriculture

and Natural Resources. Clearly, although the fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the holder of a fishpond permit over the area. But be that as it may, they were not however precluded from exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application over the same area — whichever event happened first. No law, rule or regulation prohibited them from doing so. Thus, rather than let the fishpond remain idle they cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-ownership but to establish a partnership — Inocencia Deluao as capitalist partner and Casteel as industrial partner — the ultimate undertaking of which was to divide into two equal parts such portion of the fishpond as might have been developed by the amount extended by the plaintiffs-appellees, with the further provision that Casteel should reimburse the expenses incurred by the appellees over one-half of the fishpond that would pertain to him. This can be gleaned, among others, from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit because you are the ones interested in half of the work we have done so far, besides I did not insist on our being partners in my fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners and it so happened that we became partners because I am poor, but in the midst of my poverty it never occurred to me to be unfair to you. Therefore so that each of us may be secured, let us have a document prepared to the effect that we are partners in the fishpond that we caused to be made here in Balasinon, but it does not mean that you will treat me as one of your "Bantay" (caretaker) on wage basis but not earning wages at all, while the truth is that we are partners. In the event that you are not amenable to my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I withdraw all my cases and be left without even a little and you likewise. (emphasis supplied)9

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although denominated a "contract of service," was actually the memorandum of their partnership agreement. That it was not a

contract of the services of the appellant, was admitted by the appellees themselves in their letter10 to Casteel dated December 19, 1949 wherein they stated that they did not EMPLOY  him in his (Casteel's) claim but because he used their money in developing and improving the fishpond, his right must be divided between them. Of course, although exhibit A did not specify any wage or share appertaining to the appellant as industrial partner, he was so entitled — this being one of the conditions he specified for the execution of the document of partnership.11

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a letter,12dated March 24, 1950, the appellant suggested that they divide the fishpond and the remaining capital, and offered to pay the Deluaos a yearly installment of P3,000 — presumably as reimbursement for the expenses of the appellees for the development and improvement of the one-half that would pertain to the appellant. Two days later, the appellee Felipe Deluao replied,13expressing his concurrence in the appellant's suggestion and advising the latter to ask for a reconsideration of the order of the Director of Fisheries disapproving his (appellant's) application, so that if a favorable decision was secured, then they would divide the area.

Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to maintain his petition for the reinvestigation of Casteel's application. Thus by letter14 dated March 15, 1950 addressed to the Secretary of Agriculture and Natural Resources, he withdrew his petition on the alleged ground that he was no longer interested in the area, but stated however that he wanted his interest to be protected and his capital to be reimbursed by the highest bidder.

The arrangement under the so-called "contract of service" continued until the decisions both dated September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR Cases 353 and 353-B. This development, by itself, brought about the dissolution of the partnership. Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership because each refused to share the fishpond with the other.

Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership, "... any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership." The approval of the appellant's fishpond application by the decisions in DANR Cases

353 and 353-B brought to the fore several provisions of law which made the continuation of the partnership unlawful and therefore caused its ipso facto dissolution.

Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from transferring or subletting the fishpond granted to him, without the previous consent or approval of the Secretary of Agriculture and Natural Resources.15 To the same effect is Condition No. 3 of the fishpond permit which states that "The permittee shall not transfer or sublet all or any area herein granted or any rights acquired therein without the previous consent and approval of this Office." Parenthetically, we must observe that in DANR Case 353-B, the permit granted to one of the parties therein, Leoncio Aradillos, was cancelled not solely for the reason that his permit covered a portion of the area included in the appellant's prior fishpond application, but also because, upon investigation, it was ascertained thru the admission of Aradillos himself that due to lack of capital, he allowed one Lino Estepa to develop with the latter's capital the area covered by his fishpond permit F-289-C with the understanding that he (Aradillos) would be given a share in the produce thereof.16

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of Agriculture and Commerce, and the violation of this condition shall avoid the contract; Provided, That assignment, encumbrance, or subletting for purposes of speculation shall not be permitted in any case:Provided, further, That nothing contained in this section shall be understood or construed to permit the assignment, encumbrance, or subletting of lands leased under this Act, or under any previous Act, to persons, corporations, or associations which under this Act, are not authorized to lease public lands.

Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources issued in August 1937, prohibits a transfer or sublease unless first approved by the Director of Lands and under such terms and conditions as he may prescribe. Thus, it states:

When a transfer or sub-lease of area and improvement may be allowed. — If the permittee or lessee had, unless otherwise specifically provided, held the permit or lease and actually operated and made improvements on the area for at least one year, he/she may request permission to sub-lease or transfer the area and improvements under certain conditions.

(a) Transfer subject to approval. — A sub-lease or transfer shall only be valid when first approved by the Director under such terms and conditions as may be prescribed, otherwise it shall be null and void. A transfer not previously approved or reported shall be considered sufficient cause for the cancellation of the permit or lease and forfeiture of the bond and for granting the area to a qualified applicant or bidder, as provided in subsection (r) of Sec. 33 of this Order.

Since the partnership had for its object the division into two equal parts of the fishpond between the appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged the unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved by the approval of his application and the award to him of the fishpond. The approval was an event which made it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership.

The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture and Natural Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by virtue of the contract of service, exhibit A. But the untenability of this argument would readily surface if one were to consider that the Secretary of Agriculture and Natural Resources did not do so for the simple reason that he does not possess the authority to violate the aforementioned prohibitory laws nor to exempt anyone from their operation.

