Publishing the Decision of the Supreme Court in the Cases Entitled Collector of Internal Revenue vs. Antonio Prieto, et al., G.R. No. L-11976 and Commissioner of Internal Revenue vs. Asturias Sugar Central, Inc., G.R. No. L-15013

May 4, 1962 REVENUE MEMORANDUM CIRCULAR NO. 16-62 SUBJECT : Publishing the Decision of the Supreme Court in the Cases Entitled Collector of Internal Revenue vs. Antonio Prieto, et al., G.R. No. L-11976 and Commissioner of Internal Revenue vs. Asturias Sugar Central, Inc., G.R. No. L-15013 TO : All Internal Revenue Officers and Others Concerned For the information and guidance of all concerned, pertinent portions of the decisions in the above-entitled cases are hereby published: "On the other hand, the ruling of the Court of Tax Appeals to the effect that petitioner should pay legal interests on the amounts improperly collected from respondents is in accord with our decision in Carcar Electric & Ice Plant Co., Inc. vs. The Collector of Internal Revenue (54 O.G. No. 4, p. 1068). Resolving the Collector's Motion for reconsideration in said case, we held: 'We conclude that under the present Internal Revenue Code the Collector of Internal Revenue may be made to answer for interest at the legal rate on taxes improperly collected. Such liability serves as additional safeguard in favor of the taxpayer against arbitrariness in the exaction or collection of taxes and imposts.'" (CIR vs. Antonio Prieto et al., G.R. No. L-11976 Prom. August 29, 1961) aisadc "Our decision in the Carcar case, however, must be understood as holding the Collector of Internal Revenue liable for interest on taxes improperly collected only if the collection was attended with 'arbitrariness'. The facts involved in the case relied upon by petitioner the St. Paul's Hospital of Iloilo case do not seem to justify the conclusion that arbitrariness attended or characterized the collection of the taxes in question therein. Said facts are as follows: 'Petitioner is a corporation 'dedicated to charitable, educational and religious purposes' operating a hospital giving medical assistance to destitute persons, (See St. Paul's Hospital of Iloilo v. Collector of Internal Revenue, C.T.A. Case No. 6, promulgated on December 4, 1954). It maintains a pharmacy department within the premises of its hospital to supply drugs and medicines only to charity and paying patients confined therein. However, only the paying patients are required to pay the medicines supplied to them and the charge consists of the cost of such medicines plus an additional 10% thereof to partly effect the cost of medicines supplied free of charge to charity patients. On May 6, 1954, respondent assessed and demanded from petitioner the sum of P485.00 allegedly representing business tax on its operation of a pharmacy department. From this assessment, appealed to this Court.' asia "The question of whether or not the sale of drugs and medicines made at the pharmacy department of the St. Paul's Hospital of Iloilo were taxable was, in our opinion, a fairly debatable issue. The Collector, therefore, can not be said to have acted arbitrarily in assessing the corresponding tax on the hospital. This being the case, we see no real conflict between our decision in the Carcar case, on the one hand, and the one rendered in the St. Paul's Hospital of Iloilo case. "The question we now have to decide is whether the first or the second ruling is the one applicable to the present case. Upon consideration of the facts appearing of record we believe that it is the first. The Collector of Internal Revenue had no reason to insist in collecting the inheritance tax from respondents on the basis of the value of the properties alloted to each of them, in accordance with the project of partition submitted to and approved by the court, without deducting therefrom the cash payments which, in accordance with their agreement with their coheirs, they had to pay the latter for the purpose of making the share of each heir equal in value to that of the others as ordained in the will of the deceased Doa Teresa Tuason y de la Paz, and as agreed among her heirs. What each of the respondents really received as his share in the estate of said deceased was the value of the properties alloted to each of them minus the cash payment each had to make in order to equalize their respective share with that of the other heirs. The collection of the inheritance taxes herein involved being clearly unjustified, we are constrained, as already stated above, to hold the ruling in the Carcar case applicable to the present." (CIR vs. Antonio Prieto et al., G.R. L-11976 - Resolution Prom. Sept. 26, 1961) "The motion is predicated upon the theory that the precedent established in Carcar Electric and Ice Plant Co., Inc. vs. Court of Tax Appeals (53 Off. Gaz. 1068, 1071, 1073-1075), has been superseded by the decision in