G.R. No.

120138 September 5, 1997 In 1984, Judge Torres, in order to make substantial savings in taxes,
adopted an "estate planning" scheme under which he assigned to Tormil
MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, Realty & Development Corporation (Tormil for brevity) various real
RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, properties he owned and his shares of stock in other corporations in
AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN, petitioners, exchange for 225,972 Tormil Realty shares. Hence, on various dates in
vs. July and August of 1984, ten (10) deeds of assignment were executed by
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, the late Judge Torres:
TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P.
TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION
and DANTE D. MORALES, respondents. SHARES TO BE
ISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252

KAPUNAN, J.: TCT 144240 Quezon City

In this petition for review on certiorari under Rule 45 of the Revised 2. July 13, 1984 TCT 77008 Manila
Rules of Court, petitioners seek to annul the decision of the Court of TCT 65689 Manila 78,493
Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and its TCT 109200 Manila
subsequent resolution dated 10 May 1995 denying petitioners'
motion for reconsideration. 3. July 13, 1984 TCT 374079 Makati 8,307

The present case involves two separate but interrelated conflicts. 4. July 24, 1984 TCT 41527 Pasay
The facts leading to the first controversy are as follows: TCT 41528 Pasay 9,855
TCT 41529 Pasay
The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the
majority stockholder of Tormil Realty & Development Corporation 5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000
while private respondents who are the children of Judge Torres'
deceased brother Antonio A. Torres, constituted the minority 6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737
stockholders. In particular, their respective shareholdings and
positions in the corporation were as follows: 7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

Name of Stockholder Number of Percentage Position(s) 8. Aug. 07, 1984 China banking Corp. Stocks 6,300
Shares
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468
Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair
Milagros P. Torres 33,430 19.10 Dir./Treasurer
10. Aug. 29, 1984 Ayala Fund Stocks 1,322
Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
Antonio P. Torres, Jr. 8,290 4.73 Director ———
Ma. Jacinta P. Torres 8,290 4.73 Director 225,9722
Ma. Luisa T. Morales 7,790 4.45 Director
Dante D. Morales 500 .28 Director1 Consequently, the aforelisted properties were duly recorded in the
inventory of assets of Tormil Realty and the revenues generated by the
said properties were correspondingly entered in the corporation's books
of account and financial records.
Likewise, all the assigned parcels of land were duly registered with the
respective Register of Deeds in the name of Tormil Realty, except for the
ones located in Makati and Pasay City.
At the time of the assignments and exchange, however, only 225,000
Tormil Realty shares remained unsubscribed, all of which were duly
issued to and received by Judge Torres (as evidenced by stock
certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25). 3
Due to the insufficient number of shares of stock issued to Judge Torres
and the alleged refusal of private respondents to approve the needed
increase in the corporation's authorized capital stock (to cover the
shortage of 972 shares due to Judge Torres under the "estate planning"
scheme), on 11 September 1986, Judge Torres revoked the two (2)
deeds of assignment covering the properties in Makati and Pasay City.4
Noting the disappearance of the Makati and Pasay City properties from
the corporation's inventory of assets and financial records private
respondents, on 31 March 1987, were constrained to file a complaint with
the Securities and Exchange Commission (SEC) docketed as SEC Case
No. 3153 to compel Judge Torres to deliver to Tormil corporation the two
(2) deeds of assignment covering the aforementioned Makati and Pasay
City properties which he had unilaterally revoked and to cause the
registration of the corresponding titles in the name of Tormil. Private
respondents alleged that following the disappearance of the properties
from the corporation's inventory of assets, they found that on October 24,
1986, Judge Torres, together with Edgardo Pabalan and Graciano
Tobias, then General Manager and legal counsel, respectively, of Tormil,
formed and organized a corporation named "Torres-Pabalan Realty and
Development Corporation" and that as part of Judge Torres' contribution
to the new corporation, he executed in its favor a Deed of Assignment
conveying the same Makati and Pasay City properties he had earlier
transferred to Tormil.
The second controversy — involving the same parties — concerned the
election of the 1987 corporate board of directors.
The 1987 annual stockholders meeting and election of directors of Tormil
corporation was scheduled on 25 March 1987 in compliance with the
provisions of its by-laws.
Pursuant thereto, Judge Torres assigned from his own shares, one (l)
share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and
Pabalan. These assigned shares were in the nature of "qualifying
shares," for the sole purpose of meeting the legal requirement to be able
to elect them (Tobias and company) to the Board of Directors as Torres'
nominees.
The assigned shares were covered by corresponding Tormil Stock
Certificates Nos. 030, 029, 028, 027, 026 and at the back of each
certificate the following inscription is found:
The present certificate and/or the one share it represents,
conformably to the purpose and intention of the Deed of
Assignment dated March 6, 1987, is not held by me under
any claim of ownership and I acknowledge that I hold the
same merely as trustee of Judge Manuel A. Torres, Jr.
and for the sole purpose of qualifying me as Director;
(Signature of Assignee)5
The reason behind the aforestated action was to remedy the "inequitable
lopsided set-up obtaining in the corporation, where, notwithstanding his
controlling interest in the corporation, the late Judge held only a single
seat in the nine-member Board of Directors and was, therefore, at the
mercy of the minority, a combination of any two (2) of whom would suffice
to overrule the majority stockholder in the Board's decision making
functions."6
On 25 March 1987, the annual stockholders meeting was held as
scheduled. What transpired therein was ably narrated by Attys. Benito
Cataran and Bayani De los Reyes, the official representatives dispatched
by the SEC to observe the proceedings (upon request of the late Judge
Torres) in their report dated 27 March 1987:
xxx xxx xxx
The undersigned arrived at 1:55 p.m. in the place of the
meeting, a residential bungalow in Urdaneta Village,
Makati, Metro Manila. Upon arrival, Josefina Torres
introduced us to the stockholders namely: Milagros
Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma.
Cristina Carlos and Ma. Jacinta Torres. Antonio Torres,
Jr. questioned our authority and personality to appear in
the meeting claiming subject corporation is a family and
private firm. We explained that our appearance there was
merely in response to the request of Manuel Torres, Jr.
and that SEC has jurisdiction over all registered
corporations. Manuel Torres, Jr., a septuagenarian,
argued that as holder of the major and controlling shares,
he approved of our attendance in the meeting.
At about 2:30 p.m., a group composed of Edgardo
Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr.,
Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar
Azura arrived. Atty. Azura told the body that they came as
counsels of Manuel Torres, Jr. and as stockholders
having assigned qualifying shares by Manuel Torres, Jr.
The stockholders' meeting started at 2:45 p.m. with Mr.
Pabalan presiding after verbally authorized by Manuel
Torres, Jr., the President and Chairman of the Board. The
secretary when asked about the quorum, said that there
was more than a quorum. Mr. Pabalan distributed copies
of the president's report and the financial
statements. Antonio Torres, Jr. requested time to study
the said reports and brought out the question of auditing
the finances of the corporation which he claimed was
approved previously by the board. Heated arguments
ensued which also touched on family matters. Antonio
Torres, Jr. moved for the suspension of the meeting but
Manuel Torres, Jr. voted for the continuation of the
proceedings.
Mr. Pabalan suggested that the opinion of the SEC
representatives be asked on the propriety of suspending
the meeting but Antonio Torres, Jr. objected reasoning
out that we were just observers.
When the Chairman called for the election of directors,
the Secretary refused to write down the names of
nominees prompting Atty. Azura to initiate the
appointment of Atty. Jocson, Jr. as Acting Secretary.
Antonio Torres, Jr. nominated the present members of
the Board. At this juncture, Milagros Torres cried out and
told the group of Manuel Torres, Jr. to leave the house.
Manuel Torres, Jr., together with his lawyers-stockholders
went to the residence of Ma. Jacinta Torres in San Miguel
Village, Makati, Metro Manila. The undersigned joined
them since the group with Manuel Torres, Jr. the one who
requested for S.E.C. observers, represented the majority
of the outstanding capital stock and still constituted a
quorum.
At the resumption of the meeting, the following were
nominated and elected as directors for the year 1987-
1988:
1. Manuel Torres, Jr.
2. Ma. Jacinta Torres
3. Edgardo Pabalan
4. Graciano Tobias
5. Rodolfo Jocson, Jr.
6. Melvin Jurisprudencia
7. Augustus Cesar Azura
8. Josefina Torres
9. Dante Morales
After the election, it was resolved that after the meeting,
the new board of directors shall convene for the election
of officers.
xxx xxx xxx7
Consequently, on 10 April 1987, private respondents instituted a
complaint with the SEC (SEC Case No. 3161) praying in the main, that
the election of petitioners to the Board of Directors be annulled.
Private respondents alleged that the petitioners-nominees were not
legitimate stockholders of Tormil because the assignment of shares to
them violated the minority stockholders' right of pre-emption as provided
in the corporation's articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were
consolidated for joint hearing and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a
decision in favor of private respondents. The dispositive portion thereof
states, thus:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Ordering and directing the respondents, particularly
respondent Manuel A. Torres, Jr., to turn over and deliver
to TORMIL through its Corporate Secretary, Ma. Cristina
T. Carlos: (a) the originals of the Deeds of Assignment
dated July 13 and 24, 1984 together with the owner's
duplicates of Transfer Certificates of Title Nos. 374079 of
the Registry of Deeds for Makati, and 41527, 41528 and
41529 of the Registry of Deeds for Pasay City and/or to
cause the formal registration and transfer of title in and
over such real properties in favor of TORMIL with the
proper government agency; (b) all corporate books of
account, records and papers as may be necessary for the
conduct of a comprehensive audit examination, and to
allow the examination and inspection of such accounting
books, papers and records by any or all of the corporate
directors, officers and stockholders and/or their duly
authorized representatives or auditors;
2. Declaring as permanent and final the writ of preliminary
injunction issued by the Hearing Panel on February 13,
1989;
3. Declaring as null and void the election and appointment
of respondents to the Board of Directors and executive
positions of TORMIL held on March 25, 1987, and all their
acts and resolutions made for and in behalf of TORMIL by
authority of and pursuant to such invalid appointment &
election held on March 25, 1987;
4. Ordering the respondents jointly and severally, to pay
the complainants the sum of ONE HUNDRED
THOUSAND PESOS (P100,000.00) as and by way of
attorney's fees.8
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC
No. 339). Thereafter, on 3 April 1991, during the pendency of said
appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof
was brought to the attention of the SEC not by petitioners' counsel but by
private respondents in a Manifestation dated 24 April 1991. 9
On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on
grounds that no administrator or legal representative of the late Judge
Torres' estate has yet been appointed by the Regional Trial Court of
Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the
Last Will and Testament of Manuel A Torres, Jr.") was pending. Two
similar motions for suspension were filed by petitioners on 28 June 1993
and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners'
aforecited motions on the following ground:
Before the filing of these motions, the Commission en
banc had already completed all proceedings and had
likewise ruled on the merits of the appealed cases.
Viewed in this light, we thus feel that there is nothing left
to be done except to deny these motions to suspend
proceedings. 10
On the same date, the SEC en banc rendered a decision, the dispositive
portion of which reads, thus:
WHEREFORE, premises considered, the appealed
decision of the hearing panel is hereby affirmed and all
motions pending before us incident to this appealed case
are necessarily DISMISSED.
SO ORDERED. 11
Undaunted, on 10 August 1993, petitioners proceeded to plead its cause
to the Court of Appeals by way of a petition for review (docketed as CA-
G.R. SP No. 31748).
On 23 May 1994, the Court of Appeals rendered a decision, the WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF
dispositive portion of which states: THE EVIDENCE AND THE ORIGINAL RECORD OF
S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN
WHEREFORE, the petition for review is DISMISSED and RE-EXAMINED, THAT S.E.C. CASE NO. 3153
the appealed decision is accordingly affirmed. INVOLVED A SITUATION WHERE PERFORMANCE
WAS IMPOSSIBLE (AS CONTEMPLATED UNDER
SO ORDERED. 12 ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A
MERE CASE OF LESION OR INADEQUACY OF CAUSE
(UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO
From the said decision, petitioners filed a motion for reconsideration
ERRONEOUSLY CHARACTERIZED BY THE
which was denied in a resolution issued by the Court of Appeals dated 10
RESPONDENT S.E.C.; and,
May 1995. 13
(4)
Insisting on their cause, petitioners filed the present petition for review
alleging that the Court of Appeals committed the following errors in its
decision: WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF
THE EVIDENCE AND THE ORIGINAL RECORD OF
S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN
(1)
EXAMINED, THAT THE RECORDING BY THE LATE
JUDGE MANUEL A. TORRES, JR. OF THE
WHEN IT RENDERED THE MAY 23, 1994 DECISION, QUESTIONED ASSIGNMENT OF QUALIFYING
WHICH IS A FULL LENGTH DECISION, WITHOUT THE SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE
EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — STOCK AND TRANSFER BOOK BY AN ACTING
AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT CORPORATE SECRETARY AND MOREOVER, THAT
FOR REVIEW AND RE-EXAMINATION, AN OMISSION ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY
RESULTING IN A CLEAR TRANSGRESSION OR MADE TO THE OTHER STOCKHOLDERS. 14
CURTAILMENT OF THE RIGHTS OF THE HEREIN
PETITIONERS TO PROCEDURAL DUE PROCESS;
We shall resolve the issues in seriatim.
(2)
I
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION
Petitioners insist that the failure to transmit the original records to the
OF THE RESPONDENT S.E.C., WHICH IS VOID FOR
Court of Appeals deprived them of procedural due process. Without the
HAVING BEEN RENDERED WITHOUT THE PROPER
evidence and the original records of the proceedings before the SEC, the
SUBSTITUTION OF THE DECEASED PRINCIPAL
Court of Appeals, petitioners adamantly state, could not have possibly
PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND
made a proper appreciation and correct determination of the issues,
CONSEQUENTLY, FOR WANT OF JURISDICTION
particularly the factual issues, they had raised on appeal. Petitioners also
OVER THE SAID DECEASED'S TESTATE ESTATE,
assert that since the Court of Appeals allegedly gave due course to their
AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY
petition, the original records should have been forwarded to said court.
THE NON-SUBSTITUTION BY ITS APPLICATION OF
THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91
(dated 27 February 1991) which provides that:
(3)
 8. WHEN PETITION GIVEN DUE COURSE. — The Court
of Appeals shall give due course to the petition only when
it shows prima facie that the court, commission, board,
office or agency concerned has committed errors of fact
or law that would warrant reversal or modification of the
order, ruling or decision sought to be reviewed. The
findings of fact of the court commission, board, office or
agency concerned when supported by substantial
evidence shall be final.
xxx xxx xxx
11. TRANSMITTAL OF RECORD. — Within fifteen (15)
days from notice that the petition has been given due
course, the court, commission, board, office or agency
concerned shall transmit to the Court of Appeals the
original or a certified copy of the entire record of the
proceeding under review. The record to be transmitted
may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit
subsequent correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to
their petition as allegedly indicated by the following acts:
a) it granted the restraining order applied
for by the herein petitioners, and after
hearing, also the writ of preliminary
injunction sought by them; under the
original SC Circular No. 1-91, a petition for
review may be given due course at the
onset (paragraph 8) upon a mere prima
facie finding of errors of fact or law having
been committed, and such prima
facie finding is but consistent with the
grant of the extra-ordinary writ of
preliminary injunction;
b) it required the parties to submit
"simultaneous memoranda" in its
resolution dated October 15, 1993 (this is
in addition to the comment required to be
filed by the respondents) and furthermore
declared in the same resolution that the
petition will be decided "on the merits,"
instead of outrightly dismissing the same;
c) it rendered a full length decision,
wherein: (aa) it expressly declared the
respondent S.E.C. as having erred in
denying the pertinent motions to suspend
proceedings; (bb) it declared the
supposed error as having become a non-
issue when the respondent
C.A. "proceeded to hear (the) appeal";
(cc) it formulated and applied its own
theory of negotiorum gestio in justifying
the non-substitution of the deceased
principal party in S.E.C. — AC No. 339
and moreover, its theory of di minimis non
curat lex (this, without first determining the
true extent of and the correct legal
characterization of the so-called
"shortage" of Tormil shares;
and, (dd) it expressly affirmed the assailed
decision of respondent S.E.C. 15
Petitioners' contention is unmeritorious.
There is nothing on record to show that the Court of Appeals gave due
course to the petition. The fact alone that the Court of Appeals issued a
restraining order and a writ of preliminary injunction and required the
parties to submit their respective memoranda does not indicate that the
petition was given due course. The office of an injunction is merely to
preserve the status quo pending the disposition of the case. The court
can require the submission of memoranda in support of the respective
claims and positions of the parties without necessarily giving due course
to the petition. The matter of whether or not to give due course to a
petition lies in the discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by
Revised Administrative Circular No. 1-95 (which took effect on 1 June
1995) wherein the procedure for appeals from quasi-judicial agencies to
the Court of Appeals was clarified thus:
 10. Due course. — If upon the filing of the comment or
such other pleadings or documents as may be required or
allowed by the Court of Appeals or upon the expiration of
the period for the filing thereof, and on the bases of the
petition or the record the Court of Appeals finds prima
facie that the court or agency concerned has committed
errors of fact or law that would warrant reversal or
modification of the award, judgment, final order or
resolution sought to be reviewed, it may give due course
to the petition; otherwise, it shall dismiss the same. The
findings of fact of the court or agency concerned, when
supported by substantial evidence, shall be binding on the
Court of Appeals.
11. Transmittal of record. — Within fifteen (15) days from
notice that the petition has been given due course, the
Court of Appeals may require the court or agency
concerned to transmit the original or a legible certified
true copy of the entire record of the proceeding under
review. The record to be transmitted may be abridged by
agreement of all parties to the proceeding. The Court of
Appeals may require or permit subsequent correction of
or addition to the record. (Emphasis ours.)
The aforecited circular now formalizes the correct practice and clearly
states that in resolving appeals from quasi judicial agencies, it is within
the discretion of the Court of Appeals to have the original records of the
proceedings under review be transmitted to it. In this connection
petitioners' claim that the Court of Appeals could not have decided the
case on the merits without the records being brought before it is patently
lame. Indubitably, the Court of Appeals decided the case on the basis of
the uncontroverted facts and admissions contained in the pleadings, that
is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the
parties.
II
Petitioners contend that the decisions of the SEC and the Court of
Appeals are null and void for being rendered without the necessary
substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.)
as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which
provides as follows:
Sec. 17. Death of party. — After a party dies and the
claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the
deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within
such time as may be granted. If the legal representative
fails to appear within said time, the court may order the
opposing party to procure the appointment of a legal
representative of the deceased within a time to be
specified by the court, and the representative shall
immediately appear for and on behalf of the interest of the
deceased. The court charges involved in procuring such
appointment, if defrayed by the opposing party, may be
recovered as costs. The heirs of the deceased may be
allowed to be substituted for the deceased, without
requiring the appointment of an executor or administrator
and the court may appoint guardian ad litem for the minor
heirs.
Petitioners insist that the SEC en banc should have granted the motions
to suspend they filed based as they were on the ground that the Regional
Trial Court of Makati, where the probate of the late Judge Torres' will was
pending, had yet to appoint an administrator or legal representative of his
estate.
We are not unaware of the principle underlying the aforequoted provision:
It has been held that when a party dies in an action that
survives, and no order is issued by the Court for the
appearance of the legal representative or of the heirs of
the deceased to be substituted for the deceased, and as
a matter of fact no such substitution has ever been
effected, the trial held by the court without such legal
representative or heirs, and the judgment rendered after
such trial, are null and void because the court acquired no
jurisdiction over the persons of the legal representative or
of the heirs upon whom the trial and the judgment are not
binding. 16
As early as 8 April 1988, Judge Torres instituted Special Proceedings No.
M-1768 before the Regional Trial Court of Makati for the ante-mortem
probate of his holographic will which he had executed on 31 October
1986. Testifying in the said proceedings, Judge Torres confirmed his
appointment of petitioner Edgardo D. Pabalan as the sole executor of his
will and administrator of his estate. The proceedings, however, were
opposed by the same parties, herein private respondents Antonio P.
Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who are
nephew and nieces of Judge Torres, being the children of his late brother
Antonio A. Torres.
It can readily be observed therefore that the parties involved in the
present controversy are virtually the same parties fighting over the
representation of the late Judge Torres' estate. It should be recalled that
the purpose behind the rule on substitution of parties is the protection of
the right of every party to due process. It is to ensure that the deceased
party would continue to be properly represented in the suit through the
duly appointed legal representative of his estate. In the present case, this
purpose has been substantially fulfilled (despite the lack of formal
substitution) in view of the peculiar fact that both proceedings involve
practically the same parties. Both parties have been fiercely fighting in
the probate proceedings of Judge Torres' holographic will for
appointment as legal representative of his estate. Since both parties
claim interests over the estate, the rights of the estate were expected to
be fully protected in the proceedings before the SEC en banc and the
Court of Appeals. In either case, whoever shall be appointed legal
representative of Judge Torres' estate (petitioner Pabalan or private
respondents) would no longer be a stranger to the present case, the said
parties having voluntarily submitted to the jurisdiction of the SEC and the
Court of Appeals and having thoroughly participated in the proceedings.
The foregoing rationate finds support in the recent case of Vda. de
Salazar v. CA, 18 wherein the Court expounded thus:
The need for substitution of heirs is based on the right to
due process accruing to every party in any proceeding.
The rationale underlying this requirement in case a party
dies during the pendency of proceedings of a nature not
extinguished by such death, is that . . . the exercise of
judicial power to hear and determine a cause implicitly
presupposes in the trial court, amongst other essentials,
jurisdiction over the persons of the parties. That
jurisdiction was inevitably impaired upon the death of the
protestee pending the proceedings below such that
unless and until a legal representative is for him duly
named and within the jurisdiction of the trial court, no
adjudication in the cause could have been accorded any
validity or binding effect upon any party, in representation
of the deceased, without trenching upon the fundamental
right to a day in court which is the very essence of the
constitutionally enshrined guarantee of due process.
We are not unaware of several cases where we have
ruled that a party having died in an action that survives,
the trial held by the court without appearance of the
deceased's legal representative or substitution of heirs
and the judgment rendered after such trial, are null and
void because the court acquired no jurisdiction over the
persons of the legal representatives or of the heirs upon
whom the trial and the judgment would be binding. This
general rule notwithstanding, in denying petitioner's
motion for reconsideration, the Court of Appeals correctly
ruled that formal substitution of heirs is not necessary
when the heirs themselves voluntarily appeared,
participated in the case and presented evidence in
defense of deceased defendant. Attending the case at
bench, after all, are these particular circumstances which
negate petitioner's belated and seemingly ostensible
claim of violation of her rights to due process. We should
not lose sight of the principle underlying the general rule
that formal substitution of heirs must be effectuated for
them to be bound by a subsequent judgment. Such had
been the general rule established not because the rule on
substitution of heirs and that on appointment of a legal
representative are jurisdictional requirements per se but
because non-compliance therewith results in the
undeniable violation of the right to due process of those
who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein . . .
.
It is appropriate to mention here that when Judge Torres died on April 3,
1991, the SEC en banc had already fully heard the parties and what
remained was the evaluation of the evidence and rendition of the
judgment.
Further, petitioners filed their motions to suspend proceedings only after
more than two (2) years from the death of Judge Torres. Petitioners'
counsel was even remiss in his duty under Sec. 16, Rule 3 of the Revised
Rules of Court. 19 Instead, it was private respondents who informed the
SEC of Judge Torres' death through a manifestation dated 24 April 1991.
For the SEC en banc to have suspended the proceedings to await the Petitioners' contentions cannot be sustained. We see no justifiable
appointment of the legal representative by the estate was impractical and reason to disturb the findings of SEC, as affirmed by the Court of
would have caused undue delay in the proceedings and a denial of Appeals:
justice. There is no telling when the probate court will decide the issue,
which may still be appealed to the higher courts. We sustain the ruling of respondent SEC in the decision
appealed from (Rollo, pp. 45-46) that —
In any case, there has been no final disposition of the properties of the
late Judge Torres before the SEC. On the contrary, the decision of the . . . the shortage of 972 shares would not
SEC en banc as affirmed by the Court of Appeals served to protect and be valid ground for respondent Torres to
preserve his estate. Consequently, the rule that when a party dies, he unilaterally revoke the deeds of
should be substituted by his legal representative to protect the interests assignment he had executed on July 13,
of his estate in observance of due process was not violated in this case in 1984 and July 24, 1984 wherein he
view of its peculiar situation where the estate was fully protected by the voluntarily assigned to TORMIL real
presence of the parties who claim interests therein either as directors, properties covered by TCT No. 374079
stockholders or heirs. (Makati) and TCT No. 41527, 41528 and
41529 (Pasay) respectively.
Finally, we agree with petitioners' contention that the principle
of negotiorum gestio 20 does not apply in the present case. Said principle A comparison of the number of shares
explicitly covers abandoned or neglected property or business. that respondent Torres received from
TORMIL by virtue of the "deeds of
III assignment" and the stock certificates
issued by the latter to the former readily
Petitioners find legal basis for Judge Torres' act of revoking the shows that TORMIL had substantially
assignment of his properties in Makati and Pasay City to Tormil performed what was expected of it. In fact,
corporation by relying on Art. 1191 of the Civil Code which provides that: the first two issuances were in satisfaction
to the properties being revoked by
Art. 1191. The power to rescind obligations is implied in respondent Torres. Hence, the shortage of
reciprocal ones, in case one of the obligors should not 972 shares would never be a valid ground
comply with what is incumbent upon him. for the revocation of the deeds covering
Pasay and Quezon City properties.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of In Universal Food Corp. vs. CA, the
damages in either case. He may also seek rescission, Supreme Court held:
even after he has chosen fulfillment, if the latter should
become impossible. The general rule is that
rescission of a contract will
The court shall decree the rescission claimed, unless not be permitted for a
there be just cause authorizing the fixing of a period. slight or carnal breach, but
only for such substantial
and fundamental breach
This is understood to be without prejudice to the rights of
as would defeat the very
third persons who have acquired the thing, in accordance
object of the parties in
with articles 1385 and 1388 and the Mortgage Law.
making the agreement.
 The shortage of 972 shares definitely is
not substantial and fundamental breach as
would defeat the very object of the parties
in entering into contract. Art. 1355 of the
Civil Code also provides: "Except in cases
specified by law, lesion or inadequacy of
cause shall not invalidate a contract,
unless there has been fraud, mistake or
undue influences." There being no fraud,
mistake or undue influence exerted on
respondent Torres by TORMIL and the
latter having already issued to the former
of its 225,000 unissued shares, the most
logical course of action is to declare as
null and void the deed of revocation
executed by respondent Torres. (Rollo,
pp. 45-46.) 21
The aforequoted Civil Code provision does not apply in this particular
situation for the obvious reason that a specific number of shares of stock
(as evidenced by stock certificates) had already been issued to the late
Judge Torres in exchange for his Makati and Pasay City properties. The
records thus disclose:
7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th
8. August 7, 1984 China Banking Corp. Stocks 6,300 6th
9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th
10. August 29, 1984 Ayala Fund Stocks 1,322.1)
—————
TOTAL 225,972.3
*Order of stock certificate issuances by TORMIL to
respondent Torres relative to the Deeds of Assignment he
executed sometime in July and August,
1984. 22 (Emphasis ours.)
Moreover, we agree with the contention of the Solicitor General that the
shortage of shares should not have affected the assignment of the Makati
and Pasay City properties which were executed in 13 and 24 July 1984
and the consideration for which have been duly paid or fulfilled but should
have been applied logically to the last assignment of property — Judge
Torres' Ayala Fund shares — which was executed on 29 August 1984. 23