However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership, succeeding events reveal the intent of both parties to terminate the partnership by refusing to share the fishpond with the other.

On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to divide the fishpond so that he could administer his own share, such

division to be subject to the approval of the Secretary of Agriculture and Natural Resources. By letter dated December 29, 1950,18 the appellee Felipe Deluao demurred to Casteel's proposition because there were allegedly no appropriate grounds to support the same and, moreover, the conflict over the fishpond had not been finally resolved.

The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the former expressed his determination to administer the fishpond himself because the decision of the Government was in his favor and the only reason why administration had been granted to the Deluaos was because he was indebted to them. In the same letter, the appellant forbade Felipe Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply thereto, Felipe Deluao wrote a letter20 dated January 5, 1951 in which he reiterated his refusal to grant the administration of the fishpond to the appellant, stating as a ground his belief "that only the competent agencies of the government are in a better position to render any equitable arrangement relative to the present case; hence, any action we may privately take may not meet the procedure of legal order."

Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not to share the fishpond with each other — in direct violation of the undertaking for which they have established their partnership — each must be deemed to have expressly withdrawn from the partnership, thereby causing its dissolution pursuant to art. 1830(2) of the Civil Code which provides, inter alia, that dissolution is caused "by the express will of any partner at any time."

In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and administrative powers with regard to the survey, classification, lease, sale or any other form of concession or disposition and management of the lands of the public domain, and, more specifically, with regard to the grant or withholding of licenses, permits, leases and contracts over portions of the public domain to be utilized as fishponds.21, Thus, we held in Pajo, et al. vs. Ago, et al. (L-15414, June 30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et al. (L-21167, March 31, 1966), that

... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources) by law regarding the disposition of public lands such as granting of licenses, permits, leases, and contracts, or approving, rejecting, reinstating, or cancelling applications, or deciding conflicting applications, are all executive and administrative in nature. It is a well-recognized principle that purely administrative and discretionary functions may not be interfered with by the courts (Coloso v. Board of Accountancy, G.R. No. L-5750, April 20, 1953). In general, courts have no supervising power over the proceedings and action of the administrative departments of the government. This is generally true with respect to acts involving the EXERCISE  of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of fact by an administrative board or official, following a hearing, are binding upon the courts and will not be disturbed except where the board or official has gone beyond his statutory authority, EXERCISED  unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of discretion... (emphasis supplied)

In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the appellant's fishpond application 1717 and awarded to him the possession of the area in question. In view of the finality of the Secretary's decision in DANR Cases 353 and 353-B, and considering the absence of any proof that the said official exceeded his statutory authority, EXERCISED  unconstitutional powers, or acted with arbitrariness and in disregard of his duty, or with grave abuse of discretion, we can do no less than respect and maintain unfettered his official acts in the premises. It is a salutary rule that the judicial department should not dictate to the executive department what to do with regard to the administration and disposition of the public domain which the law has entrusted to its care and administration. Indeed, courts cannot superimpose their discretion on that of the land department and compel the latter to do an act which involves the exercise of judgment and discretion.22

Therefore, with the view that we take of this case, and even assuming that the injunction was properly issued because present all the requisite grounds for its issuance, its continuation, and, worse, its declaration as permanent, was improper in the face of the knowledge later acquired by the lower court that it was the appellant's application over the fishpond which was given due course. After the Secretary of Agriculture and Natural Resources approved the appellant's

application, he became to all intents and purposes the legal permittee of the area with the corresponding right to possess, occupy and enjoy the same. Consequently, the lower court erred in issuing the preliminary mandatory injunction. We cannot overemphasize that an injunction should not be granted to take property out of the possession and control of one party and place it in the hands of another whose title has not been clearly established by law.23

However, pursuant to our holding that there was a partnership between the parties for the exploitation of the fishpond before it was awarded to Casteel, this case should be remanded to the lower court for the reception of evidence relative to an accounting from November 25, 1949 to September 15, 1950, in order for the court to determine (a) the profits realized by the partnership, (b) the share (in the profits) of Casteel as industrial partner, (e) the share (in the profits) of Deluao as capitalist partner, and (d) whether the amounts totalling about P27,000 advanced by Deluao to Casteel for the development and improvement of the fishpond have already been liquidated. Besides, since the appellee Inocencia Deluao continued in possession and enjoyment of the fishpond even after it was awarded to Casteel, she did so no longer in the concept of a capitalist partner but merely as creditor of the appellant, and therefore, she must likewise submit in the lower court an accounting of the proceeds of the sales of all the fishes harvested from the fishpond from September 16, 1950 until Casteel shall have been finally given the possession and enjoyment of the same. In the event that the appellee Deluao has received more than her lawful credit of P27,000 (or whatever amounts have been advanced to Casteel), plus 6% interest thereon per annum, then she should reimburse the excess to the appellant.

ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1) dissolving the injunction issued against the appellant, (2) placing the latter back in possession of the fishpond in litigation, and (3) remanding this case to the court of origin for the reception of evidence relative to the accounting that the parties must perforce render in the premises, at the termination of which the court shall render judgment accordingly. The appellant's counterclaim is dismissed. No pronouncement as to costs.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 21639           September 25, 1924

ALBERT F. KIEL, plaintiff-appellee, vs.ESTATE OF P. S. SABERT, defendant-appellant.