Court of Tax Appeals vs. St. Paul's Hospital of Iloilo (G.R. No. L-12127, May 25, 1959). This issue has already been decided in the negative in a resolution, dated September 26, 1961, denying a motion for reconsideration in Collector of Internal Revenue vs. Antonio Prieto, L-11976. We quote from said resolution: '. . . we held in Carcar Electric & Ice Plant Co. vs. Collector of Internal Revenue (G. R. No. L-9257, Oct. 17, 1956, 53 O.G. No. 4, 1068) that 'under the present Internal Revenue Code the Collector of Internal Revenue may be made to answer for interest at the legal rate on taxes improperly collected. Such liability serves as additional safeguard in favor of the taxpayer against arbitrariness in the exaction or collection of taxes and imposts.' (See Resolution on the Motion for Reconsideration filed by the Collector of Internal Revenue, 53 O. G. No. 4, pp. 1071-1075). 'In reasoning our Resolution in the Carcar case we said that 'Under the Internal Revenue Act of 1914, the Collector of Internal Revenue was liable for interest on taxes improperly collected as held in Hongkong Shanghai Bank vs. Rafferty, 39 Phil. 153; Neacock Co. vs. Collector of Customs, 37 Phil. 970; Vda. e Hijos de P. Roxas vs. Rafferty, 37 Phil. 957''; that, subsequently, Section 1579 of the Administrative Code of 1917 expressly authorized suits against the Collector of Internal Revenue 'for the recovery without interest of the sum alleged to have been illegally collected'; that for this reason, thereafter, no judgments for interest were rendered against the Collector; that in 1939, the National Internal Revenue Code, in its section 306, authorized recovery of taxes erroneously or illegally collected, but omitting the expression 'without interest' employed in the aforesaid section of the Administrative Code of 1917, repeated rulings holding the Collector of Internal Revenue liable for interest on taxes improperly collected, in the absence of express exemption, it was clear that the Legislature's failure to reenact the words 'without interest' of the Administrative Code of 1917 showed a clear desire to return to the rule in force before said year. 'Our decision in the Carcar case, however, must be understood as holding the Collector of Internal Revenue liable for interest on taxes improperly collected only if the collection was attended with 'arbitrariness'. The facts involved in the case relied upon by petitioner the St. Paul's Hospital of Iloilo case do not seem to justify the conclusion that arbitrariness attended or characterized the collection of the taxes in question therein.' "In the case at bar, we find that petitioner had acted arbitrarily in rejecting respondent's claim, to the effect that the destruction of the Asturias Sugar Central in April, 1942 in furtherance of our resistance to enemy attack, is compensable by the War Damage Corporation under the provisions of Section 5(g) of Public Law 506 of the 77th Congress of the United States, otherwise known as the War Damage Commission Act, and that the amount of the loss thus sustained by said respondent could be determined only in 1950, when it received from the Philippine War Damage Commission a communication stating that the check enclosed therewith would be the last payment by way of partial compensation for the loss of said Sugar Central. In other words, the assessment complained of is clearly unjustified, and, accordingly, the case at bar falls within the purview, not of the case of St. Paul's Hospital of Iloilo, but of the Carcar case." (CIR vs. Asturias Sugar Central, Inc. G.R. L-15013, Resolution Prom. December 28, 1961) Features of the Decisions The above-quoted portions of the decisions of our Supreme Court settle the important question of whether or not the Commissioner of Internal Revenue can be held liable for interest on taxes improperly collected. In effect, the Supreme court held that under our present law, the Commissioner of Internal Revenue may be held liable for interest on taxes improperly collected by only if the collection of such taxes "was attended with 'arbitrariness'" as in the Carcar case, the Prieto case and the Asturias case. In the St. Paul's Hospital of Iloilo case, the Supreme Court held that the question of whether or not the sale of drugs and medicines made at the pharmacy department of the St. Paul's Hospital of Iloilo were taxable was, in their opinion, a fairly debatable issue. Hence, the collection of the tax was not arbitrary and therefore, the Commissioner of Internal Revenue was held not liable for payment of interest on the tax improperly collected. Enforcement and Publicity All internal revenue officers and others charged with the enforcement of the internal revenue law are enjoined to be guided accordingly and to give this circular as wide a publicity as possible. (SGD.) BENEDICTO PADILLA Acting Commissioner of Internal Revenue