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF IV

ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*
Petitioners insist that the assignment of "qualifying shares" to the
1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd nominees of the late Judge Torres (herein petitioners) does not partake
TCT 144240 Quezon City) of the real nature of a transfer or conveyance of shares of stock as would
call for the "imposition of stringent requirements (with respect to the)
2. July 13, 1984 TCT 77008 Manila) recording of the transfer of said shares." Anyway, petitioners add, there
TCT 65689 Manila) 78,493 2nd was substantial compliance with the above-stated requirement since said
TCT 102200 Manila) assignments were entered by the late Judge Torres himself in the
corporation's stock and transfer book on 6 March 1987, prior to the 25
March 1987 annual stockholders meeting and which entries were
3. July 13, 1984 TCT 374079 Makati 8,307 1st
confirmed on 8 March 1987 by petitioner Azura who was appointed
Assistant Corporate Secretary by Judge Torres.
4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay) 9,855 4th
Petitioners further argue that:
TCT 41529 Pasay)
10.10. Certainly, there is no legal or just basis for the
5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th
respondent S.E.C. to penalize the late Judge Torres by
invalidating the questioned entries in the stock and
6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th transfer book, simply because he initially made those
 entries (they were later affirmed by an acting corporate
secretary) and because the stock and transfer book was
in his possession instead of the elected corporate
secretary, if the background facts herein-before narrated
and the serious animosities that then reigned between the
deceased Judge and his relatives are to be taken into
account;
xxx xxx xxx
10.12. Indeed it was a practice in the corporate
respondent, a family corporation with only a measly
number of stockholders, for the late judge to have
personal custody of corporate records; as president,
chairman and majority stockholder, he had the
prerogative of designating an acting corporate secretary
or to himself make the needed entries, in instances where
the regular secretary, who is a mere subordinate, is
unavailable or intentionally defaults, which was the
situation that obtained immediately prior to the 1987
annual stockholders meeting of Tormil, as the late Judge
Torres had so indicated in the stock and transfer book in
the form of the entries now in question;
10.13. Surely, it would have been futile nay foolish for him
to have insisted under those circumstances, for the
regular secretary, who was then part of a group ranged
against him, to make the entries of the assignments in
favor of his nominees; 24
Petitioners' contentions lack merit.
It is precisely the brewing family discord between Judge Torres and
private respondents — his nephew and nieces that should have placed
Judge Torres on his guard. He should have been more careful in
ensuring that his actions (particularly the assignment of qualifying shares
to his nominees) comply with the requirements of the law. Petitioners
cannot use the flimsy excuse that it would have been a vain attempt to
force the incumbent corporate secretary to register the aforestated
assignments in the stock and transfer book because the latter belonged
to the opposite faction. It is the corporate secretary's duty and obligation
to register valid transfers of stocks and if said corporate officer refuses to
comply, the transferor-stockholder may rightfully bring suit to compel
performance. 25 In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law in their own
hands, as the cliche goes.
Thus, we agree with the ruling of the SEC en banc as affirmed by the
Court of Appeals:
We likewise sustain respondent SEC when it ruled,
interpreting Section 74 of the Corporation Code, as
follows (Rollo, p. 45):
In the absence of (any) provision to the
contrary, the corporate secretary is the
custodian of corporate records. Corollarily,
he keeps the stock and transfer book and
makes proper and necessary entries
therein.
Contrary to the generally accepted
corporate practice, the stock and transfer
book of TORMIL was not kept by Ms.
Maria Cristina T. Carlos, the corporate
secretary but by respondent Torres, the
President and Chairman of the Board of
Directors of TORMIL. In contravention to
the above cited provision, the stock and
transfer book was not kept at the principal
office of the corporation either but at the
place of respondent Torres.
These being the obtaining circumstances,
any entries made in the stock and transfer
book on March 8, 1987 by respondent
Torres of an alleged transfer of nominal
shares to Pabalan and Co. cannot
therefore be given any valid effect. Where
the entries made are not valid, Pabalan
and Co. cannot therefore be considered
stockholders of record of TORMIL.
Because they are not stockholders, they
cannot therefore be elected as directors of
TORMIL. To rule otherwise would not only
encourage violation of clear mandate of
 Sec. 74 of the Corporation Code that Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents
stock and transfer book shall be kept in Sorianos
the principal office of the corporation but
would likewise open the flood gates of Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel
confusion in the corporation as to who has Corporation.
the proper custody of the stock and
transfer book and who are the real R. T Capulong for respondent Eduardo R. Visaya.
stockholders of records of a certain
corporation as any holder of the stock and
transfer book, though not the corporate
secretary, at pleasure would make entries
therein. ANTONIO, J.:

