G.R. No. 11524 - Government of the Philippine Islands vs. El Monte de Piedad

The case involves the Government of the Philippine Islands as plaintiff and appellant versus El Monte de Piedad y Caja de Ahorros de Manila as defendant and appellant.
The dispute arises from a recovered judgment in favor of the government for internal-revenue taxes, penalties, and interest on deposits and capital employed by the defendant bank.

The taxes are assessed on the monthly deposits and the capital employed by the defendant in its banking business.
The period for the tax assessment runs from August 1, 1904, to June 30, 1914.
Interest at 6% per annum from March 4, 1915, is also claimed by the government.

The defendant was organized in accordance with canon law and created by the royal order of the King of Spain on July 8, 1880.
Its organizational structure was influenced and confirmed by various decrees issued by the Governor-General of the Philippine Islands prior to the royal order.
The institution was established for the safe investment of the savings of the poor and for assisting the needy by offering low-interest loans.
Its statutes and by-laws are subject to the discretion of the Catholic Archbishop of Manila, who may change them as he wishes.
Depositors receive a fixed annual interest of 4% on their deposits, which is the only benefit shared by them from the profits or earnings of the institution.

Throughout the tax assessment period, the defendant maintained a place of business in Manila where it conducted banking operations such as opening credits based on deposits or collections.
Despite its original charitable aim, the defendant operates in a manner similar to ordinary commercial banks.

A tax of one‐eighteenth of one percent per month on the average amount of deposits (including money, checks, drafts, or certificates of deposit).
An additional tax of one‐twenty-fourth of one percent per month on the capital employed in the banking business.

The defendant argues that it should be exempt from at least one of these taxes because:

It is a "savings bank" within the meaning of the exception contained in paragraph 4 of section 111 of Act No. 1189.
As a savings bank, it neither has a capital stock nor engages in profit-making beyond returning deposits with a fixed 4% interest.
The so-called accrued profits or surplus—which would form its capital—should not be taxed as the institution claims it has no capital employed in the banking business.

The trial court recognized that the defendant is engaged in the banking business and has accrued profits and surplus, which are considered capital for tax purposes.
It held that the defendant does not qualify as a savings bank as defined by the statute because:

Its deposits are not solely "to be loaned or invested for the sole benefit of the parties making such deposits."
The profits derived are appropriated by the institution and not shared with depositors.

The court ruled in favor of the plaintiff by affirming the tax assessments and the accompanying penalties.

Whether the defendant qualifies as a savings bank under paragraph 4 of section 111 of Act No. 1189.

Does the nature of its operations and profit-making activities disqualify it from exemption?
Is the institution’s method of handling deposits and accrued earnings consistent with the statutory definition of a savings bank?

Whether the accrued profits or surplus of P549,912.52 should be considered as "capital" employed in the banking business.

Does the non-distribution of profits to depositors convert these funds into taxable capital?
How should “capital” be interpreted within the context of the Internal Revenue Law given its non-technical usage?

Whether the historical non-levy or non-assessment of the tax by earlier revenue collectors can be construed as an implied exemption from the tax.

Is the lapse in tax collection by prior officials sufficient to alter the clear language of the statute?
Can administrative practices override the explicit requirements and exceptions set forth in the tax law?