J. F. Yeager for appellant.J. S. Alano for appellee.

MALCOLM, J.:

This action relates to the legal right of Albert F. Kiel to secure from the estate of P. S. Sabert the sum of P20,000, on a claim first presented to the commissioners and disallowed, then on appeal to the Court of First Instance allowed, and ultimately the subject-matter of the appeal taken to this court.

A skeletonized statement of the case and the facts based on the complaint, the findings of the trial judge, and the record, may be made in the following manner:

In 1907, Albert F. Kiel along with William Milfeil commenced to work on certain public lands situated in the municipality of Parang, Province of Cotabato, known as Parang Plantation Company. Kiel subsequently took over the interest of Milfeil. In 1910, Kiel and P. S. Sabert entered into an agreement to develop the Parang Plantation Company. Sabert was to furnish the capital to run the plantation and Kiel was to manage it. They were to share and share alike in the property. It seems that this partnership was formed so that the land could be acquired in the name of Sabert, Kiel being a German citizen and not deemed eligible to acquire public lands in the Philippines.

By virtue of the agreement, from 1910 to 1917, Kiel worked upon and developed the plantation. During the World War, he was deported from the Philippines.

On August 16, 1919, five persons, including P. S. Sabert, organized the Nituan Plantation Company, with a subscribed capital of P40,000. On April 10, 1922, P. S. Sabert transferred all of his rights in two parcels of land situated in the municipality of Parang, Province of Cotabato, embraced within his homestead

application No. 21045 and his purchase application No. 1048, in consideration of the sum of P1, to the Nituan Plantation Company.

In this same period, Kiel appears to have tried to secure a settlement from Sabert. At least in a letter dated June 6, 1918, Sabert wrote Kiel that he had offered "to sell all property that I have for P40,000 or take in a partner who is willing to develop the plantation, to take up the K. & S. debt no matter which way I will straiten out with you." But Sabert's death came before any amicable arrangement could be reached and before an action by Kiel against Sabert could be decided. So these proceedings against the estate of Sabert.

In this court, the defendant-appellant assigns the following errors:

The lower court erred —

(1) In finding this was an action to establish a resulting trust in land.

(2) In finding a resulting trust in land could have been established in public lands in favor of plaintiff herein who was an alien subject at the same time said alleged resulting trust was created.

(3) In finding a resulting trust in land had been established by the evidence in the case.

(4) In admitting the testimony of the plaintiff herein.

(5) In admitting the testimony of William Milfeil, John C. Beyersdorfer, Frank R. Lasage, Oscar C. Butler and Stephen Jurika with reference to alleged statements and declarations of the deceased P. S. Sabert.

(6) In finding any copartnership existed between plaintiff and the deceased Sabert.

(7) In rendering judgment for the plaintiff herein.

Errors 1, 2, and 3, relating to resulting trusts. — These three errors discussing the same subject may be resolved together. In effect, as will soon appear, we reach the conclusion that both parties were in error in devoting so much time to the elaboration of these questions, and that a ruling on the same is not needed.

It is conceivable, that the facts in this case could have been so presented to the court by means of allegations in the complaint, as to disclose characteristics of a resulting trust. But the complaint as framed asks for a straight MONEY  judgment against an estate. In no part of the complaint did plaintiff allege any interest in land, claim any interest in land, or pretend to establish a resulting trust in land. That the plaintiff did not care to press such an action is demonstrated by the relation of the fact of alienage with the rule, that a trust will not be created when, for the purpose of evading the law prohibiting one from taking or holding real property, he takes a conveyance thereof in the name of a third person. (26 R. C. L., 1214-1222; Leggett vs. Dubois [1835], 5 Paige, N. Y., 114; 28 Am. Dec., 413.)

The parties are wrong in assuming that the trial judge found that this was an action to establish a resulting trust in land. In reality, all that the trial judge did was to ground one point of his decision on an authority coming from the Supreme Court of California, which discussed the subject of resulting trusts.

Error 4, relating to the admission of testimony of the plaintiff herein. — WELL  taken.

The Code of Civil Procedure in section 383, No. 7, names as incompetent witnesses, parties to an action or proceeding against an executor or administrator of a deceased person upon a claim or demand against the estate of such deceased person, who "cannot testify as to any matter of fact occuring before the death of such deceased person." But the trial judge, misled somewhat by the decision of the Supreme Court of California in the city ofMyers vs. Reinstein ([1885], 67 Cal., 89), permitted this testimony to go in, whereas if the decision had been read more carefully, it would have been noted that "the action was not on a claim or demand against the estate of Reinstein." Here this is exactly the situation which confronts us.

The case of Maxilom vs. Tabotabo ([1907], 9 Phil., 390), is squarely on all fours with the case at bar. It was there held that "A party to an action against an executor or administrator of a deceased person, upon a claim against the estate of

the latter, is absolutely prohibited by law from giving testimony concerning such claim or demand as to anything that occurred before the death of the person against whose estate the action is prosecuted."

Error 5, relating to the testimony of five witnesses with reference to alleged statements and declarations of the deceased P. S. Sabert. — Not WELL  taken.