The fact that respondent Torres holds The instant petition for certiorari, mandamus and injunction, with prayer
81.28% of the outstanding capital stock of for issuance of writ of preliminary injunction, arose out of two cases filed
TORMIL is of no moment and is not a by petitioner with the Securities and Exchange Commission, as follows:
license for him to arrogate unto himself a
duty lodged to (sic) the corporate SEC CASE NO 1375
secretary. 26
On October 22, 1976, petitioner, as stockholder of respondent San
All corporations, big or small, must abide by the provisions of the Miguel Corporation, filed with the Securities and Exchange Commission
Corporation Code. Being a simple family corporation is not an exemption. (SEC) a petition for "declaration of nullity of amended by-laws,
Such corporations cannot have rules and practices other than those cancellation of certificate of filing of amended by- laws, injunction and
established by law. damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an
WHEREFORE, premises considered, the petition for review unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres
on certiorari is hereby DENIED. Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio
Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San
Miguel Corporation", was docketed as SEC Case No. 1375.
SO ORDERED.
As a first cause of action, petitioner alleged that on September 18, 1976,
G.R. No. L-45911 April 11, 1979
individual respondents amended by bylaws of the corporation, basing
their authority to do so on a resolution of the stockholders adopted on
JOHN GOKONGWEI, JR., petitioner, March 13, 1961, when the outstanding capital stock of respondent
vs. corporation was only P70,139.740.00, divided into 5,513,974 common
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. shares at P10.00 per share and 150,000 preferred shares at P100.00 per
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, share. At the time of the amendment, the outstanding and paid up shares
EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, totalled 30,127,047 with a total par value of P301,270,430.00. It was
ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO contended that according to section 22 of the Corporation Law and Article
TANJUATCO, SR., and EDUARDO R. VISAYA, respondents. VIII of the by-laws of the corporation, the power to amend, modify, repeal
or adopt new by-laws may be delegated to the Board of Directors only by
De Santos, Balgos & Perez for petitioner. the affirmative vote of stockholders representing not less than 2/3 of the
subscribed and paid up capital stock of the corporation, which 2/3 should
have been computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961 authorization,
petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in
1961 had already been exercised in 1962 and 1963, after which the
authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the
Board of Directors had changed since the authority was given in 1961,
there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership,
such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested
right as afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a
director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other
corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic
business; that the portion of the amended bylaws which states that in
determining whether or not a person is engaged in competitive business,
the Board may consider such factors as business and family relationship,
is unreasonable and oppressive and, therefore, void; and that the portion
of the amended by-laws which requires that "all nominations for election
of directors ... shall be submitted in writing to the Board of Directors at
least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and
void and the certificate of filing thereof be cancelled, and that individual
respondents be made to pay damages, in specified amounts, to
petitioner.
On October 28, 1976, in connection with the same case, petitioner filed
with the Securities and Exchange Commission an "Urgent Motion for
Production and Inspection of Documents", alleging that the Secretary of
respondent corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of
respondent corporation in San Miguel International, Inc.; and (e) lists of
salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was
opposed by respondents, alleging, among others that the motion has no
legal basis; that the demand is not based on good faith; that the motion is
premature since the materiality or relevance of the evidence sought
cannot be determined until the issues are joined, that it fails to show good
cause and constitutes continued harrasment, and that some of the
information sought are not part of the records of the corporation and,
therefore, privileged.
During the pendency of the motion for production, respondents San
Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto
filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken
by the Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend, modify,
repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to
petitioner's claim, "the vote requirement for a valid delegation of the
power to amend, repeal or adopt new by-laws is determined in relation to
the total subscribed capital stock at the time the delegation of said power
is made, not when the Board opts to exercise said delegated power"; that
petitioner has not availed of his intra-corporate remedy for the nullification
of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at
any regular or special meeting, as provided in Article VIII, section I of the
by-laws and section 22 of the Corporation law, hence the, petition is
premature; that petitioner is estopped from questioning the amendments
on the ground of lack of authority of the Board. since he failed, to object As counterclaims, actual damages, moral damages, exemplary damages,
to other amendments made on the basis of the same 1961 authorization: expenses of litigation and attorney's fees were presented against
that the power of the corporation to amend its by-laws is broad, subject petitioner.
only to the condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent Subsequently, a Joint Omnibus Motion for the striking out of the motion
corporation should not be precluded from adopting protective measures for production and inspection of documents was filed by all the
to minimize or eliminate situations where its directors might be tempted to respondents. This was duly opposed by petitioner. At this juncture,
put their personal interests over t I hat of the corporation; that the respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed
questioned amended by-laws is a matter of internal policy and the to intervene as oppositors and they accordingly filed their oppositions-
judgment of the board should not be interfered with: That the by-laws, as intervention to the petition.
amended, are valid and binding and are intended to prevent the
possibility of violation of criminal and civil laws prohibiting combinations in On December 29, 1976, the Securities and Exchange Commission
restraint of trade; and that the petition states no cause of action. It was, resolved the motion for production and inspection of documents by
therefore, prayed that the petition be dismissed and that petitioner be issuing Order No. 26, Series of 1977, stating, in part as follows:
ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various
Considering the evidence submitted before the
grounds.
Commission by the petitioner and respondents in the
above-entitled case, it is hereby ordered:
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their
opposition to the petition, denying the material averments thereof and
1. That respondents produce and permit the inspection,
stating, as part of their affirmative defenses, that in August 1972, the
copying and photographing, by or on behalf of the
Universal Robina Corporation (Robina), a corporation engaged in
petitioner-movant, John Gokongwei, Jr., of the minutes of
business competitive to that of respondent corporation, began acquiring
the stockholders' meeting of the respondent San Miguel
shares therein. until September 1976 when its total holding amounted to
Corporation held on March 13, 1961, which are in the
622,987 shares: that in October 1972, the Consolidated Foods
possession, custody and control of the said corporation, it
Corporation (CFC) likewise began acquiring shares in respondent
appearing that the same is material and relevant to the
(corporation. until its total holdings amounted to P543,959.00 in
issues involved in the main case. Accordingly, the
September 1976; that on January 12, 1976, petitioner, who is president
respondents should allow petitioner-movant entry in the
and controlling shareholder of Robina and CFC (both closed
principal office of the respondent Corporation, San Miguel
corporations) purchased 5,000 shares of stock of respondent corporation,
Corporation on January 14, 1977, at 9:30 o'clock in the
and thereafter, in behalf of himself, CFC and Robina, "conducted
morning for purposes of enforcing the rights herein
malevolent and malicious publicity campaign against SMC" to generate
granted; it being understood that the inspection, copying
support from the stockholder "in his effort to secure for himself and in
and photographing of the said documents shall be
representation of Robina and CFC interests, a seat in the Board of
undertaken under the direct and strict supervision of this
Directors of SMC", that in the stockholders' meeting of March 18, 1976,
Commission. Provided, however, that other documents
petitioner was rejected by the stockholders in his bid to secure a seat in
and/or papers not heretofore included are not covered by
the Board of Directors on the basic issue that petitioner was engaged in a
this Order and any inspection thereof shall require the
competitive business and his securing a seat would have subjected
prior permission of this Commission;
respondent corporation to grave disadvantages; that "petitioner
nevertheless vowed to secure a seat in the Board of Directors at the next
annual meeting; that thereafter the Board of Directors amended the by- 2. As to the Balance Sheet of San Miguel International,
laws as afore-stated. Inc. as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from
 San Miguel International, Inc. and/or its successors-in-
interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder
of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated
November 29, 1976, withdrawing his request to copy and
inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal
and amendments thereof for the reason that he had
already obtained the same, the Commission takes note
thereof; and
4. Finally, the Commission holds in abeyance the
resolution on the matter of production and inspection of
the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation
in San Miguel International, Inc., until after the hearing on
the merits of the principal issues in the above-entitled
case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be
heard, respondent corporation issued a notice of special stockholders'
meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977.
This prompted petitioner to ask respondent Commission for a summary
judgment insofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments
of September 18, 1976. The motion for summary judgment was opposed
by private respondents. Pending action on the motion, petitioner filed an
"Urgent Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioner's application for the
issuance of a preliminary injunction and/or petitioner's motion for
summary judgment, a temporary restraining order be issued, restraining
respondents from holding the special stockholder's meeting as
scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying
the motion for issuance of temporary restraining order. After receipt of the
order of denial, respondents conducted the special stockholders' meeting
wherein the amendments to the by-laws were ratified. On February 14,
1977, petitioner filed a consolidated motion for contempt and for
nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for
summary judgment was filed by petitioner before respondent Commission
on March 10, 1977. Petitioner alleges that up to the time of the filing of
the instant petition, the said motion had not yet been scheduled for
hearing. Likewise, the motion for reconsideration of the order granting in
part and denying in part petitioner's motion for production of record had
not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent
corporation had been scheduled for May 10, 1977, petitioner filed with
respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a candidate
for director unless he could submit evidence on May 3, 1977 that he does
not come within the disqualifications specified in the amendment to the
by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in
the case and to issue a writ of injunction, alleging that private
respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent Manifestation to
prod respondent Commission to act, petitioner was not heard prior to the
date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability
on the part of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations and
businesses outside of the primary purpose clause of the corporation, in
violation of section 17 1/2 of the Corporation Law, he filed with
respondent Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well
as the respondent corporation declared guilty of such violation, and
ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to declare
individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were
filed as early as February 4, 1977, the commission acted thereon only on
April 25, 1977, when it denied respondents' motion to dismiss and gave
them two (2) days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting,
including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of
Directors by the stockholders at the meeting on March 20,
1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose
for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the
SEC an urgent motion for the issuance of a writ of preliminary injunction
to restrain private respondents from taking up Item 6 of the Agenda at the
annual stockholders' meeting, requesting that the same be set for hearing
on May 3, 1977, the date set for the second hearing of the case on the
merits. Respondent Commission, however, cancelled the dates of
hearing originally scheduled and reset the same to May 16 and 17, 1977,
or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's
contention before this Court that respondent Commission gravely abused
its discretion when it failed to act with deliberate dispatch on the motions
of petitioner seeking to prevent illegal and/or arbitrary impositions or
limitations upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents
pending before it.
On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing petitioner
from running or from being voted as director of respondent corporation
and from submitting for ratification or confirmation or from causing the
ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the
amended by-laws of respondent corporation, until further orders from this
Court or until the Securities and Ex-change Commission acts on the
matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that
after a restraining order had been issued by this Court, or on May 9,
1977, the respondent Commission served upon petitioner copies of the
following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of the order of
the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to
declare respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but stating that
he should not sit as such if elected, until such time that the Commission
has decided the validity of the bylaws in dispute, and denying deferment
of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of respondent
Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that
respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of
petitioner's right to due process when it decided en banc an issue not
raised before it and still pending before one of its Commissioners, and
without hearing petitioner thereon despite petitioner's request to have the
same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained
of be declared null and void and that respondent Commission be ordered
to allow petitioner to undertake discovery proceedings relative to San
Miguel International. Inc. and thereafter to decide SEC Cases No. 1375
and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M.
Soriano filed their comment, alleging that the petition is without merit for
the following reasons:
(1) that the petitioner the interest he represents are engaged in business
competitive and antagonistic to that of respondent San Miguel
Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in
business directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in
SMC, the Board of Directors of SMC realized the clear and present
danger that competitors or antagonistic parties may be elected directors
and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own
private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that
the Constitution and pertinent laws against combinations in restraint of
trade;
(3) that by laws are valid and binding since a corporation has the inherent
right and duty to preserve and protect itself by excluding competitors and
antogonistic parties, under the law of self-preservation, and it should be
allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos.
1375 and 1423 was due to petitioner's own acts or omissions, since he
failed to have the petition to suspend, pendente lite the amended by-laws
calendared for hearing. It was emphasized that it was only on April 29,
1977 that petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The instant petition
being dated May 4, 1977, it is apparent that respondent Commission was
not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has
become moot and academic because respondent Commission has acted
on the pending incidents, complained of. It was, therefore, prayed that the
petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his
comment, alleging that the petition has become moot and academic for
the reason, among others that the acts of private respondent sought to be
enjoined have reference to the annual meeting of the stockholders of
respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director;
and that in the same meeting, Item 6 of the Agenda was discussed, voted
upon, ratified and confirmed. Further it was averred that the questions
and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and
no hearing on the merits has been had; hence the elevation of these
issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition
presents justiciable questions for the determination of this Court because
(1) the respondent Commission acted without circumspection, unfairly
and oppresively against petitioner, warranting the intervention of this
Court; (2) a derivative suit, such as the instant case, is not rendered
academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case
moot; that the amendment to the bylaws which specifically bars petitioner
from being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate
comment, alleging that after receiving a copy of the restraining order
issued by this Court and noting that the restraining order did not foreclose
action by it, the Commission en banc issued Orders Nos. 449, 450 and
451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that
Order No. 450 which denied deferment of Item 6 of the Agenda of the
annual stockholders' meeting of respondent corporation, took into
consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the
ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition
with prayer for preliminary injunction, alleging that the actuations of
respondent SEC tended to deprive him of his right to due process, and
"that all possible questions on the facts now pending before the
respondent Commission are now before this Honorable Court which has
the authority and the competence to act on them as it may see fit."
(Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for
resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the
Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion
in allowing discussion of Item 6 of the Agenda of the Annual
Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in
violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question
which public interest requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand the
case to respondent SEC for an appropriate ruling on the intrinsic validity
of the amended by-laws in compliance with the principle of exhaustion of
administrative remedies", considering that: first: "whether or not the
provisions of the amended by-laws are intrinsically valid ... is purely a
legal question. There is no factual dispute as to what the provisions are
and evidence is not necessary to determine whether such amended by-
laws are valid as framed and approved ... "; second: "it is for the interest
and guidance of the public that an immediate and final ruling on the
question be made ... "; third: "petitioner was denied due process by SEC"
when "Commissioner de Guzman had openly shown prejudice against
petitioner ... ", and "Commissioner Sulit ... approved the amended by-
laws ex-parte and obviously found the same intrinsically valid; and finally:
"to remand the case to SEC would only entail delay rather than serve the
ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray
that this Court resolve the legal issues raised by the parties in keeping
with the "cherished rules of procedure" that "a court should always strive
to settle the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To
the same effect is the prayer of San Miguel Corporation that this Court
resolve on the merits the validity of its amended by laws and the rights
and obligations of the parties thereunder, otherwise "the time spent and
effort exerted by the parties concerned and, more importantly, by this
Honorable Court, would have been for naught because the main question
will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case involving
intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always
strive to settle the entire controversy in a single proceeding, leaving nor
root or branch to bear the seeds of future litigation. 4 Thus, in Francisco
v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the
ends of justice would not be subserved by the remand of the case.
In Republic v. Security Credit and Acceptance Corporation, et al., 6 this
Court, finding that the main issue is one of law, resolved to decide the
case on the merits "because public interest demands an early disposition
of the case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party complaint to the
trial court for further proceedings, citing precedent where this Court, in
similar situations resolved to decide the cases on the merits, instead of
remanding them to the trial court where (a) the ends of justice would not
be subserved by the remand of the case; or (b) where public interest
demand an early disposition of the case; or (c) where the trial court had
already received all the evidence presented by both parties and the
Supreme Court is now in a position, based upon said evidence, to decide
the case on its merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved. 8a Because
uniformity may be secured through review by a single Supreme Court,
questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.:
that the amended by-laws were adopted by the Board of Directors of the
San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially for that
purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was
made by the San Miguel Corporation in 1948; and that in the
stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by
the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of Directors of SMC
are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a
question of law. 9 Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is
subject, however, to the limitation that where the reasonableness of a by-
law is a mere matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make
by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them
from having representation in the Board", at the same time depriving
petitioner of his "vested right" to be voted for and to vote for a person of
his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M.
Soriano and San Miguel Corporation content that ex. conclusion of a
competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and
undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the
promotion of the corporate enterprise; that access to confidential
information by a competitor may result either in the promotion of the
interest of the competitor at the expense of the San Miguel Corporation,
or the promotion of both the interests of petitioner and respondent San
Miguel Corporation, which may, therefore, result in a combination or
agreement in violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under
Philippine Law to be voted as director of a corporation. It is alleged that
petitioner, as of May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the following
shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr.
— 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c)
CFC Corporation — 658,313 shares, or a total of 1,403,285 shares.
Since the outstanding capital stock of San Miguel Corporation, as of the
present date, is represented by 33,139,749 shares with a par value of
P10.00, the total shares owned or controlled by petitioner represents
4.2344% of the total outstanding capital stock of San Miguel Corporation.
It is also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC Corporation, both
of which are allegedly controlled by petitioner and members of his family.
It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation, and of
corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of competition are
enumerated in its Board Resolution dated April 28, 1978, thus:
 Product Line Estimated Market Share Total owning 27,257.014 shares, or more than 90% of the outstanding shares,
1977 SMC Robina-CFC rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual
Table Eggs 0.6% 10.0% 10.6% Stockholders' Meeting, 12,480 shareholders, owning more than 30 million
Layer Pullets 33.0% 24.0% 57.0% shares, or more than 90% of the total outstanding shares. voted against
Dressed Chicken 35.0% 14.0% 49.0% petitioner.
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0% AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
Instant Coffee 45.0% 40.0% 85.0% OF DIRECTORS EXPRESSLY CONFERRED BY LAW
Woven Fabrics 17.5% 9.1% 26.6%
Private respondents contend that the disputed amended by laws were
Thus, according to respondent SMC, in 1976, the areas of competition adopted by the Board of Directors of San Miguel Corporation a-, a
affecting SMC involved product sales of over P400 million or more than measure of self-defense to protect the corporation from the clear and
20% of the P2 billion total product sales of SMC. Significantly, the present danger that the election of a business competitor to the Board
combined market shares of SMC and CFC-Robina in layer pullets may cause upon the corporation and the other stockholders inseparable
dressed chicken, poultry and hog feeds ice cream, instant coffee and prejudice. Submitted for resolution, therefore, is the issue — whether or
woven fabrics would result in a position of such dominance as to affect not respondent San Miguel Corporation could, as a measure of self-
the prevailing market factors. protection, disqualify a competitor from nomination and election to its
Board of Directors.
It is further asserted that in 1977, the CFC-Robina group was in direct
competition on product lines which, for SMC, represented sales It is recognized by an authorities that 'every corporation has the inherent
amounting to more than ?478 million. In addition, CFC-Robina was power to adopt by-laws 'for its internal government, and to regulate the
directly competing in the sale of coffee with Filipro, a subsidiary of SMC, conduct and prescribe the rights and duties of its members towards itself
which product line represented sales for SMC amounting to more than and among themselves in reference to the management of its
P275 million. The CFC-Robina group (Robitex, excluding Litton Mills affairs. 12 At common law, the rule was "that the power to make and adopt
recently acquired by petitioner) is purportedly also in direct competition by-laws was inherent in every corporation as one of its necessary and
with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting inseparable legal incidents. And it is settled throughout the United States
to more than P95 million. The areas of competition between SMC and that in the absence of positive legislative provisions limiting it, every
CFC-Robina in 1977 represented, therefore, for SMC, product sales of private corporation has this inherent power as one of its necessary and
more than P849 million. inseparable legal incidents, independent of any specific enabling
provision in its charter or in general law, such power of self-government
According to private respondents, at the Annual Stockholders' Meeting of being essential to enable the corporation to accomplish the purposes of
March 18, 1976, 9,894 stockholders, in person or by proxy, owning its creation. 13
23,436,754 shares in SMC, or more than 90% of the total outstanding
shares of SMC, rejected petitioner's candidacy for the Board of Directors In this jurisdiction, under section 21 of the Corporation Law, a corporation
because they "realized the grave dangers to the corporation in the event may prescribe in its by-laws "the qualifications, duties and compensation
a competitor gets a board seat in SMC." On September 18, 1978, the of directors, officers and employees ... " This must necessarily refer to a
Board of Directors of SMC, by "virtue of powers delegated to it by the qualification in addition to that specified by section 30 of the Corporation
stockholders," approved the amendment to ' he by-laws in question. At Law, which provides that "every director must own in his right at least one
the meeting of February 10, 1977, these amendments were confirmed share of the capital stock of the stock corporation of which he is a director
and ratified by 5,716 shareholders owning 24,283,945 shares, or more ... " In Government v. El Hogar, 14 the Court sustained the validity of a
than 80% of the total outstanding shares. Only 12 shareholders, provision in the corporate by-law requiring that persons elected to the
representing 7,005 shares, opposed the confirmation and ratification. At Board of Directors must be holders of shares of the paid up value of
the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and
is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge
that its affairs are dominated by a majority of the stockholders and
that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he has invested
in the capital stock of the corporation, and surrendered it to the will of the
majority of his fellow incorporators. ... It cannot therefore be justly said
that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized
by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting minority
has only one right, viz.: "to object thereto in writing and demand payment
for his share." Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or repeal any by-law
or adopt new by-laws. It cannot be said, therefore, that petitioner has a
vested right to be elected director, in the face of the fact that the law at
the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered is
whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." 18 "The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v. Miller, 19 "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard
of fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in
trust. ... He who is in such fiduciary position cannot serve
himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment
and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters ... He cannot
utilize his inside information and strategic position for his
own preferment. He cannot violate rules of fair play by
doing indirectly through the corporation what he could not
do so directly. He cannot violate rules of fair play by doing
indirectly though the corporation what he could not do so
directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may
be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary
to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master,
without detriment to one of them. A judge cannot be
impartial if personally interested in the cause. No more
can a director. Human nature is too weak -for this. Take
whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find
 any express prohibition against a discretion to select
directors having the company's interest at heart, and it
would simply be going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a
competing company from being a director, the same reasoning would
apply to disqualify the wife and immediate member of the family of such
stockholder, on account of the supposed interest of the wife in her
husband's affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and
unreasonable the action of the board in passing the by-law. The strife
over the matter of control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and affection. The
only test that we can apply is as to whether or not the action of the Board
is authorized and sanctioned by law. ... . 22
23
These principles have been applied by this Court in previous cases.
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE
BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN
COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS
BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24 This is based upon the
principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such
an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and
therefore the corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation
Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a
corporation cannot engage in a business in direct competition with that of
the corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which
cripples or injures the business of the corporation of which he is an officer
or director. 26
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private interests." 27 In
a case where directors of a corporation cancelled a contract of the
corporation for exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the
court held that equity would regard the new contract as an offshoot of the
old contract and, therefore, for the benefit of the corporation, as a
"faultless fiduciary may not reap the fruits of his misconduct to the
exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an opportunity
for his own personal profit when the interest of the corporation justly calls
for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information,
such as: (a) marketing strategies and pricing structure; (b) budget for
expansion and diversification; (c) research and development; and (d)
sources of funding, availability of personnel, proposals of mergers or tie-
ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which he
acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the
court sustained as valid and reasonable an amendment to the by-laws of
a bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of
information concerning the business and plans of a bank
which would likely be injurious to the bank if known to
another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of
any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and others
who might acquire information which might be used
against the interests of the corporation as a legitimate
object of by-law protection. With respect to attorneys or
persons associated with a firm which is attorney for
another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse
and leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the
courts, as follows:
(1) A director shall not be directly or indirectly interested
as a stockholder in any other firm, company, or
association which competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
(5) No person who is an attorney against the corporation
in a law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience
— that a person cannot serve two hostile masters without detriment to
one of them.
The offer and assurance of petitioner that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which confidential
matters would be discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent
with petitioner's primary motive in running for board membership — which
is to protect his investments in San Miguel Corporation. More important,
such a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the corporation, for the
policy of the law is to encourage and enforce responsible corporate
management. As explained by Oleck: 31 "The law win not tolerate the
passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it
is their duty to control and supervise the day to day business activities of
the company or to promulgate definite policies and rules of guidance with
a vigilant eye toward seeing to it that these policies are carried out. It is
only then that directors may be said to have fulfilled their duty of fealty to
the corporation."
Sound principles of corporate management counsel against sharing
sensitive information with a director whose fiduciary duty of loyalty may
well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director
such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director
has an economic incentive to appropriate for the benefit of his own
corporation the corporate plans and policies of the corporation where he
sits as director.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation would
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for
the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his
advantage. 32
There is another important consideration in determining whether or not
the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus,
section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall
be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of
trade. —The penalty of prision correccional in its minimum
period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or
agreement or shall take part in any conspiracy or
combination in the form of a trust or otherwise, in restraint
of trade or commerce or to prevent by artificial means free
competition in the market.
2. Any person who shag monopolize any merchandise or
object of trade or commerce, or shall combine with any
other person or persons to monopolize said merchandise
or object in order to alter the price thereof by spreading
false rumors or making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer, producer, or
processor of any merchandise or object of commerce or
an importer of any merchandise or object of commerce
from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in
any manner with any person likewise engaged in the
manufacture, production, processing, assembling or
importation of such merchandise or object of commerce
or with any other persons not so similarly engaged for the
purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part of
the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any
article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object
of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies
and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final arbiter
in free markets. These laws are designed to preserve free and unfettered
competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation
of our economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of
trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by
unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other jurisdictions.
A "monopoly" embraces any combination the tendency of which is to
prevent competition in the broad and general sense, or to control prices
to the detriment of the public. 37 In short, it is the concentration of
business in the hands of a few. The material consideration in determining
its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition
when desired. 38 Further, it must be considered that the Idea of monopoly
is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or
the suppression of competition by the qualification of interest or
management, or it may be thru agreement and concert of action. It is, in
brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of
petitioner are not in accord with reality. The election of petitioner to the
