Case Summary (G.R. No. 146555)
Procedural Posture
The lower court entered judgment for the Government for P138,790.12 with interest from March 4, 1915. Defendant appealed, contesting (1) that it fell within an express statutory exemption for savings institutions and therefore its deposits should not be taxed under section 111 of Act No. 1189; and (2) that the fund characterized by the Government as accrued profits, surplus or reserve (P549,912.52) was not “capital employed” taxable under the same statute.
Facts
The defendant institution was created under a royal order of the King of Spain (July 8, 1880) pursuant to patronato powers and had previously been governed by decrees of the Governor-General. Its stated purpose was to provide for safe investment of savings of the poor and to assist the needy by making loans at low interest. Its statutes and by‑laws were subject to revision by the Catholic Archbishop of Manila. Depositors were entitled to annual interest of 4%—the limit of depositors’ participation in the institution’s earnings. The defendant maintained a place of business in Manila where deposit accounts were kept; the amounts of deposits and accrued profits were admitted. The Government’s tax assessment covered monthly deposit taxes and a tax on “capital employed” during the specified period.
Statutory Framework and Clauses in Issue
Act No. 1189 (Internal Revenue Law) defines a bank under section 110 and, by section 111, imposes (a) a monthly tax of one‑eighteenth of one percent on the average amount of deposits subject to payment by check, draft or certificates of deposit, and (b) a monthly tax of one‑twenty‑fourth of one percent on the capital employed by banks in the business of banking. Section 111 contains an exception (paragraph 4) exempting deposits in “provident institutions, savings banks, savings funds, or savings institutions, having no capital stock and which do no other business than receiving deposits to be loaned or invested for the sole benefit of the parties making such deposits and without profit or compensation to the association or company,” subject to conditions (investment in satisfactory securities and a limit of P4,000 per depositor).
Issues Presented
- Whether the defendant falls within the paragraph 4 exemption for savings/provident institutions and thus is exempt from the deposit tax.
- Whether the P549,912.52 characterized by the Government as surplus/accrued profits constitutes “capital employed” and is therefore taxable under section 111.
Burden of Proof and Presumptions
Because the defendant admitted it engaged in banking, it fell initially within the statute’s imposing clause. Where a taxpayer claims an exemption from taxation, the burden is on the taxpayer to show clearly that the Legislature intended to exempt the taxpayer by words too plain to be mistaken. The Government’s assessment carries a presumption of correctness affecting the defendant’s burden; even absent that presumption, the general rule that a claimant of exemption must demonstrate entitlement applies.
Analysis — Savings Bank Exception
The trial court found, and the appellate court affirmed, that the defendant did not meet the statutory requisites for the savings‑bank exemption. The statutory exception requires (a) absence of capital stock; (b) doing no other business than receiving deposits to be loaned or invested; and (c) that deposits be for the sole benefit of the depositors and without profit or compensation to the institution. The court concluded that the defendant was a profit‑making institution: depositors received only a fixed 4% interest and had no participatory right in the institution’s profits; the profits belonged to the institution itself. The defendant also conceded that, upon winding up, the surplus (P549,912.52) would belong to the institution, not to depositors. That distributional reality defeated the statutory requirement that the institution operate for the sole benefit of depositors without profit or compensation to the institution. Accordingly, the statutory elements of the exemption were not present.
Rejection of Reliance on Administrative Practice
The defendant argued that prior non‑assessment by successive Collectors of Internal Revenue constituted a practical construction of the statute in its favor. The court rejected this argument for two principal reasons: (1) the statute’s language setting out the elements of a savings bank is clear and unambiguous, so no construction was needed; and (2) the circumstances of the early years of American administration—new laws, unfamiliar institutions and practical difficulties—reduced the force of any presumption that past inaction by revenue officers established a settled, controlling administrative interpretation. Moreover, the lack of a direct or explicit official ruling on the exemption meant the mere fact that no tax had been assessed previously was not decisive.