By section 282 of the Code of Civil Procedure, the declaration, act, or omission of a deceased person having sufficient knowledge of the subject, against his pecuniary interest, is admissible as evidence to that extent against his successor in interest. By section 298, No. 4, of the same Code, evidence may be given up a trial of the following facts: ". . . the act or declaration of a deceased person, done or made against his interest in respect to his real property." (See Leonardo vs. Santiago [1907], 7 Phil., 401.) The testimony of these witnesses with reference to the acts or declarations of Sabert was, therefore, properly received for whatever they might be worth.

Error 6, relating to the existence of a copartnership between Kiel and Sabert. — Not WELL  taken.

No partnership agreement in writing was entered into by Kiel and Sabert. The question consequently is whether or not the alleged verbal copartnership formed by Kiel and Sabert has been proved, if we eliminate the testimony of Kiel and only consider the relevant testimony of other witnesses. In performing this task, we are not unaware of the rule of partnership that the declarations of one partner, not made in the presence of his copartner, are not competent to prove the existence of a partnership between them as against such other partner, and that the existence of a partnership cannot be established by general reputation, rumor, or hearsay. (Mechem on Partnership, sec. 65; 20 R. C. L., sec. 53; Owensboro Wagon Company vs. Bliss [1901], 132 Ala., 253.)

The testimony of the plaintiff's witnesses, together with the documentary evidence, leaves the firm impression with us that Kiel and Sabert did enter into a partnership, and that they were to share equally. Applying the tests as to the existence of partnership, we feel that competent evidence exists establishing the partnership. Even more primary than any of the rules of partnership above announced, is the injunction to seek out the intention of the parties, as gathered from the facts and as ascertained from their language and conduct, and then to give this intention effect. (Giles vs. Vette [1924], 263 U. S., 553.)

Error 7, relating to the judgment rendered for the plaintiff. — WELL  taken in part.

The judgment handed down, it will be remembered, permitted the plaintiff to recover from the estate the full amount claimed, presumably on the assumption that Sabert having sold by property to the Nituan Plantation Company for P40,000, Kiel should have one-half of the same, or P20,000. There is, however, extant in the record absolutely no evidence as to the precise amount received by Sabert from the sale of this particular land. If it is true that Sabert sold all his land to the Nituan Plantation Company for P40,000, although this fact was not proven, what part of the P40,000 would correspond to the property which belonged to Kiel and Sabert under their partnership agreement? It impresses us further that Kiel under the facts had no standing in court to ask for any part of the land and in fact he does not do so; his only legal right is to ask for what is in effect an accounting with reference to its improvements and income as of 1917 when Sabert became the trustee of the estate on behalf of Kiel.

As we have already intimated, we do not think that Kiel is entitled to any share in the land itself, but we are of the opinion that he has clearly shown his right to one-half of the value of the improvements and personal property on the land as to the date upon which he left the plantation. Such improvements and personal property include buildings, coconut palms, and other plantings, cattle and other animals, implements, fences, and other constructions, as well as outstanding collectible credits, if any, belonging to the partnership. The value of these improvements and of the personal property cannot be ascertained from the record and the case must therefore be remanded for further proceedings.

In resume, we disregard errors 1, 2, and 3, we find well taken, errors 4 and 7, and we find not well taken, errors 5 and 6.

The judgment appealed from is set aside and the record is returned to the lower court where the plaintiff, if he so desires, may proceed further to prove his claim against the estate of P. S. Sabert. Without costs. So ordered.

Johnson, Street, Avanceña, Villamor, Ostrand and Romualdez, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 19892           September 6, 1923

TECK SEING AND CO., LTD., petitioner-appellee. SANTIAGO JO CHUNG, ET AL., partners, vs.PACIFIC COMMERCIAL COMPANY, ET AL., creditors-appellants.

Del Rosario & Del Rosario and Block, Johnston and Greenbaum for appellants. F. V. Arias for appellants Jo Ibec and Go Tayco. No appearance for petitioner and appellee. Jose A. Espiritu and Felipe Ysmael as amici curiae.

MALCOLM, J.:

Following the presentation of an application to be adjudged an insolvent by the "Sociedad Mercantil, Teck Seing & Co., Ltd.," the creditors, the Pacific Commercial Company, Piñol & Company, Riu Hermanos, and W. H. Anderson & Company, filed a motion in which the Court was prayed to enter an order: "(A) Declaring the individual partners as described in paragraph 5 parties to this proceeding; (B) to require each of said partners to file an inventory of his property in the manner required by section 51 of Act No. 1956; and (C) that each of said partners be adjudicated insolvent debtors in this proceeding." The trial judge first granted the motion, but, subsequently, on opposition being renewed, denied it. It is from this last order that an appeal was taken in accordance with section 82 of the Insolvency Law.

There has been laid before us for consideration and decision a question of some importance and of some intricacy. The issue in the case relates to a determination of the nature of the mercantile establishment which operated under the name of Teck Seing & co., Ltd., and this issue requires us to look into, and analyze, the document constituting Teck Seing & Co., Ltd. It reads:

ESCRITURA DE SOCIEDAD MERCANTIL LIMITADA

Sepan todos por la presente:

Que nosotros, Santiago Jo Chung Cang, mayor de edad comerciante, vecino y residente del municipio de Tabogon Provincia de Cebu, Islas Filipinas, Go Tayco, mayor de edad, comerciante, vecino y residente del municipio de Cebu Provincia de Cebu, Islas Filipinas, Yap Gueco, mayor de edad, comerciante, vecino y residente del municipio y Provincia de Cebu, Islas Filipinas, Lim Yogsing, mayor de edad comerciante, vecino y residente del municipio de Cebu, Provincia de Cebu, Islas Filipinas, y Jo Ybec, mayor de edad, comerciante, vecino y residente del municipio de Jagna, Provincia de Bohol, Islas Filipinas, hacemos constar por la presente, que constituimos y formamos una sociedad mercantil limitada, bajo las leyes vigentes en las Islas Filipinas y para ser registrada de acuerdo con los reglamentos vigentes del Codigo de Comercio en Filipinas.