Board of respondent Corporation can bring about an illegal situation. This
is because an express agreement is not necessary for the existence of a
combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to
the arrangements, 41 and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act
prohibits a person from serving at the same time as a director in any two
or more corporations, if such corporations are, by virtue of their business
and location of operation, competitors so that the elimination of
competition between them would constitute violation of any provision of
the anti-trust laws. 42 There is here a statutory recognition of the anti-
competitive dangers which may arise when an individual simultaneously
acts as a director of two or more competing corporations. A common
director of two or more competing corporations would have access to
confidential sales, pricing and marketing information and would be in a
position to coordinate policies or to aid one corporation at the expense of
another, thereby stifling competition. This situation has been aptly
explained by Travers, thus:
The argument for prohibiting competing corporations from
sharing even one director is that the interlock permits the
coordination of policies between nominally independent
firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example,
is to be faithful to both corporations, some
accommodation must result. Suppose X is a director of
both Corporation A and Corporation B. X could hardly
vote for a policy by A that would injure B without violating
his duty of loyalty to B at the same time he could hardly
abstain from voting without depriving A of his best
judgment. If the firms really do compete — in the sense of
vying for economic advantage at the expense of the other
— there can hardly be any reason for an interlock
between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S.
Congress on section 9 of the Clayton Act, it was established that: "By
means of the interlocking directorates one man or group of men have
been able to dominate and control a great number of corporations ... to
the detriment of the small ones dependent upon them and to the injury of
the public. 44
Shared information on cost accounting may lead to price fixing. Certainly,
shared information on production, orders, shipments, capacity and
inventories may lead to control of production for the purpose of controlling
prices.
Obviously, if a competitor has access to the pricing policy and cost
conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest priced
goods to the consuming public would be frustrated, The competitor could
so manipulate the prices of his products or vary its marketing strategies
by region or by brand in order to get the most out of the consumers.
Where the two competing firms control a substantial segment of the
market this could lead to collusion and combination in restraint of trade.
Reason and experience point to the inevitable conclusion that the
inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing
interests, and thus eliminate competition. As respondent SMC aptly
observes, knowledge by CFC-Robina of SMC's costs in various industries
and regions in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and change varying
prices in order to maximize profits from every market segment. CFC-
Robina could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC. Access to
SMC pricing policy by CFC-Robina would in effect destroy free
competition and deprive the consuming public of opportunity to buy
goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or attempting to
bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case
of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible
to run for director, there must be hearing and evidence must be submitted
to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a by-
law which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to
protect legitimate corporation interests. Thus, "where the reasonableness
of a by-law is a mere matter of judgment, and upon which reasonable
minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present
Board powers to perpetua themselves in power such fears appear to be
misplaced. This power, but is very nature, is subject to certain well
established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an independent
endeavor of two or more persons to obtain the business patronage of a
third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not
whether it is capable of an indirect and highly unsubstantial duplication of
an isolated or non-characteristics activity. 47 It is, therefore, obvious that
not every person or entity engaged in business of the same kind is a
competitor. Such factors as quantum and place of business, Identity of
products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to the extent
of not less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it
does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there
must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the responsibility
of directors to act with fairness to the stockholders. 48 Pursuant to this
obligation and to remove any suspicion that this power may be utilized by
the incumbent members of the Board to perpetuate themselves in power,
any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless reversed by
this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by
statute, or is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power
to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International Inc., a fully owned subsidiary of San Miguel Corporation —
Respondent San Miguel Corporation stated in its memorandum that
petitioner's claim that he was denied inspection rights as stockholder of
SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for
use at the annual stockholders' meeting of May 18, 1975; (3) a copy of
the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated companies
and other companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or remunerations
received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of
the minutes of all meetings of the Board of Directors from January 1975
to May 1976, with deletions of sensitive data, which deletions were not
objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in
writing on September 18, 1976; (1) that SMC's foreign investments are
handled by San Miguel International, Inc., incorporated in Bermuda and
wholly owned by SMC; this was SMC's first venture abroad, having
started in 1948 with an initial outlay of ?500,000.00, augmented by a loan
of Hongkong $6 million from a foreign bank under the personal guaranty
of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost
P400 million (3) that the total cash dividends received by SMC from SMI
since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings having been
used in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate
Secretary, enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law,
"(t)he record of all business transactions of the corporation and minutes
of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation. 53 In other words, the
inspection has to be germane to the petitioner's interest as a stockholder,
and has to be proper and lawful in character and not inimical to the
interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held
that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity,
or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears
to be, that on application for mandamus to enforce the right, it is proper
for the court to inquire into and consider the stockholder's good faith and
his purpose and motives in seeking inspection. 56 Thus, it was held that
"the right given by statute is not absolute and may be refused when the
information is not sought in good faith or is used to the detriment of the
corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to
take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing
impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the
corporation and the manner of expenditure of its funds, and to inspection
to obtain such information, especially where it appears that the company
is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of
others." 59
While the right of a stockholder to examine the books and records of a
corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different
thing.
Some state courts recognize the right under certain conditions, while
others do not. Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the corporations
may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all
incontents and purposes, the records of the parent even though
subsidiary was not named as a party. 61 mandamus was likewise held
proper to inspect both the subsidiary's and the parent corporation's books
upon proof of sufficient control or dominion by the parent showing the
relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused
where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63 Likewise,
inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of
the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control in
its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used the
same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had
been attempting to suppress information for the stockholders" and that
petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent
corporation is very reluctant in revealing to the petitioner notwithstanding
the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to
inspect the books and records of a corporation in order to investigate the
conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the
officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned
by respondent San Miguel Corporation and, therefore, under its control, it
would be more in accord with equity, good faith and fair dealing to
construe the statutory right of petitioner as stockholder to inspect the
books and records of the corporation as extending to books and records
of such wholly subsidiary which are in respondent corporation's
possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing
the stockholders of respondent corporation to ratify the investment of
corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI without prior
authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing
ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should not
be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its
funds in any other corporation or business or for any purpose other than
the main purpose for which it was organized" provided that its Board of
Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the corporate purpose,
it does not need the approval of the stockholders. It is only when the
purchase of shares is done solely for investment and not to accomplish
the purpose of its incorporation that the vote of approval of the
stockholders holding shares entitling them to exercise at least two-thirds
of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its
main purpose in its Articles of Incorporation, which is to manufacture and
market beer. It appears that the original investment was made in 1947-
1948, when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of
the investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar
Central Co., Inc., supra, appears relevant. In said case, one of the issues
was the legality of an investment made by Manao Sugar Central Co.,
Inc., without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower court
said that "there is more logic in the stand that if the investment is made in
a corporation whose business is important to the investing corporation
and would aid it in its purpose, to require authority of the stockholders
would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof.
Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. —
A private corporation, in order to accomplish is purpose
as stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the
power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of
stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case,
the purchase of such shares or securities must be subject
to the limitations established by the Corporations law;
namely, (a) that no agricultural or mining corporation shall
be restricted to own not more than 15% of the voting
 stock of nay agricultural or mining corporation; and (c)
that such holdings shall be solely for investment and not
for the purpose of bringing about a monopoly in any line
of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967
Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. — A private
corporation has the power to invest its corporate funds "in
any other corporation or business, or for any purpose
other than the main purpose for which it was organized,
provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that
purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any
other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the
approval of the stockholders is not necessary."" (Id., p.
108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority
to make the assailed investment, there is no question that a corporation,
like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. 70 This is true
because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which
is within the corporate powers, but which is defective from a supported
failure to observe in its execution the. requirement of the law that the
investment must be authorized by the affirmative vote of the stockholders
holding two-thirds of the voting power. This requirement is for the benefit
of the stockholders. The stockholders for whose benefit the requirement
was enacted may, therefore, ratify the investment and its ratification by
said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those
which are not illegal and void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate purpose.
The mere fact that respondent corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting of
May 10, 1977 cannot be construed as an admission that respondent
corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San
Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar,
Antonio, Santos, Abad Santos and De Castro, voted to sustain the
validity per se of the amended by-laws in question and to dismiss the
petition without prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and
proper hearing by the Board of Directors of said corporation, whose
decision shall be appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to this Court.
Unless disqualified in the manner herein provided, the prohibition in the
afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando,
voted to declare the issue on the validity of the foreign investment of
respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability of
section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment
to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they voted
against the validity of the questioned amended bylaws and that this
question should properly be resolved first by the SEC as the agency of
primary jurisdiction. They concur in the result that petitioner may be
allowed to run for and sit as director of respondent SMC in the scheduled
May 6, 1979 election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and petitioner's
disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the
books and records of San Miguel International, Inc. as specified in the
petition. The petition, insofar as it assails the validity of the amended by-
laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
G.R. No. L-22442 August 1, 1924
ANTONIO PARDO, Petitioner, vs. THE HERCULES LUMBER
CO., INC., and IGNACIO FERRER, Respondents.
W.J. O'Donovan and M.H. de Joya for petitioner.
Sumulong and Lavides and Ross, Lawrence and Selph for
respondents.
STREET, J.:
The petitioner, Antonio Pardo, a stockholder in the Hercules
Lumber Company, Inc., one of the respondents herein, seeks by
this original proceeding in the Supreme Court to obtain a writ
of mandamus to compel the respondents to permit the plaintiff
and his duly authorized agent and representative to examine
the records and business transactions of said company. To this
petition the respondents interposed an answer, in which, after
admitting certain allegations of the petition, the respondents set
forth the facts upon which they mainly rely as a defense to the
petition. To this answer the petitioner in turn interposed a
demurrer, and the cause is now before us for determination of
the issue thus presented.chanroblesvirtualawlibrary chanrobles
virtual law library
It is inferentially, if not directly admitted that the petitioner is in
fact a stockholder in the Hercules Lumber Company, Inc., and
that the respondent, Ignacio Ferrer, as acting secretary of the
said company, has refused to permit the petitioner or his agent
to inspect the records and business transactions of the said
Hercules Lumber Company, Inc., at times desired by the
petitioner. No serious question is of course made as to the right
of the petitioner, by himself or proper representative, to
exercise the right of inspection conferred by section 51 of Act
No. 1459. Said provision was under the consideration of this
court in the case of Philpotts vs. Philippine Manufacturing Co.,
and Berry (40 Phil., 471), where we held that the right of
examination there conceded to the stockholder may be
exercised either by a stockholder in person or by any duly
authorized agent or
representative.chanroblesvirtualawlibrary chanrobles virtual law
library
The main ground upon which the defense appears to be rested
has reference to the time, or times, within which the right of
inspection may be exercised. In this connection the answer
asserts that in article 10 of the By-laws of the respondent
corporation it is declared that "Every shareholder may examine
the books of the company and other documents pertaining to
the same upon the days which the board of directors shall
annually fix." It is further averred that at the directors' meeting
of the respondent corporation held on February 16, 1924, the
board passed a resolution to the following effect:chanrobles
virtual law library
The board also resolved to call the usual general (meeting of
shareholders) for March 30 of the present year, with notice to
the shareholders that the books of the company are at their
disposition from the 15th to 25th of the same month for
examination, in appropriate hours.
The contention for the respondent is that this resolution of the
board constitutes a lawful restriction on the right conferred by
statute; and it is insisted that as the petitioner has not availed
himself of the permission to inspect the books and transactions
of the company within the ten days thus defined, his right to
inspection and examination is lost, at least for this year.
We are entirely unable to concur in this contention. The general
right given by the statute may not be lawfully abridged to the
extent attempted in this resolution. It may be admitted that the
officials in charge of a corporation may deny inspection when
sought at unusual hours or under other improper conditions;
but neither the executive officers nor the board of directors
have the power to deprive a stockholder of the right altogether.
A by-law unduly restricting the right of inspection is
undoubtedly invalid. Authorities to this effect are too numerous
and direct to require extended comment. (14 C.J., 859; 7
R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517;
Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664.
681.) Under a statute similar to our own it has been held that
the statutory right of inspection is not affected by the adoption
by the board of directors of a resolution providing for the
closing of transfer books thirty days before an election.
(State vs. St. Louis Railroad Co., 29 Mo., Ap., 301.)chanrobles
virtual law library
It will be noted that our statute declares that the right of
inspection can be exercised "at reasonable hours." This means
at reasonable hours on business days throughout the year, and
not merely during some arbitrary period of a few days chosen
by the directors.chanroblesvirtualawlibrary chanrobles virtual
law library
In addition to relying upon the by-law, to which reference is
above made, the answer of the respondents calls in question
the motive which is supposed to prompt the petitioner to make
inspection; and in this connection it is alleged that the
information which the petitioner seeks is desired for ulterior
purposes in connection with a competitive firm with which the
petitioner is alleged to be connected. It is also insisted that one
of the purposes of the petitioner is to obtain evidence
preparatory to the institution of an action which he means to
bring against the corporation by reason of a contract of
employment which once existed between the corporation and
himself. These suggestions are entirely apart from the issue, as,
generally speaking, the motive of the shareholder exercising the
right is immaterial. (7 R.C.L., 327.)chanrobles virtual law library
We are of the opinion that, upon the allegations of the petition
and the admissions of the answer, the petitioner is entitled to
relief. The demurrer is, therefore, sustained; and the writ
of mandamus will issue as prayed, with the costs against the
respondent. So ordered.
Johnson, Malcolm, Villamor, Ostrand, and Romualdez, JJ.,
concur.
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First
Instance of Manila a special civil action for mandamus against the herein
respondent praying that the latter be ordered to allow him to look into the
books and records of the respondent bank in order to satisfy himself as to
the truth of the published reports that the respondent has guaranteed the
obligation of Southern Negros Development Corporation in the purchase
of a US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21
million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and
the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines,
Inc., as well as to inquire into the validity of Id transactions. The petitioner
has alleged hat his written request for such examination was denied by
the respondent. The trial court having dismissed the petition for
mandamus, the instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by
the trial court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the
stipulation of the parties served as the backdrop of this
proceeding.
Previous to the present action, the petitioner instituted
several cases in this Court questioning different
transactions entered into by the Bark with other parties.
First among them is Civil Case No. 69345 filed on April
27, 1967, by petitioner as a taxpayer versus Sec. Antonio
Raquiza of Public Works and Communications, the
Commissioner of Public Highways, the Bank, Continental
Ore Phil., Inc., Continental Ore, Huber Corporation, Allis
Chalmers and General Motors Corporation In the course
of the hearing of said case on August 3, 1967, the
personality of herein petitioner to sue the bank and
question the letters of credit it has extended for the
importation by the Republic of the Philippines of public
works equipment intended for the massive development
program of the President was raised. In view thereof, he
expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was
transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one
share of stock of the Bank, petitioner, in his dual capacity
as a taxpayer and stockholder, filed the following cases
involving the bank or the members of its Board of
Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the
Board of Directors of the Bank; the National Investment
and Development Corp., Marubeni Iida Co., Ltd., and
Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus
Roberto Benedicto and other Directors of the Bank, Passi
(Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill
Integrated Farming, Inc., Talog sugar Milling Co., Inc.,
Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo
Montelibano and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a
letter to the President of the Bank (Annex A, Pet.),
requesting submission to look into the records of its
transactions covering the purchase of a sugar central by
the Southern Negros Development Corp. to be financed
by Japanese suppliers and financiers; its financing of the
Cebu-Mactan Bridge to be constructed by V.C. Ponce,
Inc. and the construction of the Passi Sugar Mills in Iloilo.
On January 23, 1969, the Asst. Vice-President and Legal
Counsel of the Bank answered petitioner's letter denying
his request for being not germane to his interest as a one-
share stockholder and for the cloud of doubt as to his real
intention and purpose in acquiring said share. (Annex B,
Pet.) In view of the Bank's refusal the petitioner instituted
this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial
court in its brief which he characterized as having been "correctly stated."
(Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to
examine and inspect the books and records of the respondent bank
regarding the transactions mentioned on the grounds that the right of a
stockholder to inspect the record of the business transactions of a
corporation granted under Section 51 of the former Corporation Law (Act
No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for in
good faith for a specific and honest purpose and not gratify curiosity or for
speculative or vicious purposes; that such examination would violate the
confidentiality of the records of the respondent bank as provided in
Section 16 of its charter, Republic Act No. 1300, as amended; and that
the petitioner has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned
the single error to the lower court of having ruled that his alleged
improper motive in asking for an examination of the books and records of
the respondent bank disqualifies him to exercise the right of a stockholder
to such inspection under Section 51 of Act No. 1459, as amended. Said
provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the
corporation and the minutes of any meeting shall be open
to the inspection of any director, member or stockholder
of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate
records may be denied on the ground that it is intended for an improper
motive or purpose, the law having granted such right to a stockholder in
clear and unconditional terms. He further argues that, assuming that a
proper motive or purpose for the desired examination is necessary for its
exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act
No. 1459, as amended, regarding the right of a stockholder to inspect
and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by
Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of
the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act
No. 1459 has been retained, but with some modifications. The second
and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide
the following:
The records of all business transactions of the corporation
and the minutes of any meeting shag be open to
inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days
and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to
allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder
or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of directors
or trustees, the liability under this section for such action
shall be imposed upon the directors or trustees who voted
for such refusal; and Provided, further, That it shall be a
defense to any action under this section that the person
demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used
any information secured through any prior examination of
the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted
to a stockholder are the following the records must be kept at the
principal office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the excerpts of the
records or minutes; and the refusal to allow such inspection shall subject
the erring officer or agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new Code
has prescribed limitations to the same. It is now expressly required as a
condition for such examination that the one requesting it must not have
been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must be
"acting in good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained
in Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
granted to him under Section 51 of the former Corporation Law should
not be dependent on the propriety of his motive or purpose in asking for
the inspection of the books of the respondent bank loses whatever
validity it might have had before the amendment of the law. If there is any
doubt in the correctness of the ruling of the trial court that the right of
inspection granted under Section 51 of the old Corporation Law must be
dependent on a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language of the
pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in
seeking the inspection of the books of the respondent bank, he has not
set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of
inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which
he can use against the respondent bank for acts done by the latter when
the petitioner was a total stranger to the same. He could have been
impelled by a laudable sense of civic consciousness, but it could not be
said that his purpose is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and
Examination of the Central Bank. — The National Bank
shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent
of Banks and the Auditor General, or other officers
designated by law to inspect or investigate the condition
of the National Bank, shall not reveal to any person other
than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any
information relative to the funds in its custody, its current
accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a
Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this
Act.— Any director, officer, employee, or agent of the
Bank, who violates or permits the violation of any of the
provisions of this Act, or any person aiding or abetting the
violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or
by imprisonment of not more than five years, or both such
fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a
charter of its own, it is not governed, as a rule, by the Corporation Code
of the Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters.
— Corporations created by special laws or charters shall
be governed primarily by the provisions of the special law
or charter creating them or applicable to them.
supplemented by the provisions of this Code, insofar as
they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to demand an
inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
[G.R. No. 37064. October 4, 1932.]
EUGENIO VERAGUTH, Director and Stockholder of the
Isabela Sugar Company, Inc., Petitioner, v. ISABELA
SUGAR COMPANY, INC., GIL MONTILLA, Acting President,
and AGUSTIN B. MONTILLA, Secretary of the same
corporation, Respondents.
Jose B. Gamboa for Petitioner.
Agustin P. Seva for Respondents.
SYLLABUS
1. SPECIAL PROCEEDINGS; MANDAMUS; COGNIZANCE OF
SPECIAL PROCEEDINGS BY SUPREME COURT OF FIRST
INSTANCE — Where the Supreme Court has concurrent
jurisdiction with Courts of First Instance of special proceedings,
except for sufficient reasons being shown, the action will be left
for determination by the Court of First Instance. This practice is
especially to be commended where questions of fact are
involved, since the Court of First Instance is better equipped for
the taking of testimony and the resolution of questions of fact
than is the appellate court.
2. CORPORATIONS; CORPORATION LAW, SECTION 51 APPLIED
AND CONSTRUED; RIGHT OF INSPECTION OF THE BOOKS AND
MINUTES OF A CORPORATION; MANDAMUS. — Directors of a
corporation have the unqualified right to inspect the books and
records of the corporation at all reasonable times.
3. ID.; ID.; ID.; ID. — Pretexts may not be put forward by the
officers of a corporation to keep a director or shareholder from
inspecting the books and minutes of the corporation, and the
right of inspection is not to be denied on the ground that the
director or shareholder is on unfriendly terms with the officers
of the corporation whose records are sought to be inspected.
4. ID.; ID.; ID.; ID. — A director or shareholder can make
copies, abstracts, and memoranda of documents, books, and
papers as an incident to the right of inspection, but cannot,
without an order of a court, be permitted to take books from
the office of the corporation.
5. ID.; ID.; ID.; ID. — A director or stockholder has no absolute
right to secure certified copies of the minutes of a corporation
until these minutes have been written up and approved by the
directors.
6. ID.; ID.; ID.; ID. — On the facts and the law, it is ruled that
the petitioner has not made out a case for relief by mandamus.
DECISION
MALCOLM, J.:
The parties to this action are Eugenio Veraguth, a director and
stockholder of the Isabela Sugar Company, Inc., who is the
petitioner, and the Isabela Sugar Company, Inc., Gil Montilla,
acting president of the company, and Agustin B. Montilla,
secretary of the company, who are the respondents. The
petitioner prays: (a) That the respondents be required within
five days from receipt of notice of this petition to show cause
why they refuse to notify the petitioner, as director, of the
regular and special meetings of the board of directors, and to
place at his disposal at reasonable hours, the minutes,
documents, and books of the aforesaid corporation, for his
inspection as director and stockholder, and to issue, upon
payment of the fees, certified copies of any documentation in
connection with said minutes, documents, and books of the
corporation; and (b) that, in view of the memoranda and
hearing of the parties, a final and absolute writ of mandamus be
issued to each and all of the respondents to notify immediately
the petitioner within the reglementary period, of all regular and
special meetings of the board of directors of the Isabela Sugar
Central Company, Inc., and to place at his disposal at
reasonable hours the minutes, documents, and books of said
corporation for his inspection as director and stockholder, and
to issue immediately, upon payment of the fees, certified copies
of any documentation in connection with said minutes,
documents, and books of the aforesaid corporation. To the
petition an answer has been interposed by the respondents, too
long to be here summarized, which raised questions of fact and
law. Following the taking of considerable testimony before the
clerk as commissioner, the case has been submitted on
memoranda.
It should first be observed that when the case was filed here, it
was, in accordance with settled practice, dismissed without
prejudice to the right of the petitioner to present the action
before the Court of First Instance of Occidental Negros.
Thereafter, on a motion of reconsideration being presented, this
order was set aside and the case was permitted to continue in
this court. On further reflection, we now feel that this was error,
and that it would have been the correct practice to have
required the petitioner to present the action in a Court of First
Instance which is better equipped for the taking of testimony
and the resolution of questions of fact than is the appellate
court. Only with considerable difficulty, therefore, can we decide
the issues of fact, since none of the members of the court saw
or heard the witnesses testify.
Speaking to the first point with which the petition is concerned,
relating to the alleged failure of the secretary of the company to
notify the petitioner in due time of a special meeting of the
company, we find the by-laws, together with a resolution of the
board of directors, providing for the holding of ordinary and
special meetings. Whether there was a malicious attempt to
keep Director Veraguth from attending a special meeting of the
board of directors at which the compensation of the attorneys of
the company was fixed, or whether Director Veraguth, in a spirit
of antagonism, has made this merely a pretext to cause trouble,
we are unable definitely to say. This much, however, can
appropriately be stated and is decisive, and this is that the
meeting in question is in the past and, therefore, now merely
presents an academic question; that no damage was caused to
Veraguth by the action taken at the special meeting which he
did not attend, since his interests were fully protected by the
Philippine National Bank; and that as to meetings in the future
it is to be presumed that the secretary of the company will fulfill
the requirements of the resolutions of the company pertaining
to regular and special meetings. It will, of course, be incumbent
upon Veraguth to give formal notice to the secretary of his post-
office address if he desires notice sent to a particular residence.
On the second question pertaining to the right of inspection of
the books of the company, we find Director Veraguth
telegraphing the secretary of the company, asking the latter to
forward in the shortest possible time a certified copy of the
resolution of the board of directors concerning the payment of
attorney’s fees in the case against the Isabela Sugar Company
and others. To this the secretary made answer by letter stating
that, since the minutes of the meeting in question had not been
signed by the directors present, a certified copy could not be
furnished, and that as to other proceedings of the stockholders
a request should be made to the president of the Isabela Sugar
Company, Inc. It further appears that the board of directors
adopted a resolution providing for inspection of the books and
the taking of copies "by authority of the President of the
corporation previously obtained in each case."cralaw virtua1aw
library
The Corporation Law, section 51, provides
that:jgc:chanrobles.com.ph
"All business corporations shall keep and carefully preserve a
record of all business transactions, and a minute of all meetings
of directors, members, or stockholders, in which shall be set
forth in detain the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular
or special, if special its object, those present and absent, and
every act done or ordered done at the meeting. . . .
"The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of
any director, member, or stockholder of the corporation at
reasonable hours."cralaw virtua1aw library
The above puts in statutory form the general principles of
Corporation Law. Directors of a corporation have the unqualified
right to inspect the books and records of the corporation at all
reasonable times. Pretexts may not be put forward by officers of
corporations to keep a director or shareholder from inspecting
the books and minutes of the corporation, and the right of
inspection is not to be denied on the ground that the director or
shareholder is on unfriendly terms with the officers of the
corporation whose records are sought to be inspected. A
director or stockholder can of course make copies, abstracts,
and memoranda of documents, books, and papers as an
incident to the right of inspection, but cannot, without an order
of a court, be permitted to take books from the office of the
corporation. We do not conceive, however, that a director or
stockholder has any absolute right to secure certified copies of
the minutes of the corporation until these minutes have been
written up and approved by the directors. (See Fisher’s
Philippine Law of Stock Corporations, sec. 153, and Flecher
Cyclopedia Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything
improper occurred when the secretary declined of furnish
certified copies of minutes which had not been approved by the
board of directors, and that while so much of the last resolution
of the board of directors as provides for the prior approval of
the president of the corporation before the books of the
corporation can be inspected puts an illegal obstacle in the way
of a stockholder or director, that resolution, so far as we are
aware, has not been enforced to the detriment of anyone. In
addition, it should be said that this is a family dispute, the
petitioner and the individual respondents belonging to the same
family; that a test case between the petitioner and the
respondents has been begun in the Court of First Instance of
Occidental Negros involving hundreds of thousands of pesos,
and that the appellate court should not intrude its views to give
an advantage to either party. We rule that the petitioner has
not made out a case for relief by mandamus. consequence, the shares of L.T.B. Co. were costing P360 a
share, while the shares of the B.T. Co. were quoted at only P200.
Petition denied, with costs.
2. That the proposed consolidation or merger was illegal because
the unanimous vote of the stockholders was not secured and that
the same was contrary to the spirit of our laws. (Rec. on Appeal,
G.R. No. L-4420             May 19, 1952 pp. 19-20)