Ownership of Reserves and Relation to U.S. Savings‑Bank Analogies
The appellant’s analogy to certain U.S. savings banks—where large reserves or accrued profits are treated as belonging to depositors—was deemed inapposite because, in those U.S. cases, the ownership of reserves by depositors and their right to distribution was admitted. Here the defendant claimed ownership of the reserve and denied d
...continue readingCase Syllabus (G.R. No. 146555)
Procedural Posture
- Appeal from a judgment of the Court of First Instance of the city of Manila in favor of the plaintiff (Government of the Philippine Islands) and against the defendant (El Monte de Piedad y Caja de Ahorros de Manila).
- Trial court judgment awarded the plaintiff P 138,790.12, with interest at 6% per annum from March 4, 1915.
- The action below sought recovery of internal-revenue taxes assessed on monthly deposits and on the capital employed by defendant in the business of banking for the period August 1, 1904 to June 30, 1914, together with statutory penalties for refusing to pay taxes.
- The case was brought before the Supreme Court on a stipulation of facts; some oral and documentary evidence was introduced at trial.
Stipulation of Facts and Evidence
- Parties submitted a stipulation of facts to the trial court and some additional oral and documentary evidence was presented.
- Amounts of deposits and the amount of accrued profits, surplus, or capital of the defendant were admitted by the parties.
- It was substantially conceded that the defendant was engaged in the banking business and that the tax amounts and penalties, if liability were established, were not in dispute.
Origin, Legal Nature, and Organization of the Defendant
- El Monte de Piedad y Caja de Ahorros de Manila was organized in accordance with the canon law.
- The institution was created by royal order of the King of Spain dated July 8, 1880, issued under the royal patronate powers of the Crown of Spain.
- Prior decrees promulgated by the Governor-General of the Philippine Islands, as vice royal patron, affecting the defendant’s organization were referred to and confirmed in the royal order of July 8, 1880.
- The institution’s statutes and by-laws are subject to the will of the Catholic Archbishop of Manila, and the Archbishop may change them at his pleasure.
Business Operations, Depositor Rights, and Profit Allocation
- During the entire period for which the taxes were assessed, the defendant maintained a place of business in the city of Manila where credits were opened by deposit or collection of money or currency subject to be paid by order.
- The statutes provided for an annual interest of 4% to depositors; this interest rate constitutes the limit of depositors’ participation in the profits or earnings of the institution.
- The profits derived from investment of deposits were treated as belonging to the institution itself; depositors’ participation was limited to the stipulated interest and not to any share of surplus or accrued profits.
- It was conceded that if the defendant were liquidated at the time in question, the so-called surplus, reserve, or accrued profits of P 549,912.52 would belong to and be turned over to the defendant institution.
Statutory Framework (Act No. 1189, Internal Revenue Law)
- The tax assessment was based on the contention that the defendant is a “bank” within the definition of section 110 of Act No. 1189 (Internal Revenue Law).
- Section 111 of Act No. 1189 imposed:
- A tax of one‑eighteenth of one percent each month upon the average amount of deposits of money subject to payment by check or draft or represented by certificates of deposit or otherwise, whether payable on demand or at some future day.
- A further tax of one‑twenty‑fourth of one percent each month upon the capital employed by the defendant in the business of banking (paragraph 2 of section 111).
- Paragraph 4 of section 111 contained an exception (quoted in the record) providing that:
- "The deposits in associations or companies known as provident institutions, savings banks, savings funds, or savings institutions, having no capital stock and which do no other business than receiving deposits to be loaned or invested for the sole benefit of the parties making such deposits and without profit or compensation to the association or company, shall be exempt from this tax on so much of their deposits as such institutions have invested in securities satisfactory to the Insular Treasurer, and on all deposits, not exceeding four thousand pesos, made in the name of any one person."
- The defendant relied on this exception to claim exemption from the tax on deposits.
- The defendant also advanced the specific claim that it had no capital and therefore should not be taxed under the provision taxing "capital employed."
Issues Presented
- Whether the defendant falls within the paragraph 4 exception (savings bank exception) of section 111 and is therefore exempt from the tax on deposits.
- Whether the defendant had "capital" within the meaning of the Internal Revenue Law and whether the sum of P 549,912.52 constituted taxable capital employed by the bank.
- Whether the failure of prior Collectors of Internal Revenue to assess the tax constituted a practical construction of the statute that should be followed.
- Whether the presumption of correctness that attaches to an assessment by the Collector alleviates the plaintiff’