Que la razon social se denominara "Teck Seing & Co., Ltd." y tendra su domicilio principal en la Calle Magallanes No. 94, de la Ciudad de Cebu, Provincia de Cebu, Islas Filipinas.

Que el capital social sera de treinta mil pesos (P30,000) moneda legal de las Islas Filipinas, dividido en cinco acciones de a P6,000 como sigue:

Santiago Jo Chung Cang . . . . . . . . . . . . . P6,000.00

Go Tayco . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000.00

Yap Gueco . . . . . . . . . . . . . . . . . . . . . . . . 6,000.00

Jo Ybec . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000.00

Lim Yogsing . . . . . . . . . . . . . . . . . . . . . . . 6,000.00

Total . . . . . . . . . . . . . . . . . . . . . . 30,000.00

Que la duracion de la sociedad sera la de seis años, a contar de la fecha de esta escritura, pudiendo prorrogarse este tiempo a discrecion unanime de todos los accionistas.

El objeto de la sociedad sera la compra y venta de mercaderias en general.

El administrador o administradores de la sociedad podran, previa conformidad de los accionistas, establecer cuantas sucursales o establecimientos considere necesarios para facilitar sus negocios y el mayor desarrollo del comercio a que se dedica la sociedad, verificando todas las operaciones que crean convenientes para el fomento de su capital.

Las ganancias o perdidas que resultaren durante cada año comercial, se distribuiran proporcionalmente entre los accionistas, de acuerdo con el capital aportado por cada uno de los mismos.

Las ganancias que resultaren en cada año comercial, si resultaren algunas ganancias, no podran ser retiradas pors los accionistas hasta dentro del termino de tres años a contar de la fecha del primer balance anual del negocio, quedadno por tanto estas ganancias en reserva, para ampliar el capital aportado opor los accionistas y ampliar por tanto la esfera de accion emprendida por la misma sociedad. Al pasar o expirar el termino de tres años, cada accionista podra retirar o depositar en poder de la sociedad, las ganancias que le debiera corresponder durante dicho termino de tres años.

Que los accionistas no podran extraer ni disponer en ningun tiempo cualesquiera cantidad o cantidades de la sociedad, que haya sido aportado por los mismos, para atender sus gastos particulares ni aun pagando redito alguno sobre la cantidad que intenen disponer o extraer de dicha sociedad.

El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr. Vicente Jocson Jo, la administracion de la Compañia, quienes podran usar indistintamente la firma social, quedando por consiguiente autorizados

amobs para hacer en nombre de ella toda calse de operaciones, negocios y especulaciones mercantiles, practicando judicial y extra-judicialment cuantos actos se requieran para el bien de la sociedad, nombrar procuradores o abogados para reclamaciones y cobro de creditos y proponer ante los tribunales las demandas, convenios, transacciones y excepciones procdentes. En caso de ausencia, enfermedad o cualquier otro impedimento del accionista administrador Sr. Lim Yogsing, este podra conferir poder general o especial al accionista que crea conveniente para que en union del administrador auxiliar Sr. Vicente Jocson Jo, pudieran ambos administrar convenientemente los negocios de la sociedad. Que los administradores podran tener los empleados necesarios para el mejor que debieran percibir dichos empleados por servicios rendidos a la sociedad.

Que ambos administradores podran disponer de mil discientos pesos (P1,200) moneda filipina, anualmente, para sus gastos particulares, siendo dicha cantidad de P1,200 la que corresponde a cada uno de dichos administradores, como emolumentos o salarios que se les asigna a cas uno, por sus trabajos en la administracion de la sociedad. Entendiendose, que, los accionistas podran disponer cada fin de añola gratificacion quese concedera a cada administrador, si los negocios del año fueran boyantes y justifiquen la concesion de una gratificacion especial, aparte del salario aqui dispuesto y especificado.

Que pasado el termino de seis años, y es de la conveniencia de los accionistas la continuacion del negocio de esta sociedad, dicho termino sera prorrogado por igual numero de años, sin necesidas del otorgamiento de ulteriores escrituras, quedando la presente en vigor hasta el termino dispuesto por todos los accionistas.

Que las diferencias que pudieran suscitarse entre los accionistas, bien sea por razon de lo estipulado en esta en ella comprendidos, se procurara arreglar entre los mismos amistosa y extrajudicialmente, y si no se consiguiere un arreglo de este modo, dichos accionistas nombraran un arbitro, cuya resolucion estan todos obligados y por la presente se comprometen y se obligan a acatarla en todas sus partes, renunciando ulteriores recursos.

En cuyos terminos dejamos formalizada esta escritura de sociedad mercantillimitada, y prometemos cumplirla fiel y estrictamente segun los pactos que hemos establecido.

En testimonio de todo lo cual, firmamos en la Ciudad de Cebu, Provincia de Cebu, Islas Filipinas, hoy 31 de octubre de mil novecientos diez y nueve.