CESAR REYES, ET ALS., plaintiffs-appellants, After the filing of the complaint, the court granted the writ of preliminary
vs. injunction prayed for therein upon a nominal bond of P5,000, which later
MAX BLOUSE, ET ALS., defendants-appellees. was increased to P10,000.

Reyes, Albert and Agcaoili for appellants. Defendants twice moved to dissolve the writ of preliminary injunction, but
Gibbs, Gibbs, Chuidian and Quasha for appellees. both motions were denied by the lower court.

BAUTISTA ANGELO, J.:
This is an action instituted by the plaintiffs as minority stockholders of the
Laguna Tayabas Bus Co. to restrain its Board of Directors composed of
the defendants from carrying out a resolution approved by approximately
92½ per cent of the stockholders in a meeting held on July 30, 1947,
authorizing said Board of Directors to take the necessary steps to
consolidate the properties and franchises of the Laguna Tayabas Bus Co.
with those of the Batangas Transportation Co. The grounds on which
plaintiffs predicate their action are:
1. That the proposed consolidation or merger of the two
companies would be prejudicial to the L.T.B. Co. and to the
appellants in particular who do not own shares of stock of B.T.
Co. in that:
a. During the last ten years prior to the last war, the dividends
declared by L.T.B. Co. were increasing, whereas the dividends
declared by B.T. Co. were decreasing in amount.
b. In 1941, the shares of L.T.B. Co. cost P250 each in the market,
whereas the shares of B.T. Co. cost only P150 each.
c. A comparative study of the net gains of each company for the
first six months of 1947 showed that the profits of the L.T.B. Co.
exceeded B.T. Co. by approximately P67,000. As a
The defendants also asked for the dismissal of the complaint on the
ground that the facts, therein alleged do not constitute sufficient cost of
action. In connection with the determination of this incident, defendants
submitted an affidavit of Max Blouse, President of the Laguna Tayabas
Bus Co., outlining the steps to be taken by the Board of Directors in
carrying out the merger or consolidation authorized in the disputed
resolution. the court however, deferred its resolution on the motion until
after trial on the merits. After due trial, at which both parties presented
their respective evidence, the lower court rendered its decision, the
dispositive portion of which reads:
For all the foregoing considerations, the court is of the opinion
and so holds that the contoversial proposed acts to be performed
by the defendants, directors of the Laguna Tayabas Bus Co., are
with in the authority granted under Section 28½ of the
Corporation Law. The complaint, therefore, is dismissed and the
preliminary injunction is hereby lifted without pronouncement as
to costs. (Record on Appeal, p. 182)
On the motion of the plaintiffs, the court a quo revived the writ of
preliminary injunction which was dissolved in its decision above
mentioned and maintained the status quo of the case pending appeal
upon a new indemnity bond of P30,000, which was subsequently
increased to P50,000.
The case is now before this Court on appeal interposed by the plaintiffs
who impute six errors to the lower court.
The principal issue involved in this appeal is whether the real purpose of
the disputed resolution is the merger or consolidation of the properties
and franchises of the Laguna Tayabas Bus Co. with those of the
Batangas Transportation Co. within the meaning of the law, and in the
affirmative case, whether said merger or consolidation can be carried out
under the law now existing and in force in the Philippines. On one hand
counsel for plaintiffs contends that its real purpose is to effect a merger or
consolidation, and as such there is no law in the Philippines under which
it may properly be carried out; on the other hand, counsel for the
defendants maintains the negative view, holding that it is merely an
exchange of properties sanctioned by our corporation law, as amended,
and that even if it be considered as a consolidation, the same can still be
carried out under Commonwealth Act No. 146, section 20, otherwise
known as the Public Service Law.
The disputed resolution, which was approved on July 20, 1947, at a
special meeting held by the stock holders of the Laguna Tayabas Bus
Co. reads as follows:
Resolved that the Board of Directors of the Laguna Tayabas Bus
Company, be as it hereby is, authorized to take the necessary
steps to consolidate the properties and franchises of the
corporation with those of the Batangas Transportation Company
under a single corporation by the organization of a new
corporation and to dispose to such new corporation all the
properties and franchises of the corporation in return for stock of
the new corporation, or by the exchange of stock, and/or through
such other means as may be deemed most advisable by the
Board of Directors.
It should be noted that under the above resolution, the Board of Directors
is charged with the authority to take the necessary steps to consolidate
the properties and franchises of the Laguna Tayabas Bus Co. with those
of the Batangas Transportation Co. under a new corporation in return for
stock of the new corporation, or by exchange of stock, and/or through
such other means as may be deemed most advisable by the Board of
Directors. The way and manner the consolidation shall be effected is,
therefore, left to the discretion of the Board of Directors. In pursuance of
this broad authority, the Board of Directors acted and the steps it has
taken having in view the interest of both corporations are outlined in the
affidavit attached to the memorandum submitted to the court by Max
Blouse, president of the two corporations above mentioned. The
substance of this affidavit is; that both corporations have passed similar
resolutions authorizing the Board of Directors to take such steps as may
be necessary to effect the consolidation; that the Board of Directors of the
Laguna Tayabas Bus Co. has decided to transfer its assets, franchises
and other properties to the new corporation, from which shall be excluded
the claims that it has against the United States Army and the cash it has
received from it for the use and commandering of its busses and other
stock and equipment during the war; that the Laguna Tayabas Bus Co.,
will not transfer any liabilities to the new corporation; and that said
company will not be dissolved but will continue existing, although not
operating, until the stockholders decide to dissolve the same.
It is apparent that the purpose of the resolution is not to dissolve the
Laguna Tayabas Bus Co. but merely to transfer its assets to a new
corporation in exchange for its corporation stock. This intent is clearly
deducible from the provision that the Laguna Tayabas Bus Co. will not be
dissolved but will continue existing until its stockholders decide to
dissolve the same. This comes squarely within the purview of section
28½ of the corporation may sell, exchange, lease or otherwise dispose of
all its property and assets, including its good will, upon such terms and
conditions as its Board of Directors may deem expedient when
authorized by the affirmative vote of the shareholders holding at least 2/3
of the voting power. The words "or other wise disposed of" is very broad
and in a sense covers a merger or consolidation. The action of the
corporation was taken having in view this provision of our corporation law
and in our opinion the corporation has acted correctly.
But appellants contend that the disputed resolution calls for a real merger
or consolidation in the sense and in the manner said terms are intended
and understood under the law and authorities of the United States, citing
in support of their contention a long line of American authorities, and that
view the resolution in that light, the same cannot come within the purview
of section 28_«_ of our corporation law, as claimed by appellees. But
even if we view the resolution in the light of the American authorities, we
are of the opinion that the transaction called for therein cannot be
considered, strickly speaking, as a merger or consolidation of the two
corporations because, under said authorities, a merger implies
necessarily the termination or cessation of the merged corporations and
not merely a merger of their properties and assets. This situation does
not here obtain. The two corporations will not lose their corporate
existence or personality, or at least the Laguna Tayabas Bus Co., but will
continue to exist even after the consolidation. In other words, what is
intended by the resolution is merely a consolidation of properties and
assets, to be managed and operated by a new corporation, and not a
merger of the corporations themselves.
Granting arguendo that the disputed resolution has really the intention
and the purpose of carrying out the merger or consolidation both of the
assets and properties of the two corporations as well as of the two
corporations themselves in the true sense of the word, or in the light of
the American authorities, still we believe that this can be carried out in
this jurisdiction in the light of our Public Service Law. Thus, section 20(g)
of Commonwealth Act No. 146, as amended, prohibits any public service
operators, unless with the approval of the Public Service Commission, "to
sell, alienate, mortgage, encumber or lease its property, franchises,
certificates, privileges, or rights, or any part thereof, or merge or
consolidate its property, franchises, privileges or rights or any part
thereof, with those of any other public service". This law speaks of
merger or consolidation of public service engaged in land transportation.
It does not impose any qualification except that it shall be done with the
approval of the Public Service Commission. There is no doubt that the
intended merger or consolidation comes within the purview of this legal
provision.
The claim that the merger or consolidation of two land transportation
companies cannot be carried out in this jurisdiction because it is
prohibited by Act No. 2772, is untenable in the light of the very provisions
of said Act. A careful analysis of said act will show that it only regulates
the merger or consolidation of railroad companies, or of a railroad
company with any other carrier by land or water. Said Act does not apply
to the merger or consolidation of two corporations exclusively engaged in
land transportation. To extend the meaning and scope of said Act 2772 to
the merger or consolidation of land carries would be to render nugatory
the provisions of the Public Service Law, which effect cannot be implied
because the latter law (1936) is of more recent enactment than the
former (1918). As to how the merger or consolidation shall be carried out,
our corporation law contains ample provisions to this effect (sections
17½, 18 and 25½). This law does not require that there be an express
legislative authority, or a unanimous consent of all stockholders, to effect
a merger or consolidation of two corporations.
Plaintiffs object to the use made by the lower court of the affidavit
submitted by Max Blouse, president of the merging corporations, in
connection with the incident relative to the motion to dismiss filed by the
defendants to which affidavit no objection has been interposed by the
plaintiffs and for that reason that affidavit became part or the record. As
said Affidavit was submitted with the motion to dismiss and other exhibits
presented by both parties for the consideration of the court, we find no
reason why the lower court should err in considering it in its decision and
why it cannot now be considered in this appeal. This action of the court
was merely in line with the move of the parties when they submitted for
consideration the motion to dismiss filed by the defendants.
The remaining question to be determined refers to the claim that the
proposed consolidation or merger of the two corporations would be
prejudicial to the Laguna Tayabas Bus Co. and to the appellants in
particular who do not own shares of stock of the Batangas Transportation
Co. This is a question of fact which much depends upon the evidence
submitted by the parties. After weighing the evidence, the lower court
reached the conclusion that the merger would not be prejudicial or
disadvantageous to the appellants or to the stockholders of the Laguna
Tayabas Bus Co. On this point the court said: "The testimony of Max
Blouse, who had founded both the Laguna Tayabas Bus Co. and the
Batangas Transportation Co., should be given consideration weight and
credence not only because of the position which he enjoys in both
companies, but also because of his long experience in the transportation
business in this country. His opinion, therefore, insofar as he states that
the earnings of both companies should be about equal, in normal
circumstances, is entitled to more weight and credit than that of the
plaintiffs".
To the foregoing we may add the following: the Laguna Tayabas Bus Co.
and the Batangas Transportation Co. are pre-war corporations organized
in 1928 and 1918, respectively. They ceased operating during the war. In
April, 1945, they resumed operations, and pursuant to the authority
granted by the respective Board of Directors, the two companies were
jointly operated under a single management. In view of the success of
this joint operation, it was strongly recommended that it be continued and
made permanent. For this purpose a meeting of the stockholders was
called, and the disputed resolution was approved. And this resolution was
approved because the stockholders found that with the consolidation, the
two companies would enjoy the services of the same technical men,
would invest much less in the purchase of spare parts, would effect
savings in running one machine shop, instead of two, would employ less
personel, and in general, both companies would effect a substantial
economy in men, materials and operation expenses. The merger or the
consolidation has been voted upon by two-thirds vote of the stockholders.
Their action is decisive. They have acted having in view only the best
interests of both companies. It is not fair to allow a small minority to undo
or set at naught what they have done. The remedy of the appellants is to
register their objection in writing and demand payment of their shares
from the corporation as provided for in section 28½ of the corporation
law.
Wherefore, the decision is hereby affirmed, with cost against appellants.
G.R. No. L-20850           November 29, 1965
THE EDWARD J. NELL COMPANY, petitioner,
vs.
PACIFIC FARMS, INC., respondent.
Agrava & Agrava for petitioner.
Araneta, Mendoza & Papa for respondent.
CONCEPCION, J.:
Appeal by certiorari, taken by Edward J. Nell Co. — hereinafter referred
to as appellant — from a decision of the Court of Appeals.
On October 9, 1958, appellant secured in Civil Case No. 58579 of the
Municipal Court of Manila against Insular Farms, Inc. — hereinafter
referred to as Insular Farms a judgment for the sum of P1,853.80 —
representing the unpaid balance of the price of a pump sold by appellant
to Insular Farms — with interest on said sum, plus P125.00 as attorney's
fees and P84.00 as costs. A writ of execution, issued after the judgment
had become final, was, on August 14, 1959, returned unsatisfied, stating
that Insular Farms had no leviable property. Soon thereafter, or on
November 13, 1959, appellant filed with said court the present action
against Pacific Farms, Inc. — hereinafter referred to as appellee — for
the collection of the judgment aforementioned, upon the theory that
appellee is the alter ego of Insular Farms, which appellee has denied. In
due course, the municipal court rendered judgment dismissing appellant's
complaint. Appellant appealed, with the same result, to the court of first
instance and, subsequently, to the Court of Appeals. Hence this appeal
by certiorari, upon the ground that the Court of Appeals had erred: (1) in
not holding the appellee liable for said unpaid obligation of the Insular
Farms; and (2) in not granting attorney's fees to appellant.
With respect to the first ground, it should be noted that appellant's
complaint in the municipal court was anchored upon the theory that
appellee is an alter ego of Insular Farms, because the former had
purchased all or substantially all of the shares of stock, as well as the real
and personal properties of the latter, including the pumping equipment
sold by appellant to Insular Farms. The record shows that, on March 21,
1958, appellee purchased 1,000 shares of stock of Insular Farms for
P285,126.99; that, thereupon, appellee sold said shares of stock to
certain individuals, who forthwith reorganized said corporation; and that
the board of directors thereof, as reorganized, then caused its assets,
including its leasehold rights over a public land in Bolinao, Pangasinan, to
be sold to herein appellee for P10,000.00. We agree with the Court of
Appeals that these facts do not prove that the appellee is an alter ego of
Insular Farms, or is liable for its debts. The rule is set forth in Fletcher
Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:
Generally where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts;
(2) where the transaction amounts to a consolidation or merger of
the corporations; (3) where the purchasing corporation is merely
a continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability
for such debts.
In the case at bar, there is neither proof nor allegation that appellee had
expressly or impliedly agreed to assume the debt of Insular Farms in
favor of appellant herein, or that the appellee is a continuation of Insular
Farms, or that the sale of either the shares of stock or the assets of
Insular Farms to the appellee has been entered into fraudulently, in order
to escape liability for the debt of the Insular Farms in favor of appellant
herein. In fact, these sales took place (March, 1958) not only over six (6)
months before the rendition of the judgment (October 9, 1958) sought to
be collected in the present action, but, also, over a month before the filing
of the case (May 29, 1958) in which said judgment was rendered.
Moreover, appellee purchased the shares of stock of Insular Farms as
the highest bidder at an auction sale held at the instance of a bank to
which said shares had been pledged as security for an obligation of
Insular Farms in favor of said bank. It has, also, been established that the
appellee had paid P285,126.99 for said shares of stock, apart from the
sum of P10,000.00 it, likewise, paid for the other assets of Insular Farms.
Neither is it claimed that these transactions have resulted in the
consolidation or merger of the Insular Farms and appellee herein. On the
contrary, appellant's theory to the effect that appellee is an alter ego of
the Insular Farms negates such consolidation or merger, for a corporation
cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by appellee for other
assets of Insular Farms is a grossly inadequate price, because, appellant
now claims, said assets were worth around P285,126.99, and that,
consequently, the sale must be considered fraudulent. However, the sale
was submitted to and approved by the Securities and Exchange
Commission. It must be presumed, therefore, that the price paid was fair
and reasonable. Moreover, the only issue raised in the court of origin was
whether or not appellee is an alter ego of Insular Farms. The question of
whether the aforementioned sale of assets for P10,000.00 was fraudulent
or not, had not been put in issue in said court. Hence, it may, not be
raised on appeal.
Being a mere consequence of the first assignment of error, which is thus
clearly untenable, appellant's second assignment of error needs no
discussion.
WHEREFORE, the decision appealed from is hereby affirmed, with costs
against the appellant. It is so ordered.
Bengzon, C.J., Bautista Angelo, Reyes, J.B.L., Dizon, Regala,
Makalintal, Bengzon. J.P., and Zaldivar, JJ., concur.
Barrera, J., is on leave.
G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D.
RUFINO and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA
A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, and
COURT OF TAX APPEALS, respondents.
Leonardo Abola for respondents.
CRUZ, J.:
Petition for review on certiorari of the decision of the Court of Tax
Appeals absolving the private respondents from liability for capital gains
tax on the stocks received by them from the Eastern Theatrical Inc.
These were originally four cages involving appeals from the decision of
the Commissioner of Internal Revenue dated July 11, 1966, holding the
said respondents, Vicente A. Rufino and Remedies S. Rufino, Ernesto D.
Rufino and Elvira B. Rufino, Rafael R. Rufino and Julieta A. Rufino, and
Manuel S. Galvez and Ester R. Galvez, liable for deficiency income tax,
surcharge and interest in the sums of P44,294.88, P27,229.44,
P58,082.60 and P58,074.24, respectively, for the year 1959.
The facts, as narrated by the Court of Tax Appeals, are as follows:
The private respondents were the majority stockholders of the defunct
Eastern Theatrical Co., Inc., a corporation organized in 1934, for a period
of twenty-five years terminating on January 25, 1959. It had an original
capital stock of P500,000.00, which was increased in 1949 to
P2,000,000.00, divided into 200,000 shares at P10.00 per share, and
was organized to engage in the business of operating theaters, opera
houses, places of amusement and other related business enterprises,
more particularly the Lyric and Capitol Theaters in Manila. The President
of this corporation (hereinafter referred to as the Old Corporation) during
the year in question was Ernesto D. Rufino.
The private respondents are also the majority and controlling
stockholders of another corporation, the Eastern Theatrical Co Inc., which
was organized on December 8, 1958, for a term of 50 years, with an
authorized capital stock of P200,000.00, each share having a par value of
P10.00. This corporation is engaged in the same kind of business as the
Old Corporation. The General-Manager of this corporation (hereinafter
referred to as the New Corporation) at the time was Vicente A. Rufino.
In a special meeting of stockholders of the Old Corporation on December
17, 1958, to provide for the continuation of its business after the end of its
corporate life, and upon the recommendation of its board of directors, a
resolution was passed authorizing the Old Corporation to merge with the
New Corporation by transferring its business, assets, goodwill, and
liabilities to the latter, which in exchange would issue and distribute to the
shareholders of the Old Corporation one share for each share held by
them in the said Corporation.
It was expressly declared that the merger of the Old Corporation with the
New Corporation was necessary to continue the exhibition of moving
pictures at the Lyric and Capitol Theaters even after the expiration of the
corporate existence of the former, in view of its pending booking
contracts, not to mention its collective bargaining agreements with its
employees.
Pursuant to the said resolution, the Old Corporation, represented by
Ernesto D. Rufino as President, and the New Corporation, represented
by Vicente A. Rufino as General Manager, signed on January 9, 1959, a
Deed of Assignment providing for the conveyance and transfer of all the
business, property, assets and goodwill of the Old Corporation to the
New Corporation in exchange for the latter's shares of stock to be
distributed among the shareholders on the basis of one stock for each
stock held in the Old Corporation except that no new and unissued
shares would be issued to the shareholders of the Old Corporation; the
delivery by the New Corporation to the Old Corporation of 125,005-3/4
shares to be distributed to the shareholders of the Old Corporation as
their corresponding shares of stock in the New Corporation; the
assumption by the New Corporation of all obligations and liabilities of the
Old Corporation under its bargaining agreement with the Cinema Stage &
Radio Entertainment Free Workers (FFW) which included the retention of
all personnel in the latter's employ; and the increase of the capitalization
of the New Corporation in compliance with their agreement. This
agreement was made retroactive to January 1, 1959.
The aforesaid transfer was eventually made by the Old Corporation to the
New Corporation, which continued the operation of the Lyric and Capitol
Theaters and assumed all the obligations and liabilities of the Old
Corporation beginning January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the
Deed of Assignment of January 9, 1959, were approved in a resolution by
the stockholders of the New Corporation in their special meeting on
January 12, 1959. In the same meeting, the increased capitalization of
the New Corporation to P2,000,000.00 was also divided into 200,000
shares at P10.00 par value each share, and the said increase was
registered on March 5, 1959, with the Securities and Exchange
Commission, which approved the same on August 20,1959.
As agreed, and in exchange for the properties, and other assets of the
Old Corporation, the New Corporation issued to the stockholders of the
former stocks in the New Corporation equal to the stocks each one held
in the Old Corporation, as follows:
Mr. & Mrs. Vicente A. Rufino............... 17,083 shares
Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares
Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares
Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares
It was this above-narrated series of transactions that the Bureau of
Internal Revenue examined later, resulting in the petitioner declaring that
the merger of the aforesaid corporations was not undertaken for a bona
fide business purpose but merely to avoid liability for the capital gains tax
on the exchange of the old for the new shares of stock. Accordingly, he
imposed the deficiency assessments against the private respondents for
the amounts already mentioned. The private respondents' request for
reconsideration having been denied, they elevated the matter to the
Court of Tax Appeals, which reversed the petitioner.
We have given due course to the instant petition questioning the decision
of the said court holding that there was a valid merger between the Old
Corporation and the New Corporation and declaring that:
It is well established that where stocks for stocks were
exchanged, and distributed to the stockholders of the
corporations, parties to the merger or consolidation,
pursuant to a plan of reorganization, such exchange is
exempt from capital gains tax . . .
In view of the foregoing, we are of the opinion and so hold
that no taxable gain was derived by petitioners from the
exchange of their old stocks solely for stocks of the New
Corporation pursuant to Section 35(c) (2), in relation to (c)
(5), of the National Internal Revenue Code, as amended
by Republic Act 1921. 1
The above-cited Section 35 of the Tax Code, on the proper interpretation
and application of which the resolution of this case depends, provides in
material part as follows:
Sec. 35. Determination of gain or loss from the sale or
other disposition of property. — The gain derived or loss
sustained from the sale or other disposition of property,
real, personal or mixed, shall be determined in
accordance with the following schedule:
xxx xxx xxx
(c) Exchange of property-
(1) General Rule. — Except as herein
provided upon the sale or exchange of
 property, the entire amount of the gain or
loss, as the case may be, shall be
recognized.
(2) Exceptions. — No gain or loss shall be
recognized if in pursuance of a plan of
merger or consolidation (a) a corporation
which is a party to a merger or
consolidation, exchanges property solely
for stock in a corporation which is a party
to the merger or consolidation, (b) a
shareholder exchanges stock in a
corporation which is a party to the merger
or consolidation solely for the stock of
another corporation, also a party to the
merger or consolidation, or (c) a security
holder of a corporation which is a party to
the merger or consolidation exchanges his
securities in such corporation solely for
stock or securities in another corporation,
a party to the merger or consolidation.
xxx xxx xxx
(5) Definitions.-(a) x x x (b) The term
"merger" or "consolidation," when used in
this section, shall be understood to mean:
(1) The ordinary merger or consolidation,
or (2) the acquisition by one corporation of
all or substantially all the properties of
another corporation solely for stock;
Provided, That for a transaction to be
regarded as a merger or consolidation
within the purview of this section, it must
be undertaken for a bona fide business
purpose and not solely for the purpose of
escaping the burden of taxation; Provided
further, That in determining whether a
bona fide business purpose exists, each
and every step of the transaction shall be
considered and the whole transaction or
series of transactions shall be treated as a
single unit: ...
In support of its position that the Deed of Assignment was concluded by
the private respondents merely to evade the burden of taxation, the
petitioner points to the fact that the New Corporation did not actually
issue stocks in exchange for the properties of the Old Corporation at the
time of the supposed merger on January 9, 1959. The exchange, he
says, was only on paper. The increase in capitalization of the New
Corporation was registered with the Securities and Exchange
Commission only on March 5, 1959, or 37 days after the Old Corporation
expired on January 25, 1959. Prior to such registration, it was not
possible for the New Corporation to effect the exchange provided for in
the said agreement because it was capitalized only at P200,000.00 as
against the capitalization of the Old Corporation at P2,000,000.00.
Consequently, as there was no merger, the automatic dissolution of the
Old Corporation on its expiry date resulted in its liquidation, for which the
respondents are now liable in taxes on their capital gains.
For their part, the private respondents insist that there was a genuine
merger between the Old Corporation and the New Corporation pursuant
to a plan aimed at enabling the latter to continue the business of the
former in the operation of places of amusement, specifically the Capitol
and Lyric Theaters. The plan was evolved through the series of
transactions above narrated, all of which could be treated as a single unit
in accordance with the requirements of Section 35. Obviously, all these
steps did not have to be completed at the time of the merger, as there
were some of them, such as the increase and distribution of the stock of
the New Corporation, which necessarily had to come afterwards.
Moreover, the Old Corporation was dissolved on January 1, 1959,
pursuant to the Deed of Assignment, and not on January 25, 1959, its
original expiry date. As the properties of the Old Corporation were
transferred to the New Corporation before that expiry date, there could
not have been any distribution of liquidating dividends by the Old
Corporation for which the private respondents should be held liable in
taxes.
We sustain the Court of Tax Appeals. We hold that it did not err in finding
that no taxable gain was derived by the private respondents from the
questioned transaction.
Contrary to the claim of the petitioner, there was a valid merger although
the actual transfer of the properties subject of the Deed of Assignment
was not made on the date of the merger. In the nature of things, this was
not possible. Obviously, it was necessary for the Old Corporation to
surrender its net assets first to the New Corporation before the latter
could issue its own stock to the shareholders of the Old Corporation
because the New Corporation had to increase its capitalization for this
purpose. This required the adoption of the resolution to this effect at the
special stockholders meeting of the New Corporation on January 12,
1959, the registration of such issuance with the SEC on March 5, 1959,
and its approval by that body on August 20, 1959. All these took place
after the date of the merger but they were deemed part and parcel of, and
indispensable to the validity and enforceability of, the Deed of
Assignment.
The Court finds no impediment to the exchange of property for stock
between the two corporations being considered to have been effected on
the date of the merger. That, in fact, was the intention, and the reason
why the Deed of Assignment was made retroactive to January 1, 1959.
Such retroaction provided in effect that all transactions set forth in the
merger agreement shall be deemed to be taking place simultaneously on
January 1, 1959, when the Deed of Assignment became operative.
The certificates of stock subsequently delivered by the New Corporation
to the private respondents were only evidence of the ownership of such
stocks. Although these certificates could be issued to them only after the
approval by the SEC of the increase in capitalization of the New
Corporation, the title thereto, legally speaking, was transferred to them on
the date the merger took effect, in accordance with the Deed of
Assignment.
The basic consideration, of course, is the purpose of the merger, as this
would determine whether the exchange of properties involved therein
shall be subject or not to the capital gains tax. The criterion laid down by
the law is that the merger" must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of
taxation." We must therefore seek and ascertain the intention of the
parties in the light of their conduct contemporaneously with, and
especially after, the questioned merger pursuant to the Deed of
Assignment of January 9, 1959.
It has been suggested that one certain indication of a scheme to evade
the capital gains tax is the subsequent dissolution of the new corporation
after the transfer to it of the properties of the old corporation and the
liquidation of the former soon thereafter. This highly suspect development
is likely to be a mere subterfuge aimed at circumventing the requirements
of Section 35 of the Tax Code while seeming to be a valid corporate
combination. Speaking of such a device, Justice Sutherland declared for
the United States Supreme Court in Helvering v. Gregory:
When subdivision (b) speaks of a transfer of assets by
one corporation to another, it means a transfer made 'in
pursuance of a plan of reorganization' (Section 112[g]) of
corporate business; and not a transfer of assets by one
corporation to another in pursuance of a plan having no
relation to the business of either, as plainly is the case
here. Putting aside, then, the question of motive in
respect of taxation altogether, and fixing the character of
proceeding by what actually occurred, what do we find?
Simply an operation having no business or corporate
purpose — a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its
real character, and the sole object and accomplishment of
which was the consummation of a preconceived plan, not
to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to the petitioner. No
doubt, a new and valid corporation was created. But that
corporation was nothing more than a contrivance to the
end last described. It was brought into existence for no
other purpose; it performed, as it was intended from the
beginning it should perform, no other function. When that
limited function had been exercised, it immediately was
put to death.
In these circumstances, the facts speak for themselves
and are susceptible of but one interpretation. The whole
undertaking, though conducted according to the terms of
subdivision (b), was in fact an elaborate and devious form
of conveyance masquerading as a corporate
reorganization and nothing else. The rule which excludes
from consideration the motive of tax avoidance is not
pertinent to the situation, because the transaction upon its
face lies outside the plain intent of the statute. To hold
otherwise would be to exalt artifice above reality and to
deprive the statutory provision in question of all serious
purpose. 2
We see no such furtive intention in the instant case. It is clear, in fact, that
the purpose of the merger was to continue the business of the Old
Corporation, whose corporate life was about to expire, through the New
Corporation to which all the assets and obligations of the former had
been transferred. What argues strongly, indeed, for the New Corporation
is that it was not dissolved after the merger agreement in 1959. On the
contrary, it continued to operate the places of amusement originally
owned by the Old Corporation and transfered to the New Corporation,
particularly the Capitol and Lyric Theaters, in accordance with the Deed
of Assignment. The New Corporation, in fact, continues to do so today
after taking over the business of the Old Corporation twenty-seven years
ago.
It may be recalled at this point that under the original provisions of the old
Corporation Law, which was in effect when the merger agreement was
concluded in 1959, it was not possible for a corporation, by mere
amendment of its charter, to extend its life beyond the time fixed in the
original articles; in fact, this was specifically prohibited by Section 18,
which provided that "any corporation may amend its articles of
incorporation by a majority vote of its board of directors or trustees and
the vote or written assent of two-thirds of its members, if it be a non-stock
corporation, or if it be a stock corporation, by the vote or written assent of
the stockholders representing at least two-thirds of the subscribed capital
stock of the corporation ... : Provided, however, That the life of said
corporation shall not be extended by said amendment beyond the fixed in
the original articles ... "
This prohibition, which incidentally has since been deleted, made it
necessary for the Old and New Corporations to enter into the questioned
merger, to enable the former to continue its unfinished business through
the latter.
The procedure for such merger was prescribed in Section 28 1/2 of the
old Corporation Law which, although not expressly authorizing a merger
by name (as the new Corporation Code now does in its Section 77),
provided that "a corporation may, by action taken at any meeting of its
board of directors, sell, lease, exchange, or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon
such terms and conditions and for such considerations, which may be
money, stocks, bond, or other instruments for the payment of money or
other property or other considerations, as its board of directors deem
expedient." The transaction contemplated in the old law covered the
second type of merger defined by Section 35 of the Tax Code as "the
acquisition by one corporation of all or substantially all of the properties of
another corporation solely for stock," which is precisely what happened in
the present case.
What is also worth noting is that, as in the case of the Old Corporation
when it was dissolved on December 31, 1958, there has been no
distribution of the assets of the New Corporation since then and up to
now, as far as the record discloses. To date, the private respondents
have not derived any benefit from the merger of the Old Corporation and
the New Corporation almost three decades earlier that will make them
subject to the capital gains tax under Section 35. They are no more liable
now than they were when the merger took effect in 1959, as the merger,
being genuine, exempted them under the law from such tax.
By this decision, the government is, of course, not left entirely without
recourse, at least in the future. The fact is that the merger had merely
deferred the claim for taxes, which may be asserted by the government
later, when gains are realized and benefits are distributed among the
stockholders as a result of the merger. In other words, the corresponding
taxes are not forever foreclosed or forfeited but may at the proper time
and without prejudice to the government still be imposed upon the private
respondents, in accordance with Section 35(c) (4) of the Tax Code. Then,
in assessing the tax, "the basis of the property transferred in the hands of
the transferee shall be the same as it would be in the hands of the
transferor, increased by the amount of gain recognized to the transferor
on the transfer." The only inhibition now is that time has not yet come.
The reason for this conclusion is traceable to the purpose of the
legislature in adopting the provision of law in question. The basic Idea
was to correct the Tax Code which, by imposing taxes on corporate
combinations and expansions, discouraged the same to the detriment of
economic progress, particularly the promotion of local industry. Speaking
of this problem, HB No. 7233, which was subsequently enacted into R.A.
No. 1921 embodying Section 35 as now worded, declared in the
Explanatory Note:
The exemption from the tax of the gain derived from
exchanges of stock solely for stock of another corporation
resulting from corporate mergers or consolidations under
the above provisions, as amended, was intended to
encourage corporations in pooling, combining or
expanding their resources conducive to the economic
development of the country. 3
Our ruling then is that the merger in question involved a pooling of
resources aimed at the continuation and expansion of business and so
came under the letter and intendment of the National Internal Revenue
Code, as amended by the abovecited law, exempting from the capital
gains tax exchanges of property effected under lawful corporate
combinations.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed in money market
full, without any pronouncement as to costs.
borrowings P 45,771,849.00
SO ORDERED. ———————

