G.R. No. 34774 - El Oriente Fabrica de Tabacos, Inc. vs. Posadas

El Oriente, Fabrica de Tabacos, Inc., a domestic corporation duly organized and existing under Philippine laws.
Principal office located at No. 732 Calle Eyangelista, Manila, Philippine Islands.

Juan Posadas, the duly appointed, qualified, and acting Collector of Internal Revenue of the Philippine Islands.

To protect the corporation against the financial loss that might result from the death of its manager.
The manager, A. Velhagen, was a proven expert with more than thirty-five (35) years of experience in the manufacture of cigars in the Philippines, whose death would have been a significant detriment to the corporation.

The insurance policy was procured on March 18, 1925, from the Manufacturers Life Insurance Co. of Toronto, Canada through its local agent E. E. Elser.
Policy sum: $50,000 in United States currency.
El Oriente, Fabrica de Tabacos, Inc. designated itself as the sole beneficiary of the policy.
The corporation was responsible for paying all insurance premiums during the policy’s duration, and these premiums were charged as business expenses, duly deducted from its gross income as recorded in its annual income tax returns—with the deductions initially allowed by the Collector of Internal Revenue.

The insured manager, A. Velhagen, died in 1929.
Following his death, the plaintiff received the full insurance proceeds, inclusive of the principal sum, accrued interest, and dividends, amounting to P104,957.88.

Despite the plaintiff’s claim of exemption under section 4 of the Philippine Income Tax Law (Act No. 2833), the defendant assessed and levied an income tax of P3,148.74 on the insurance proceeds.
The plaintiff paid the tax under protest on July 2, 1930, while the defendant overruled the protest on July 9, 1930.

Chapter I, Section 4: Provides that the proceeds of life insurance policies paid to beneficiaries upon the death of the insured are exempt from income tax.
Chapter II, Section 10: Imposes a three percent tax on the total net income of corporations but does not explicitly reference the exemption provided in Section 4.
Section 11: Enumerates further exemptions but similarly does not clarify the treatment of proceeds for corporate beneficiaries.

The trial court erred in holding that section 4 is inapplicable to the case.
It was contended that the trial court improperly read into the law exceptions and distinctions not warranted by its explicit language.
The plaintiff insisted that the insurance proceeds did not represent net profit but rather an indemnity for the actual loss incurred by the death of its experienced manager.

The initial decision was rendered by the Court of First Instance of Manila, which absolved the defendant from the complaint and ruled against the plaintiff.
The plaintiff then appealed, arguing that the insurance proceeds should not be taxed as income because they were merely an indemnity for the loss suffered due to the manager’s death.

Whether the proceeds of a life insurance policy, taken by a corporation on the life of an important official (in this case, its manager), are taxable as income under the Philippine Income Tax Law.
Whether the exemption provided in Section 4 of the Income Tax Law, which explicitly applies to individuals, should also extend to cases where a corporation is the beneficiary of the policy.
If the insurance proceeds represent taxable net profit or simply serve as indemnity for the loss suffered by the corporation upon the death of its manager.