(Fdos.) "LIM YOGSING"Jo YBec por Ho Seng Sian"SANTIAGO JO CHUNG CANG"GO TAYCO"YAP GUECO

Firnando en presencia de:           (Fdos.) "ATILANO LEYSON           "JULIO DIAZ

"ESTADOS UNIDOS DE AMERCA"ISLAS FILIPINAS 

"PROVINCIA DE CEBU

En el Municipio de Cebu, de la Provincia antes mencionada, I.F., hoy 31 de octubre de 1919, A.D., ante mi, Notario Publico que subscribe, comprecieron personalmente Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing y Jo Ybec, representado este ultimo por Ho Seng Sian, segun autorizacion hecha en telegrama de fecha 27 de septiembre de 1919 que se me ha presentado en este mismo acto, de quienes doy fe de que les conozco por ser las mismas personas que otorgaron el preinserto documento, ratificando ant emi su contenido y manifestando ser el mismo un acto de su libre y voluntario otorgamiento. El Sr. Santiago Jo Chung Cang me exhibio su cedula personal expedida en Cebu, Cebu, I.F. el dia 19 de septiembre de 1919 bajo el No. H77742, Go Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 9 de octubre de 1919 bajo el No. G2042490, Yap Gueco tambien me exhibio la suya expedida en Cebu, Cebu, I.F. el dia 20 de enero de 1919 bajo el No. F1452296, Lim Yogsing tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 26 de febrero de 1919 bajo el No. F1455662, y Ho Seng Sian representante de Jo Ybec, me

exhibio su cedula personal expedida en Cebu, Cebu, I.f. el dia 4 de febrero de 1919 bajo el No. F1453733.

Ante mi,

(Fdo.) "F.V.ARIAS"Notario Publico"Hasta el 1.º de enero de 1920

"Asiento No. 157Pagina No. 95 de miRegistro NotarialSerie 1919Libro 2.º

Presentado a las diez y cuarenta y tres minutos de la mañana de hoy, segun el asiento No. 125, pagina 9 del Tomo 1.º del Libro Diario. Cebu, 11 de febrero de 1920.

(Fdo.) "QUIRICO ABETO[SELLO] "Registrador Mercantil Ex-Officio"

Inscrito el documento que preced al folio 84 hoja No. 188, inscripcion 1.a del Tomo 3.º del Libro Registro de Sociedades Mercantiles. Cebu, 11 de febrero de 1920. Honorarios treinta pesos con cincuenta centavos. Art. 197, Ley No. 2711, Codigo Administrativo.

(Fdo.) "QUIRICO ABETO[SELLO] "Registrador Mercantil Ex-Officio"

Proceeding by process of elimination, it is self-evident that Teck Seing & Co., Ltd., is not a corporation. Neither is it contended by any one that Teck Seing & Co., Ltd., is accidental partnership denominated cuenta en participacion(joint account association).

Counsel for the petitioner and appellee described his client in once place in his opposition to the motion of the creditors as "una verdadera sociedad anonima" (a true sociedad anonima). The provisions of the Code of Commerce relating to sociedades anonimas were, however, repealed by section 191 of the Corporation Law (Act No. 1459), with the exceptions the sociedades anonimas lawfully organized at the time of the passage of the Corporation Law were recognized, which is not our case.

The document providing for the partnership contract purported to form "una sociedad mercantil limitada," and counsel for the petitioner's first contention was that Teck Seing & Co., Ltd., was not "una sociedad regular colectiva, ni siquiera comanditaria, sino una sociedad mercantil limitada." Let us see if the partnership contract created a "sociedad en comandita," or, as it is known in English, and will hereafter be spoken of, "a limited partnership."

To establish a limited partnership there must be, at least, one general partner and the name of the least one of the general partners must appear in the firm name. (Code of Commerce, arts. 122 [2], 146, 148.) But neither of these requirements have been fulfilled. The general rule is, that those who seek to avail themselves of the protection of laws permitting the creation of limited partnerships must show a substantially full compliance with such laws. A limited partnership that has not complied with the law of its creation is not considered a limited partnership at all, but a general partnership in which all the members are liable. (Mechem, Elements of Partnership, p. 412; Gilmore, Partnership, pp. 499, 595; 20 R C. L. 1064.)

The contention of the creditors and appellants is that the partnership contract established a general partnership.

Article 125 of the Code of Commerce provides that the articles of general copartnership must estate the names, surnames, and domiciles of the partners; the firm name; the names, and surnames of the partners to whom the management of the firm and the use of its signature is instrusted; the capital which each partner contributes in cash, credits, or property, stating the value given the latter or the basis on which their appraisement is to be made; the duration of the copartnership; and the amounts which, in a proper case, are to be given to each managing partner annually for his private expenses, while the succeeding article of the Code provides that the general copartnership must transact business under the name of all its members, of several of them, or of one only. Turning to the

document before us, it will be noted that all of the requirements of the Code have been met, with the sole exception of that relating to the composition of the firm name. We leave consideration of this phase of the case for later discussion.

The remaining possibility is the revised contention of counsel for the petitioners to the effect that Teck Seing & Co., Ltd., is "una sociedad mercantil "de facto" solamente" (only a de facto commercial association), and that the decision of the Supreme court in the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng [1906], 6 Phil., 498), is controlling. It was this argument which convinced the trial judge, who gave effect to his understanding of the case last cited and which here must be given serious attention.

The decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, discloses that the firm Kieng-Chiong-Seng was not organized by means of any public document; that the partnership had not been recorded in the mercantile registry; and that Kieng-Chiong-Seng was not proven to be the firm name, but rather the designation of the partnership. The conclusion then was, that the partnership in question was merely de facto and that, therefore, giving effect to the provisions of article 120 of the Code of Commerce, the right of action was against the persons in charge of the management of the association.

Laying the facts of the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, side by side with the facts before us, a marked difference is at once disclosed. In the cited case, the organization of the partnership was not evidenced by any public document; here, it is by a public document. In the cited case, the partnership naturally could not present a public instrument for record in the mercantile registry; here, the contract of partnership has been duly registered. But the two cases are similar in that the firm name failed to include the name of any of the partners.

We come then to the ultimate question, which is, whether we should follow the decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, or whether we should differentiate the two cases, holding Teck Seing & Co., Ltd., a general copartnership, notwithstanding the failure of the firm name to include the name of one of the partners. Let us now notice this decisive point in the case.

Article 119 of the Code of Commerce requires every commercial association before beginning its business to state its article, agreements, and conditions in a

public instrument, which shall be presented for record in the mercantile registry. Article 120, next following, provides that the persons in charge of the management of the association who violate the provisions of the foregoing article shall be responsible in solidum to the persons not members of the association with whom they may have transacted business in the name of the association. Applied to the facts before us, it would seem that Teck Seing & Co., Ltd. has fulfilled the provisions of article 119. Moreover, to permit the creditors only to look to the person in charge of the management of the association, the partner Lim Yogsing, would not prove very helpful to them.

What is said in article 126 of the Code of Commerce relating to the general copartnership transacting business under the name of all its members or of several of them or of one only, is wisely included in our commercial law. It would appear, however, that this provision was inserted more for the protection of the creditors than of the partners themselves. A distinction could well be drawn between the right of the alleged partnership to institute action when failing to live up to the provisions of the law, or even the rights of the partners as among themselves, and the right of a third person to hold responsible a general copartnership which merely lacks a legal firm name in order to make it a partnership de jure.

The civil law and the common law alike seem to point to a difference between the rights of the partners who have failed to comply with the law and the rights of third persons who have dealt with the partnership.

The supreme court of Spain has repeatedly held that notwithstanding the obligation of the members to register the articles of association in the commercial registry, agreements containing all the essential requisites are valid as between the contracting parties, whatever the form adopted, and that, while the failure to register in the commercial registry necessarily precludes the members from enforcing rights acquired by them against third persons, such failure cannot prejudice the rights of third persons. (See decisions of December 6, 1887, January 25, 1888, November 10, 1890, and January 26, 1900.) The same reasoning would be applicable to the less formal requisite pertaining to the firm name.

The common law is to the same effect. The State of Michigan had a statute prohibiting the transaction of business under an assumed name or any other than the real name of the individual conducting the same, unless such person shall file

with the county clerk a certificate setting forth the name under which the business is to be conducted and the real name of each of the partners, with their residences and post-office addresses, and making a violation thereof a misdemeanor. The supreme Court of Michigan said:

The one object of the act is manifestly to protect the public against imposition and fraud, prohibiting persons from concealing their identity by doing business under an assumed name, making it unlawful to use other than their real names in transacting business without a public record of who they are, available for use in courts, and to punish those who violate the prohibition. The object of this act is not limited to facilitating the collection of debts, or the protection of those giving credit to persons doing business under an assumed name. It is not unilateral in its application. It applies to debtor and creditor, contractor and contractee, alike. Parties doing business with those acting under an assumed name, whether they buy or sell, have a right, under the law, to know who they are, and who to hold responsible, in case the question of damages for failure to perform or breach of warranty should arise.

The general rule is well settled that, where statutes enacted to protect the public against fraud or imposition, or to safeguard the public health or morals, contain a prohibition and impose a penalty, all contracts in violation thereof are void. . . .

As this act involves purely business transactions, and affects only money interests, we think it should be construed as rendering contracts made in violation of it unlawful and unforceable at the instance of the offending party only, but not as designed to take away the rights of innocent parties who may have dealt with the offenders in ignorance of their having violated the statute. (Cashin vs. Pliter [1912], 168 Mich., 386; Ann. Cas. [1913-C, 697.)

The early decision of our Supreme Court in the case of Prautch Scholes & Co. vs. Hernandez [1903], 1 Phil., 705), contains the following pertinent observations:

Another case may be supposed. A partnership is organized for commercial purposes. It fails to comply with the requirements of article 119. A creditor sues the partnership for a debt contracted by it, claiming to hold the partners severally. They answer that their failure to comply with the Code

of Commerce makes them a civil partnership and that they are in accordance with article 1698 of the Civil Code only liable jointly. To allow such liberty of action would be to permit the parties by a violation of the Code to escape a liability which the law has seen fit to impose upon persons who organized commercial partnership; "Because it would be contrary to all legal principles that the nonperformance of a duty should redound to the benefit of the person in default either intentional or unintentional." (Mercantile Law, Eixala, fourth ed., p. 145.)" (See also Lichauco vs. Lichauco [1916], 33 Phil., 350, 360.)

Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the following comment after articles 121 and 126 of the Code:

From the decisions cited in this and in the previous comments, the following is deduced: 1st. Defects in the organization cannot affect relations with third persons. 2d. Members who contract with other persons before the association is lawfully organized are liable to these persons. 3d. The intention to form an association is necessary, so that if the intention of mutual participation in the profits and losses in a particular business is proved, and there are no articles of association, there is no association. 4th. An association, the articles of which have not been registered, is valid in favor of third persons. 5th. The private pact or agreement to form a commercial association is governed not by the commercial law but by the civil law. 6th. Secret stipulationsexpressed in a public instrument, but not inserted in the articles of association, do not affect third persons, but are binding on the parties themselves. 7th. An agreement made in a public instrument, other than the articles of association, by means of which one of the partners guarantees to another certain profits or secures him from losses, is valid between them, without affecting the association. 8th. Contracts entered into by commercial associations defectively organized are valid when they are voluntarily executed by the parties, if the only controversy relates to whether or not they complied with the agreement.

xxx           xxx           xxx

The name of the collective merchant is called firm name. By this name, the new being is distinguished from others, its sphere of action fixed, and the juridical personality better determined, without constituting an exclusive

character of the general partnership to such an extent as to serve the purpose of giving a definition of said kind of a mercantile partnership, as is the case in our Code.

Having in mind that these partnerships are prevailingly of a personal character, article 126 says that they must transact business under the name of all its members, of some of them, or of one only, the words "and company" to be added in the latter two cases.

It is rendered impossible for the general partnership to adopt a firm name appropriate to its commercial object; the law wants to link, and does link, the solidary and unlimited responsibility of the members of this partnership with the formation of its name, and imposes a limitation upon personal liberty in its selection, not only by prescribing the requisites, but also by prohibiting persons not members of the company from including their names in its firm name under penalty of civil solidary responsibility.

Of course, the form required by the Code for the adoption of the firm name does not prevent the addition thereto of any other title connected with the commercial purpose of the association. The reader may see our commentaries on the mercantile registry about the business names and firm names of associations, but it is proper to establish here that, while the business name may be alienated by any of the means admitted by the law, it seems impossible to separate the firm names of general partnerships from the juridical entity for the creation of which it was formed. (Vol. 2, pp. 197, 213.)

On the question of whether the fact that the firm name "Teck Seing & Co., Ltd." does not contain the name of all or any of the partners as prescribed by the Code of Commerce prevents the creation of a general partnership, Professor Jose A. Espiritu, as amicus curiæ, states:

My opinion is that such a fact alone cannot and will not be a sufficient cause of preventing the formation of a general partnership, especially if the other requisites are present and the requisite regarding registration of the articles of association in the Commercial Registry has been complied with, as in the present case. I do not believe that the adoption of a wrong name is a material fact to be taken into consideration in this case; first, because the

mere fact that a person uses a name not his own does not prevent him from being bound in a contract or an obligation he voluntarily entered into; second, because such a requirement of the law is merely a formal and not necessarily an essential one to the existence of the partnership, and as long as the name adopted sufficiently identity the firm or partnership intended to use it, the acts and contracts done and entered into under such a name bind the firm to third persons; and third, because the failure of the partners herein to adopt the correct name prescribed by law cannot shield them from their personal liabilities, as neither law nor equity will permit them to utilize their own mistake in order to put the blame on third persons, and much less, on the firm creditors in order to avoid their personal possibility.

The legal intention deducible from the acts of the parties controls in determining the existence of a partnership. If they intend to do a thing which in law constitutes a partnership, they are partners, although their purpose was to avoid the creation of such relation. Here, the intention of the persons making up Teck Seing & co., Ltd. was to establish a partnership which they erroneously denominated a limited partnership. If this was their purpose, all subterfuges resorted to in order to evade liability for possible losses, while assuming their enjoyment of the advantages to be derived from the relation, must be disregarded. The partners who have disguised their identity under a designation distinct from that of any of the members of the firm should be penalized, and not the creditors who presumably have dealt with the partnership in good faith.

Articles 127 and 237 of the Code of Commerce make all the members of the general copartnership liable personally and in solidum with all their property for the results of the transactions made in the name and for the account of the partnership. Section 51 of the Insolvency Law, likewise, makes all the property of the partnership and also all the separate property of each of the partners liable. In other words, if a firm be insolvent, but one or more partners thereof are solvent, the creditors may proceed both against the firm and against the solvent partner or partners, first exhausting the assets of the firm before seizing the property of the partners. (Brandenburg of Bankcruptcy, sec. 108; De los Reyes vs. Lukban and Borja [1916], 35 Phil., 757; Involuntary Insolvency of Campos Rueda & Co. vs. Pacific Commercial Co. [1922], 44 Phil., 916).

We reach the conclusion that the contract of partnership found in the document hereinbefore quoted established a general partnership or, to be more exact, a partnership as this word is used in the Insolvency Law.

Wherefore, the order appealed from is reversed, and the record shall be returned to the court of origin for further proceedings pursuant to the motion presented by the creditors, in conformity with the provisions of the Insolvency Law. Without special findings as to the costs in this instance, it is ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-24193           June 28, 1968

MAURICIO AGAD, plaintiff-appellant, vs.SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.

Angeles, Maskarino and Associates for plaintiff-appellant.Victorio S. Advincula for defendants-appellees.

CONCEPCION, C.J.:

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