G.R. Nos. 106949-50 December 1, 1995 35% Transaction tax due

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES thereon 16,020,147.00

(PICOP), petitioner,
vs. Add: 25% surcharge 4,005,036.75
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS, respondents. ——————

G.R. Nos. 106984-85 December 1, 1995 T o t a l P 20,025,183.75

COMMISSIONER INTERNAL REVENUE, petitioner, Add:

vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE
14% int. fr.
COURT OF APPEALS and THE COURT OF TAX
APPEALS, respondents.
1-20-78 to

7-31-80 P 7,093,302.57
FELICIANO, J.:
20% int, fr.
The Paper Industries Corporation of the Philippines ("Picop"), which is
petitioner in G.R. Nos. 106949-50 and private respondent in G.R. Nos. 8-1-80 to
106984-85, is a Philippine corporation registered with the Board of
Investments ("BOI") as a preferred pioneer enterprise with respect to its 3-31-83 10,675,523.58
integrated pulp and paper mill, and as a preferred non-pioneer enterprise
with respect to its integrated plywood and veneer mills. ——————

On 21 April 1983, Picop received from the Commissioner of Internal 17,768,826.15

Revenue ("CIR") two (2) letters of assessment and demand both dated
31 March 1983: (a) one for deficiency transaction tax and for ——————
documentary and science stamp tax; and (b) the other for deficiency
income tax for 1977, for an aggregate amount of P88,763,255.00. These P 37,794,009.90
assessments were computed as follows:
Documentary and Science Stamps Tax
Transaction Tax
Total face value of
Interest payments on
debentures P100,000,000.00 1) Disallowed deductions

Documentary Stamps availed of under

Tax Due R.A. No. 5186 P 44,332,980.00

(P0.30 x P100,000.000 ) 2) Capitalized interest

( P200 ) P 150,000.00 expenses on funds

Science Stamps Tax Due used for acquisition

(P0.30 x P100,000,000 ) of machinery & other

( P200 ) P 150,000.00 equipment 42,840,131.00

—————— 3) Unexplained financial

T o t a l P 300,000.00 guarantee expense 1,237,421.00

Add: Compromise for 4) Understatement

non-affixture 300.00 of sales 2,391,644.00

—————— 5) Overstatement of

300,300.00 cost of sales 604,018.00

—————— ——————

TOTAL AMOUNT DUE AND COLLECTIBLE P P91,406,194.00

38,094,309.90
Net income per investigation P91,664,360.00
===========
Income tax due thereon 34,734,559.00
Deficiency Income Tax for 1977
Less: Tax already assessed per return 80,358.00
Net income per return P 258,166.00
——————
Add: Unallowable deductions
Deficiency P34,654,201.00
 Add: Documentary & Science

14% int. fr. Stamp Tax 300,300.00

4-15-78 to Deficiency Income Tax Due 3,813,349.33

7-31-81 P 11,128,503.56 ——————

20% int. fr. TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2

8-1-80 to ===========

4-15-81 4,886,242.34 Picop and the CIR both went to the Supreme Court on separate Petitions
for Review of the above decision of the CTA. In two (2) Resolutions dated
—————— 7 February 1990 and 19 February 1990, respectively, the Court referred
the two (2) Petitions to the Court of Appeals. The Court of Appeals
P16,014,745.90 consolidated the two (2) cases and rendered a decision, dated 31 August
1992, which further reduced the liability of Picop to P6,338,354.70. The
dispositive portion of the Court of Appeals decision reads as follows:
——————
WHEREFORE, the appeal of the Commissioner of
TOTAL AMOUNT DUE AND COLLECTIBLE P
Internal Revenue is denied for lack of merit. The judgment
50,668,946.90 1
against PICOP is modified, as follows:
===========
1. PICOP is declared liable for the 35% transaction tax in
the amount of P3,578,543.51;
On 26 April 1983, Picop protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. Picop also
2. PICOP is absolved from the payment of documentary
protested on 21 May 1983 the deficiency income tax assessment for
and science stamp tax of P300,000.00 and the
1977. These protests were not formally acted upon by respondent CIR.
compromise penalty of P300.00;
On 26 September 1984, the CIR issued a warrant of distraint on personal
property and a warrant of levy on real property against Picop, to enforce
collection of the contested assessments; in effect, the CIR denied Picop's 3. PICOP shall pay 20% interest per annum on the
protests. deficiency income tax of P1,481,579.15, for a period of
three (3) years from 21 May 1983, or in the total amount
of P888,947.49, and a surcharge of 10% on the latter
Thereupon, Picop went before the Court of Tax Appeals ("CTA")
amount, or P88,984.75.
appealing the assessments. After trial, the CTA rendered a decision
dated 15 August 1989, modifying the findings of the CIR and holding
Picop liable for the reduced aggregate amount of P20,133,762.33, which No pronouncement as to costs.
was itemized in the dispositive portion of the decision as follows:
SO ORDERED.
35% Transaction Tax P 16,020,113.20
Picop and the CIR once more filed separate Petitions for Review before (3) documentary and science stamp taxes;
the Supreme Court. These cases were consolidated and, on 23 August
1993, the Court resolved to give due course to both Petitions in G.R. Nos. II. Whether Picop is entitled to deductions against income
106949-50 and 106984-85 and required the parties to file their of:
Memoranda.
(1) interest payments on
Picop now maintains that it is not liable at all to pay any of the loans for the purchase of
assessments or any part thereof. It assails the propriety of the thirty-five machinery and equipment;
percent (35%) deficiency transaction tax which the Court of Appeals held
due from it in the amount of P3,578,543.51. Picop also questions the (2) net operating losses
imposition by the Court of Appeals of the deficiency income tax of incurred by the Rustan
P1,481,579.15, resulting from disallowance of certain claimed financial Pulp and Paper Mills, Inc.;
guarantee expenses and claimed year-end adjustments of sales and cost and
of sales figures by Picop's external auditors. 3
(3) certain claimed financial guarantee expenses; and
The CIR, upon the other hand, insists that the Court of Appeals erred in
finding Picop not liable for surcharge and interest on unpaid transaction
III. (1) Whether Picop had understated its
tax and for documentary and science stamp taxes and in allowing Picop
sales and overstated its cost of sales for
to claim as deductible expenses:
1977; and
(a) the net operating losses of another corporation (i.e.,
(2) Whether Picop is liable
Rustan Pulp and Paper Mills, Inc.); and
for the corporate
development tax of five
(b) interest payments on loans for the purchase of percent (5%) of its net
machinery and equipment. income for 1977.

The CIR also claims that Picop should be held liable for interest We will consider these issues in the foregoing sequence.
at fourteen percent (14%) per annum from 15 April 1978 for three
(3) years, and interest at twenty percent (20%) per annum for a
I.
maximum of three (3) years; and for a surcharge of ten percent
(10%), on Picop's deficiency income tax. Finally, the CIR
contends that Picop is liable for the corporate development tax (1) Whether Picop is liable
equivalent to five percent (5%) of its correct 1977 net income. for the thirty-five percent
(35%) transaction tax.
The issues which we must here address may be sorted out and grouped
in the following manner: With the authorization of the Securities and Exchange Commission,
Picop issued commercial paper consisting of serially numbered
promissory notes with the total face value of P229,864,000.00 and a
I. Whether Picop is liable for:
maturity period of one (1) year, i.e., from 24 December 1977 to 23
December 1978. These promissory notes were purchased by various
(1) the thirty-five percent (35%) transaction tax; commercial banks and financial institutions. On these promissory notes,
Picop paid interest in the aggregate amount of P45,771,849.00. In
(2) interest and surcharge on unpaid transaction tax; and respect of these interest payments, the CIR required Picop to pay the
thirty-five percent (35%) transaction tax.
The CIR based this assessment on Presidential Decree No. 1154 dated 3
June 1977, which reads in part as follows:
Sec. 1. The National Internal Revenue Code, as
amended, is hereby further amended by adding a new
section thereto to read as follows:
Sec. 195-C. Tax on certain interest. — There shall be
levied, assessed, collected and paid on every commercial
paper issued in the primary market as principal
instrument, a transaction tax equivalent to thirty-five
percent (35%) based on the gross amount of interest
thereto as defined hereunder, which shall be paid by the
borrower/issuer: Provided, however, that in the case of a
long-term commercial paper whose maturity exceeds
more than one year, the borrower shall pay the tax based
on the amount of interest corresponding to one year, and
thereafter shall pay the tax upon accrual or actual
payment (whichever is earlier) of the untaxed portion of
the interest which corresponds to a period not exceeding
one year.
The transaction tax imposed in this section shall be a final
tax to be paid by the borrower and shall be allowed as a
deductible item for purposes of computing the borrower's
taxable income.
For purposes of this tax —
(a) "Commercial paper" shall be defined as an instrument
evidencing indebtedness of any person or entity, including
banks and non-banks performing quasi-banking functions,
which is issued, endorsed, sold, transferred or in any
manner conveyed to another person or entity, either with
or without recourse and irrespective of
maturity. Principally, commercial papers are promissory
notes and/or similar instruments issued in the primary
market and shall not include repurchase agreements,
certificates of assignments, certificates of participations,
and such other debt instruments issued in the secondary
market.
(b) The term "interest" shall mean the difference between
what the principal borrower received and the amount it
paid upon maturity of the commercial paper which shall, in
no case, be lower than the interest rate prevailing at the
time of the issuance or renewal of the commercial paper.
Interest shall be deemed synonymous with discount and
shall include all fees, commissions, premiums and other
payments which form integral parts of the charges
imposed as a consequence of the use of money.
In all cases, where no interest rate is stated or if the rate
stated is lower than the prevailing interest rate at the time
of the issuance or renewal of commercial paper, the
Commissioner of Internal Revenue, upon consultation
with the Monetary Board of the Central Bank of the
Philippines, shall adjust the interest rate in accordance
herewith, and assess the tax on the basis thereof.
The tax herein imposed shall be remitted by the borrower
to the Commissioner of Internal Revenue or his Collection
Agent in the municipality where such borrower has its
principal place of business within five (5) working days
from the issuance of the commercial paper. In the case of
long term commercial paper, the tax upon the untaxed
portion of the interest which corresponds to a period not
exceeding one year shall be paid upon accrual payment,
whichever is earlier. (Emphasis supplied)
Both the CTA and the Court of Appeals sustained the
assessment of transaction tax.
In the instant Petition, Picop reiterates its claim that it is exempt from the
payment of the transaction tax by virtue of its tax exemption under R.A.
No. 5186, as amended, known as the Investment Incentives Act, which in
the form it existed in 1977-1978, read in relevant part as follows:
Sec. 8. Incentives to a Pioneer Enterprise. In addition to
the incentives provided in the preceding section, pioneer
enterprises shall be granted the following incentive
benefits:
(a) Tax Exemption. Exemption from all taxes under the
National Internal Revenue Code, except income tax, from
 the date the area of investment is included in the
Investment Priorities Plan to the following extent:
(1) One hundred per cent (100%) for the first five years;
(2) Seventy-five per cent (75%) for the sixth through the
eighth years;
(3) Fifty per cent (50%) for the ninth and tenth years;
(4) Twenty per cent (20%) for the eleventh and twelfth
years; and
(5) Ten per cent (10%) for the thirteenth through the
fifteenth year.
xxx xxx xxx 4
We agree with the CTA and the Court of Appeals that Picop's tax
exemption under R.A. No. 5186, as amended, does not include
exemption from the thirty-five percent (35%) transaction tax. In the first
place, the thirty-five percent (35%) transaction tax 5 is an income tax, that
is, it is a tax on the interest income of the lenders or creditors. In Western
Minolco Corporation v. Commissioner of Internal Revenue, 6 the
petitioner corporation borrowed funds from several financial institutions
from June 1977 to October 1977 and paid the corresponding thirty-five
(35%) transaction tax thereon in the amount of P1,317,801.03, pursuant
to Section 210 (b) of the 1977 Tax Code. Western Minolco applied for
refund of that amount alleging it was exempt from the thirty-five (35%)
transaction tax by reason of Section 79-A of C.A. No. 137, as amended,
which granted new mines and old mines resuming operation "five (5)
years complete tax exemptions, except income tax, from the time of its
actual bonafide orders for equipment for commercial production." In
denying the claim for refund, this Court held:
The petitioner's contentions deserve scant
consideration. The 35% transaction tax is imposed on
interest income from commercial papers issued in the
primary money market. Being a tax on interest, it is a tax
on income.
As correctly ruled by the respondent Court of Tax
Appeals:
Accordingly, we need not and do not think
it necessary to discuss further the nature
of the transaction tax more than to say
that the incipient scheme in the issuance
of Letter of Instructions No. 340 on
November 24, 1975 (O.G. Dec. 15,
1975), i.e., to achieve operational
simplicity and effective administration in
capturing the interest-income "windfall"
from money market operations as a new
source of revenue, has lost none of its
animating principle in parturition of
amendatory Presidential Decree No.
1154, now Section 210 (b) of the Tax
Code. The tax thus imposed is actually a
tax on interest earnings of the lenders or
placers who are actually the taxpayers in
whose income is imposed. Thus "the
borrower withholds the tax of 35% from
the interest he would have to pay the
lender so that he (borrower) can pay the
35% of the interest to the Government."
(Citation omitted) . . . . Suffice it to state
that the broad consensus of fiscal and
monetary authorities is that "even if
nominally, the borrower is made to pay the
tax, actually, the tax is on the interest
earning of the immediate and all prior
lenders/placers of the money. . . ." (Rollo,
pp. 36-37)
The 35% transaction tax is an income tax on interest
earnings to the lenders or placers. The latter are actually
the taxpayers. Therefore, the tax cannot be a tax imposed
upon the petitioner. In other words, the petitioner who
borrowed funds from several financial institutions by
issuing commercial papers merely withheld the 35%
transaction tax before paying to the financial institutions
the interests earned by them and later remitted the same
to the respondent Commissioner of Internal Revenue. The
tax could have been collected by a different procedure but
the statute chose this method. Whatever collecting
procedure is adopted does not change the nature of the
tax.
 xxx xxx xxx 7
(Emphasis supplied)
Much the same issue was passed upon in Marinduque Mining
Industrial Corporation v. Commissioner of Internal Revenue  8 and
resolved in the same way:
It is very obvious that the transaction tax, which is a tax
on interest derived from commercial paper issued in the
money market, is not a tax contemplated in the above-
quoted legal provisions. The petitioner admits that it is
subject to income tax. Its tax exemption should be strictly
construed.
We hold that petitioner's claim for refund was justifiably
denied. The transaction tax, although nominally
categorized as a business tax, is in reality a withholding
tax as positively stated in LOI No. 340. The petitioner
could have shifted the tax to the lenders or recipients of
the interest. It did not choose to do so. It cannot be heard
now to complain about the tax. LOI No. 340 is an
extraneous or extrinsic aid to the construction of section
210 (b).
xxx xxx xxx 9
(Emphasis supplied)
It is thus clear that the transaction tax is an income tax and as such, in
any event, falls outside the scope of the tax exemption granted to
registered pioneer enterprises by Section 8 of R.A. No. 5186, as
amended. Picop was the withholding agent, obliged to withhold thirty-five
percent (35%) of the interest payable to its lenders and to remit the
amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a
withholding agent, Picop is made personally liable for the thirty-five
percent (35%) transaction tax 10 and if it did not actually withhold thirty-
five percent (35%) of the interest monies it had paid to its lenders, Picop
had only itself to blame.
Picop claims that it had relied on a ruling, dated 6 October 1977, issued
by the CIR, which held that Picop was not liable for the thirty-five (35%)
transaction tax in respect of debenture bonds issued by Picop. Prior to
the issuance of the promissory notes involved in the instant case, Picop
had also issued debenture bonds P100,000,000.00 in aggregate face
value. The managing underwriter of this debenture bond issue, Bancom
Development Corporation, requested a formal ruling from the Bureau of
Internal Revenue on the liability of Picop for the thirty-five percent (35%)
transaction tax in respect of such bonds. The ruling rendered by the then
Acting Commissioner of Internal Revenue, Efren I. Plana, stated in
relevant part:
It is represented that PICOP will be offering to the public
primary bonds in the aggregate principal sum of one
hundred million pesos (P100,000,000.00); that the bonds
will be issued as debentures in denominations of one
thousand pesos (P1,000.00) or multiples, to mature in ten
(10) years at 14% interest per annum payable semi-
annually; that the bonds are convertible into common
stock of the issuer at the option of the bond holder at an
agreed conversion price; that the issue will be covered by
a "Trust Indenture" with a duly authorized trust
corporation as required by the Securities and Exchange
Commission, which trustee will act for and in behalf of the
debenture bond holders as beneficiaries; that once
issued, the bonds cannot be preterminated by the holder
and cannot be redeemed by the issuer until after eight (8)
years from date of issue; that the debenture bonds will
be subordinated to present and future debts of PICOP;
and that said bonds are intended to be listed in the stock
exchanges, which will place them alongside listed equity
issues.
In reply, I have the honor to inform you that although the
bonds hereinabove described are commercial papers
which will be issued in the primary market, however, it is
clear from the abovestated facts that said bonds will not
be issued as money market instruments. Such being the
case, and considering that the purposes of Presidential
Decree No. 1154, as can be gleaned from Letter of
Instruction No. 340, dated November 21, 1975, are (a) to
regulate money market transactions and (b) to ensure the
collection of the tax on interest derived from money
market transactions by imposing a withholding tax
thereon, said bonds do not come within the purview of
the "commercial papers" intended to be subjected to the
35% transaction tax prescribed in Presidential Decree
 No. 1154, as implemented by Revenue Regulations No.
7-77. (See Section 2 of said Regulation)
Accordingly, PICOP is not subject to 35% transaction tax
on its issues of the aforesaid bonds. However, those
investing in said bonds should be made aware of the fact
that the transaction tax is not being imposed on the issuer
of said bonds by printing or stamping thereon, in bold
letters, the following statement: "ISSUER NOT SUBJECT
TO TRANSACTION TAX UNDER P.D. 1154.
BONDHOLDER SHOULD DECLARE INTEREST
EARNING FOR INCOME TAX." 11 (Emphases supplied)
In the above quoted ruling, the CIR basically held that Picop's debenture
bonds did not constitute "commercial papers" within the meaning of P.D.
No. 1154, and that, as such, those bonds were not subject to the thirty-
five percent (35%) transaction tax imposed by P.D. No. 1154.
The above ruling, however, is not applicable in respect of the promissory
notes which are the subject matter of the instant case. It must be noted
that the debenture bonds which were the subject matter of Commissioner
Plana's ruling were long-term bonds maturing in ten (10) years and which
could not be pre-terminated and could not be redeemed by Picop until
after eight (8) years from date of issue; the bonds were moreover
subordinated to present and future debts of Picop and convertible into
common stock of Picop at the option of the bondholder. In contrast, the
promissory notes involved in the instant case are short-term instruments
bearing a one-year maturity period. These promissory notes constitute
the very archtype of money market instruments. For money market
instruments are precisely, by custom and usage of the financial
markets, short-term instruments with a tenor of one (1) year or
less. 12 Assuming, therefore, (without passing upon) the correctness of
the 6 October 1977 BIR ruling, Picop's short-term promissory notes must
be distinguished, and treated differently, from Picop's long-term
debenture bonds.
We conclude that Picop was properly held liable for the thirty-five percent
(35%) transaction tax due in respect of interest payments on its money
market borrowings.
At the same time, we agree with the Court of Appeals that the transaction
tax may be levied only in respect of the interest earnings of Picop's
money market lenders accruing after P.D. No. 1154 went into effect, and
not in respect of all the 1977 interest earnings of such lenders. The Court
of Appeals pointed out that:
PICOP, however contends that even if the tax has to be
paid, it should be imposed only for the interests earned
after 20 September 1977 when PD 1154 creating the tax
became effective. We find merit in this contention. It
appears that the tax was levied on interest earnings from
January to October, 1977. However, as found by the
lower court, PD 1154 was published in the Official
Gazette only on 5 September 1977, and became effective
only fifteen (15) days after the publication, or on 20
September 1977, no other effectivity date having been
provided by the PD. Based on the Worksheet prepared by
the Commissioner's office, the interests earned from 20
September to October 1977 was P10,224,410.03. Thirty-
five (35%) per cent of this is P3,578,543.51 which is all
PICOP should pay as transaction tax. 13 (Emphasis
supplied)
P.D. No. 1154 is not, in other words, to be given retroactive effect by
imposing the thirty-five percent (35%) transaction tax in respect of
interest earnings which accrued before the effectivity date of P.D. No.
1154, there being nothing in the statute to suggest that the legislative
authority intended to bring about such retroactive imposition of the tax.
(2) Whether Picop is liable
for interest and surcharge
on unpaid transaction tax.
With respect to the transaction tax due, the CIR prays that Picop be held
liable for a twenty-five percent (25%) surcharge and for interest at the
rate of fourteen percent (14%) per annum from the date prescribed for its
payment. In so praying, the CIR relies upon Section 10 of Revenue
Regulation 7-77 dated 3 June 1977, 14 issued by the Secretary of
Finance. This Section reads:
Sec. 10. Penalties. — Where the amount shown by the
taxpayer to be due on its return or part of such payment is
not paid on or before the date prescribed for its
payment, the amount of the tax shall be increased by
twenty-five (25%) per centum, the increment to be a part
of the tax and the entire amount shall be subject to
interest at the rate of fourteen (14%) per centum per
annum from the date prescribed for its payment.
 In the case of willful neglect to file the return within the
period prescribed herein or in case a false or fraudulent
return is willfully made, there shall be added to the tax or
to the deficiency tax in case any payment has been made
on the basis of such return before the discovery of the
falsity or fraud, a surcharge of fifty (50%) per centum of
its amount. The amount so added to any tax shall be
collected at the same time and in the same manner and
as part of the tax unless the tax has been paid before the
discovery of the falsity or fraud, in which case the amount
so added shall be collected in the same manner as the
tax.
In addition to the above administrative penalties,
the criminal and civil penalties as provided for under
Section 337 of the Tax Code of 1977 shall be imposed for
violation of any provision of Presidential Decree No.
1154. 15 (Emphases supplied)
The 1977 Tax Code itself, in Section 326 in relation to Section 4
of the same Code, invoked by the Secretary of Finance in issuing
Revenue Regulation 7-77, set out, in comprehensive terms, the
rule-making authority of the Secretary of Finance:
Sec. 326. Authority of Secretary of Finance to Promulgate
Rules and Regulations. — The Secretary of Finance,
upon recommendation of the Commissioner of Internal
Revenue, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions
of this Code. (Emphasis supplied)
Section 4 of the same Code contains a list of subjects or areas to
be dealt with by the Secretary of Finance through the medium of
an exercise of his quasi-legislative or rule-making authority. This
list, however, while it purports to be open-ended,
does not include the imposition of administrative or civil penalties
such as the payment of amounts additional to the tax due. Thus,
in order that it may be held to be legally effective in respect of
Picop in the present case, Section 10 of Revenue Regulation 7-
77 must embody or rest upon some provision in the Tax Code
itself which imposes surcharge and penalty interest for failure to
make a transaction tax payment when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the
imposition of, a surcharge and penalty interest in case of failure to pay
the thirty-five percent (35%) transaction tax when due. Neither did
Section 210 (b) of the 1977 Tax Code which re-enacted Section 195-C
inserted into the Tax Code by P.D. No. 1154.
The CIR, both in its petition before the Court of Appeals and its Petition in
the instant case, points to Section 51 (e) of the 1977 Tax Code as its
source of authority for assessing a surcharge and penalty interest in
respect of the thirty-five percent (35%) transaction tax due from Picop.
This Section needs to be quoted in extenso:
Sec. 51. Payment and Assessment of Income Tax. —
(c) Definition of deficiency. — As used in this Chapter in
respect of a tax imposed by this Title, the term
"deficiency" means:
(1) The amount by which the tax imposed by this
Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown on the
return shall first be increased by the amounts previously
assessed (or collected without assessment) as a
deficiency, and decreased by the amount previously
abated, credited, returned, or otherwise in respect of such
tax; . . .
xxx xxx xxx
(e) Additions to the tax in case of non-payment. —
(1) Tax shown on the return. — Where the amount
determined by the taxpayer as the tax imposed by this
Title or any installment thereof, or any part of such
amount or installment is not paid on or before the date
prescribed for its payment, there shall be collected as a
part of the tax, interest upon such unpaid amount at the
rate of fourteen per centum per annum from the date
prescribed for its payment until it is paid: Provided, That
the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount
corresponding to a period of three years, the present
 provisions regarding prescription to the contrary
notwithstanding.
(2) Deficiency. — Where a deficiency, or any interest
assessed in connection therewith under paragraph (d) of
this section, or any addition to the taxes provided for in
Section seventy-two of this Code is not paid in full within
thirty days from the date of notice and demand from the
Commissioner of Internal Revenue, there shall be
collected upon the unpaid amount as part of the tax,
interest at the rate of fourteen per centum per
annum from the date of such notice and demand until it is
paid: Provided, That the maximum amount that may be
collected as interest on deficiency shall in no case exceed
the amount corresponding to a period of three years, the
present provisions regarding prescription to the contrary
notwithstanding.
(3) Surcharge. — If any amount of tax included in the
notice and demand from the Commissioner of Internal
Revenue is not paid in full within thirty days after such
notice and demand, there shall be collected in addition to
the interest prescribed herein and in paragraph (d) above
and as part of the tax a surcharge of five per centum of
the amount of tax unpaid. (Emphases supplied)
Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2)
above, provides:
Sec. 72. Surcharges for failure to render returns and for
rendering false and fraudulent returns. — In case of willful
neglect to file the return or list required by this Title within
the time prescribed by law, or in case a false or fraudulent
return or list is wilfully made, the Commissioner of Internal
Revenue shall add to the tax or to the deficiency tax, in
case any payment has been made on the basis of such
return before the discovery of the falsity or fraud,
as surcharge of fifty per centum of the amount of such tax
or deficiency tax. In case of any failure to make and file a
return or list within the time prescribed by law or by the
Commissioner or other Internal Revenue Officer, not due
to willful neglect, the Commissioner of Internal Revenue
shall add to the tax twenty-five per centum of its amount,
except that, when a return is voluntarily and without notice
from the Commissioner or other officer filed after such
time, and it is shown that the failure to file it was due to a
reasonable cause, no such addition shall be made to the
tax. The amount so added to any tax shall be collected at
the same time, in the same manner and as part of the tax
unless the tax has been paid before the discovery of the
neglect, falsity, or fraud, in which case the amount so
added shall be collected in the same manner as the tax.
(Emphases supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax
Code, authorize the imposition of surcharge and interest only in respect
of a "tax imposed by this Title," that is to say, Title II on "Income Tax." It
will also be seen that Section 72 of the 1977 Tax Code imposes a
surcharge only in case of failure to file a return or list "required by this
Title," that is, Title II on "Income Tax." The thirty-five percent (35%)
transaction tax is, however, imposed in the 1977 Tax Code by Section
210 (b) thereof which Section is embraced in Title V on "Taxes on
Business" of that Code. Thus, while the thirty-five percent (35%)
transaction tax is in truth a tax imposed on interest income earned by
lenders or creditors purchasing commercial paper on the money market,
the relevant provisions, i.e., Section 210 (b), were not inserted in Title II
of the 1977 Tax Code. The end result is that the thirty-five percent (35%)
transaction tax is not one of the taxes in respect of which Section 51 (e)
authorized the imposition of surcharge and interest and Section 72 the
imposition of a fraud surcharge.
It is not without reluctance that we reach the above conclusion on the
basis of what may well have been an inadvertent error in legislative
draftsmanship, a type of error common enough during the period of
Martial Law in our country. Nevertheless, we are compelled to adopt this
conclusion. We consider that the authority to impose what the present
Tax Code calls (in Section 248) civil penalties consisting of additions to
the tax due, must be expressly given in the enabling statute, in language
too clear to be mistaken. The grant of that authority is not lightly to be
assumed to have been made to administrative officials, even to one as
highly placed as the Secretary of Finance.
The state of the present law tends to reinforce our conclusion that
Section 51 (c) and (e) of the 1977 Tax Code did not authorize the
imposition of a surcharge and penalty interest for failure to pay the thirty-
five percent (35%) transaction tax imposed under Section 210 (b) of the
same Code. The corresponding provision in the current Tax Code very
clearly embraces failure to pay all taxes imposed in the Tax
Code, without any regard to the Title of the Code where provisions
imposing particular taxes are textually located. Section 247 (a) of the
NIRC, as amended, reads:
Title X
Statutory Offenses and Penalties
Chapter I
Additions to the Tax
Sec. 247. General Provisions. — (a) The additions to the
tax or deficiency tax prescribed in this Chapter shall apply
to all taxes, fees and charges imposed in this Code. The
amount so added to the tax shall be collected at the same
time, in the same manner and as part of the tax. . . .
Sec. 248. Civil Penalties. — (a) There shall be
imposed, in addition to the tax required to be paid,
penalty equivalent to twenty-five percent (25%) of the
amount due, in the following cases:
x x x           x x x          x x x
(3) failure to pay the tax within the time
prescribed for its payment; or
xxx xxx xxx
(c) the penalties imposed hereunder shall form part of the
tax and the entire amount shall be subject to the interest
prescribed in Section 249.
Sec. 249. Interest. — (a) In General. — There shall be
assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per
annum or such higher rate as may be prescribed by
regulations, from the date prescribed for payment until the
amount is fully paid. . . . (Emphases supplied)
In other words, Section 247 (a) of the current NIRC supplies what
did not exist back in 1977 when Picop's liability for the thirty-five
percent (35%) transaction tax became fixed. We do not believe
we can fill that legislative lacuna by judicial fiat. There is nothing
to suggest that Section 247 (a) of the present Tax Code, which
was inserted in 1985, was intended to be given retroactive
application by the legislative authority. 16
(3) Whether Picop is Liable
for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term subordinated
convertible debenture bonds with an aggregate face value of
P100,000,000.00. Picop stated, and this was not disputed by the CIR,
that the proceeds of the debenture bonds were in fact utilized to finance
the BOI-registered operations of Picop. The CIR assessed documentary
and science stamp taxes, amounting to P300,000.00, on the issuance of
Picop's debenture bonds. It is claimed by Picop that its tax exemption —
"exemption from all taxes under the National Internal Revenue Code,
except income tax" on a declining basis over a certain period of time —
includes exemption from the documentary and science stamp taxes
imposed under the NIRC.
The CIR, upon the other hand, stresses that the tax exemption under the
Investment Incentives Act may be granted or recognized only to the
extent that the claimant Picop was engaged in registered operations, i.e.,
operations forming part of its integrated pulp and paper project. 17 The
borrowing of funds from the public, in the submission of the CIR, was not
an activity included in Picop's registered operations. The CTA adopted
the view of the CIR and held that "the issuance of convertible debenture
bonds [was] not synonymous [with] the manufactur[ing] operations of an
integrated pulp and paper mill." 18
The Court of Appeals took a less rigid view of the ambit of the tax
exemption granted to registered pioneer enterprises. Said the Court of
Appeals:
. . . PICOP's explanation that the debenture bonds were
issued to finance its registered operation is logical and is
unrebutted. We are aware that tax exemptions must be
applied strictly against the beneficiary in order to deter
their abuse. It would indeed be altogether a different
 matter if there is a showing that the issuance of the You now request a ruling that as a preferred pioneer
debenture bonds had no bearing whatsoever on the enterprise, you are exempt from the payment of
registered operations PICOP and that they were issued in Documentary Stamp Tax (DST).
connection with a totally different business undertaking of
PICOP other than its registered operation. There is, In reply, please be informed that your request is hereby
however, a dearth of evidence in this regard. It cannot be granted. Pursuant to Section 46 (a) of Presidential Decree
denied that PICOP needed funds for its operations. One No. 1789, pioneer enterprises registered with the BOI are
of the means it used to raise said funds was to issue exempt from all taxes under the National Internal
debenture bonds. Since the money raised thereby was to Revenue Code, except from all taxes under the National
be used in its registered operation, PICOP should enjoy Internal Revenue Code, except income tax, from the date
the incentives granted to it by R.A. 5186, one of which is the area of investment is included in the Investment
the exemption from payment of all taxes under the Priorities Plan to the following extent:
National Internal Revenue Code, except income
taxes, otherwise the purpose of the incentives would be xxx xxx xxx
defeated. Documentary and science stamp taxes on
debenture bonds are certainly not income
Accordingly, your company is exempt from the payment
taxes. 19 (Emphasis supplied)
of documentary stamp tax to the extent of the percentage
aforestated on transactions connected with the registered
Tax exemptions are, to be sure, to be "strictly construed," that is, they are business activity. (BIR Ruling No. 111-81) However, if
not to be extended beyond the ordinary and reasonable intendment of the said transactions conducted by you require the execution
language actually used by the legislative authority in granting the of a taxable document with other parties, said parties who
exemption. The issuance of debenture bonds is certainly conceptually are not exempt shall be the one directly liable for the tax.
distinct from pulping and paper manufacturing operations. But no one (Sec. 173, Tax Code, as amended; BIR Ruling No. 236-
contends that issuance of bonds was a principal or regular business 87) In other words, said parties shall be liable to the same
activity of Picop; only banks or other financial institutions are in the percentage corresponding to your tax exemption.
regular business of raising money by issuing bonds or other instruments (Emphasis supplied)
to the general public. We consider that the actual dedication of the
proceeds of the bonds to the carrying out of Picop's registered operations
Similarly, in BIR Ruling No. 013, dated 6 February 1989, the
constituted a sufficient nexus with such registered operations so as to
Commissioner held that a registered pioneer enterprise producing
exempt Picop from stamp taxes ordinarily imposed upon or in connection
polyester filament yarn was entitled to exemption "from the
with issuance of such bonds. We agree, therefore, with the Court of
documentary stamp tax on [its] sale of real property in Makati up
Appeals on this matter that the CTA and the CIR had erred in rejecting
to December 31, 1989." It appears clear to the Court that the CIR,
Picop's claim for exemption from stamp taxes.
administratively at least, no longer insists on the position it
originally took in the instant case before the CTA.
It remains only to note that after commencement of the present litigation
before the CTA, the BIR took the position that the tax exemption granted
II
by R.A. No. 5186, as amended, does include exemption from
documentary stamp taxes on transactions entered into by BOI-registered
enterprises. BIR Ruling No. 088, dated 28 April 1989, for instance, held (1) Whether Picop is entitled
that a registered preferred pioneer enterprise engaged in the to deduct against current
manufacture of integrated circuits, magnetic heads, printed circuit boards, income interest payments
etc., is exempt from the payment of documentary stamp taxes. The on loans for the purchase
Commissioner said: of machinery and equipment.
In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in
order to finance the purchase of machinery and equipment needed for its
operations. In its 1977 Income Tax Return, Picop claimed interest
payments made in 1977, amounting to P42,840,131.00, on these loans
as a deduction from its 1977 gross income.
The CIR disallowed this deduction upon the ground that, because the
loans had been incurred for the purchase of machinery and equipment,
the interest payments on those loans should have been capitalized
instead and claimed as a depreciation deduction taking into account the
adjusted basis of the machinery and equipment (original acquisition cost
plus interest charges) over the useful life of such assets.
Both the CTA and the Court of Appeals sustained the position of Picop
and held that the interest deduction claimed by Picop was proper and
allowable. In the instant Petition, the CIR insists on its original position.
We begin by noting that interest payments on loans incurred by a
taxpayer (whether BOI-registered or not) are allowed by the NIRC as
deductions against the taxpayer's gross income. Section 30 of the 1977
Tax Code provided as follows:
Sec. 30. Deduction from Gross Income. — The following
may be deducted from gross income:
(a) Expenses:
xxx xxx xxx
(b) Interest:
(1) In general. — The amount of interest
paid within the taxable year
on indebtedness, except on indebtedness
incurred or continued to purchase or carry
obligations the interest upon which is
exempt from taxation as income under this
Title: . . . (Emphasis supplied)
Thus, the general rule is that interest expenses are deductible
against gross income and this certainly includes interest paid
under loans incurred in connection with the carrying on of the
business of the taxpayer. 20 In the instant case, the CIR does not
dispute that the interest payments were made by Picop on
loans incurred in connection with the carrying on of the registered
operations of Picop, i.e., the financing of the purchase of
machinery and equipment actually used in the registered
operations of Picop. Neither does the CIR deny that such interest
payments were legally due and demandable under the terms of
such loans, and in fact paid by Picop during the tax year 1977.
The CIR has been unable to point to any provision of the 1977 Tax Code
or any other Statute that requires the disallowance of the interest
payments made by Picop. The CIR invokes Section 79 of Revenue
Regulations No. 2 as amended which reads as follows:
Sec. 79. Interest on Capital. — Interest calculated for
cost-keeping or other purposes on account of capital or
surplus invested in the business, which does not
represent a charge arising under an interest-bearing
obligation, is not allowable deduction from gross income.
(Emphases supplied)
We read the above provision of Revenue Regulations No. 2 as
referring to so called "theoretical interest," that is to say, interest
"calculated" or computed (and not incurred or paid) for the
purpose of determining the "opportunity cost" of investing funds in
a given business. Such "theoretical" or imputed interest
does not arise from a legally demandable interest-bearing
obligation incurred by the taxpayer who however wishes to find
out, e.g., whether he would have been better off by lending out
his funds and earning interest rather than investing such funds in
his business. One thing that Section 79 quoted above makes
clear is that interest which does constitute a charge arising under
an interest-bearing obligation is an allowable deduction from
gross income.
It is claimed by the CIR that Section 79 of Revenue Regulations No. 2
was "patterned after" paragraph 1.266-1 (b), entitled "Taxes and Carrying
Charges Chargeable to Capital Account and Treated as Capital Items" of
the U.S. Income Tax Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The items thus
chargeable to capital accounts are —
 (11) In the case of real property, whether improved or
unimproved and whether productive or nonproductive.
(a) Interest on a loan (but not theoretical interest of a
taxpayer using his own funds). 21
The truncated excerpt of the U.S. Income Tax Regulations quoted by the
CIR needs to be related to the relevant provisions of the U.S. Internal
Revenue Code, which provisions deal with the general topic of adjusted
basis for determining allowable gain or loss on sales or exchanges of
property and allowable depreciation and depletion of capital assets of the
taxpayer:
Present Rule. The Internal Revenue Code, and the
Regulations promulgated thereunder provide that "No
deduction shall be allowed for amounts paid or
accrued for such taxes and carrying charges as, under
regulations prescribed by the Secretary or his delegate,
are chargeable to capital account with respect to
property, if the taxpayer elects, in accordance with such
regulations, to treat such taxes or charges as so
chargeable."
At the same time, under the adjustment of basis
provisions which have just been discussed, it is provided
that adjustment shall be made for all "expenditures,
receipts, losses, or other items" properly chargeable to a
capital account, thus including taxes and carrying
charges; however, an exception exists, in which event
such adjustment to the capital account is not made, with
respect to taxes and carrying charges which the taxpayer
has not elected to capitalize but for which a deduction
instead has been taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized under the above
quoted provisions of the U.S. Internal Revenue Code include, as
the CIR has pointed out, interest on a loan "(but not theoretical
interest of a taxpayer using his own funds)." What the CIR failed
to point out is that such "carrying charges" may, at the election of
the taxpayer, either be (a) capitalized in which case the cost
basis of the capital assets, e.g., machinery and equipment, will be
adjusted by adding the amount of such interest
payments or alternatively, be (b) deducted from gross income of
the taxpayer. Should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer cannot at the
same time capitalize the interest payments. In other words, the
taxpayer is not entitled to both the deduction from gross income
and the adjusted (increased) basis for determining gain or loss
and the allowable depreciation charge. The U.S. Internal
Revenue Code does not prohibit the deduction of interest on a
loan obtained for purchasing machinery and equipment against
gross income, unless the taxpayer has also or previously
capitalized the same interest payments and thereby adjusted the
cost basis of such assets.
We have already noted that our 1977 NIRC does not prohibit the
deduction of interest on a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel the capitalization of
interest payments on such a loan. The 1977 Tax Code is simply silent on
a taxpayer's right to elect one or the other tax treatment of such interest
payments. Accordingly, the general rule that interest payments on a
legally demandable loan are deductible from gross income must be
applied.
The CIR argues finally that to allow Picop to deduct its interest payments
against its gross income would be to encourage fraudulent claims to
double deductions from gross income:
[t]o allow a deduction of incidental expense/cost incurred
in the purchase of fixed asset in the year it was incurred
would invite tax evasion through fraudulent application of
double deductions from gross income. 23 (Emphases
supplied)
The Court is not persuaded. So far as the records of the instant
cases show, Picop has not claimed to be entitled to double
deduction of its 1977 interest payments. The CIR has neither
alleged nor proved that Picop had previously adjusted its cost
basis for the machinery and equipment purchased with the loan
proceeds by capitalizing the interest payments here involved. The
Court will not assume that the CIR would be unable or unwilling to
disallow "a double deduction" should Picop, having deducted its
interest cost from its gross income, also attempt subsequently to
adjust upward the cost basis of the machinery and equipment
purchased and claim, e.g., increased deductions for depreciation.
We conclude that the CTA and the Court of Appeals did not err in
allowing the deductions of Picop's 1977 interest payments on its loans for
capital equipment against its gross income for 1977.
(2) Whether Picop is entitled
to deduct against current
income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.
On 18 January 1977, Picop entered into a merger agreement with the
Rustan Pulp and Paper Mills, Inc. ("RPPM") and Rustan Manufacturing
Corporation ("RMC"). Under this agreement, the rights, properties,
privileges, powers and franchises of RPPM and RMC were to be
transferred, assigned and conveyed to Picop as the surviving corporation.
The entire subscribed and outstanding capital stock of RPPM and RMC
would be exchanged for 2,891,476 fully paid up Class "A" common stock
of Picop (with a par value of P10.00) and 149,848 shares of preferred
stock of Picop (with a par value of P10.00), to be issued by Picop, the
result being that Picop would wholly own both RPPM and RMC while the
stockholders of RPPM and RMC would join the ranks of Picop's
shareholders. In addition, Picop paid off the obligations of RPPM to the
Development Bank of the Philippines ("DBP") in the amount of
P68,240,340.00, by issuing 6,824,034 shares of preferred stock (with a
par value of P10.00) to the DBP. The merger agreement was approved in
1977 by the creditors and stockholders of Picop, RPPM and RMC and by
the Securities and Exchange Commission. Thereupon, on 30 November
1977, apparently the effective date of merger, RPPM and RMC were
dissolved. The Board of Investments approved the merger agreement on
12 January 1978.
It appears that RPPM and RMC were, like Picop, BOI-registered
companies. Immediately before merger effective date, RPPM had over
preceding years accumulated losses in the total amount of
P81,159,904.00. In its 1977 Income Tax Return, Picop claimed
P44,196,106.00 of RPPM's accumulated losses as a deduction against
Picop's 1977 gross income. 24
Upon the other hand, even before the effective date of merger, on 30
August 1977, Picop sold all the outstanding shares of RMC stock to San
Miguel Corporation for the sum of P38,900,000.00, and reported a gain of
P9,294,849.00 from this transaction. 25
In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186
which provides as follows:
Sec. 7. Incentives to Registered Enterprise. — A
registered enterprise, to the extent engaged in a preferred
area of investment, shall be granted the following
incentive benefits:
xxx xxx xxx
(c) Net Operating Loss Carry-over. — A net operating
loss incurred in any of the first ten years of operations
may be carried over as a deduction from taxable income
for the six years immediately following the year of such
loss. The entire amount of the loss shall be carried over to
the first of the six taxable years following the loss, and
any portion of such loss which exceeds the taxable
income of such first year shall be deducted in like manner
from the taxable income of the next remaining five
years. The net operating loss shall be computed in
accordance with the provisions of the National Internal
Revenue Code, any provision of this Act to the contrary
notwithstanding, except that income not taxable either in
whole or in part under this or other laws shall be included
in gross income. (Emphasis supplied)
Picop had secured a letter-opinion from the BOI dated 21
February 1977 — that is, after the date of the agreement of
merger but before the merger became effective — relating to the
deductibility of the previous losses of RPPM under Section 7 (c)
of R.A. No. 5186 as amended. The pertinent portions of this BOI
opinion, signed by BOI Governor Cesar Lanuza, read as follows:
2) PICOP will not be allowed to carry over the losses of
Rustan prior to the legal dissolution of the latter because
at that time the two (2) companies still had separate legal
personalities;
3) After BOI approval of the merger, PICOP can no longer
apply for the registration of the registered capacity of
Rustan because with the approved merger, such
registered capacity of Rustan transferred to PICOP will
have the same registration date as that of Rustan. In this
 case, the previous losses of Rustan may be carried over
by PICOP, because with the merger, PICOP assumes all
the rights and obligations of Rustan subject, however, to
the period prescribed for carrying over of such
losses. 26 (Emphasis supplied)
Curiously enough, Picop did not also seek a ruling on this matter,
clearly a matter of tax law, from the Bureau of Internal Revenue.
Picop chose to rely solely on the BOI letter-opinion.
The CIR disallowed all the deductions claimed on the basis of RPPM's
losses, apparently on two (2) grounds. Firstly, the previous losses were
incurred by "another taxpayer," RPPM, and not by Picop in connection
with Picop's own registered operations. The CIR took the view that Picop,
RPPM and RMC were merged into one (1) corporate personality only on
12 January 1978, upon approval of the merger agreement by the BOI.
Thus, during the taxable year 1977, Picop on the one hand and RPPM
and RMC on the other, still had their separate juridical personalities.
Secondly, the CIR alleged that these losses had been incurred by RPPM
"from the borrowing of funds" and not from carrying out of RPPM's
registered operations. We focus on the first ground. 27
The CTA upheld the deduction claimed by Picop; its reasoning, however,
is less than crystal clear, especially in respect of its view of what the U.S.
tax law was on this matter. In any event, the CTA apparently fell back on
the BOI opinion of 21 February 1977 referred to above. The CTA said:
Respondent further averred that the incentives granted
under Section 7 of R.A. No. 5186 shall be available only
to the extent in which they are engaged in registered
operations, citing Section 1 of Rule IX of the Basic Rules
and Regulations to Implement the Intent and Provisions of
the Investment Incentives Act, R.A. No. 5186.
We disagree with respondent. The purpose of the merger
was to rationalize the container board industry and not to
take advantage of the net losses incurred by RPPMI prior
to the stock swap. Thus, when stock of a corporation is
purchased in order to take advantage of the corporation's
net operating loss incurred in years prior to the purchase,
the corporation thereafter entering into a trade or
business different from that in which it was previously
engaged, the net operating loss carry-over may be
entirely lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens,
Law of Federal Income Taxation, Chap. 29.11a, p.
103]. 28 Furthermore, once the BOI approved the merger
agreement, the registered capacity of Rustan shall be
transferred to PICOP, and the previous losses of Rustan
may be carried over by PICOP by operation of law. [BOI
ruling dated February 21, 1977 (Exh. J-1)] It is clear
therefrom, that the deduction availed of under Section
7(c) of R.A. No. 5186 was only proper." (pp. 38-
43, Rollo of SP No. 20070) 29 (Emphasis supplied)
In respect of the above underscored portion of the CTA decision,
we must note that the CTA in fact overlooked the statement made
by petitioner's counsel before the CTA that:
Among the attractions of the merger to Picop was the
accumulated net operating loss carry-over of RMC that it
might possibly use to relieve it (Picop) from its income
taxes, under Section 7 (c) of R.A. 5186. Said section
provides:
xxx xxx xxx
With this benefit in mind, Picop addressed three (3)
questions to the BOI in a letter dated November 25, 1976.
The BOI replied on February 21, 1977 directly answering
the three (3) queries. 30 (Emphasis supplied)
The size of RPPM's accumulated losses as of the date of the
merger — more than P81,000,000.00 — must have constituted a
powerful attraction indeed for Picop.
The Court of Appeals followed the result reached by the CTA. The Court
of Appeals, much like the CTA, concluded that since RPPM was
dissolved on 30 November 1977, its accumulated losses were
appropriately carried over by Picop in the latter's 1977 Income Tax
Return "because by that time RPPMI and Picop were no longer separate
and different taxpayers." 31
After prolonged consideration and analysis of this matter, the Court is
unable to agree with the CTA and Court of Appeals on the deductibility of
RPPM's accumulated losses against Picop's 1977 gross income.
It is important to note at the outset that in our jurisdiction, the ordinary
rule — that is, the rule applicable in respect of corporations not registered
with the BOI as a preferred pioneer enterprise — is that net operating
losses cannot be carried over. Under our Tax Code, both in 1977 and at
present, losses may be deducted from gross income only if such losses
were actually sustained in the same year that they are deducted or
charged off. Section 30 of the 1977 Tax Code provides:
Sec. 30. Deductions from Gross Income. — In computing
net income, there shall be allowed as deduction —
xxx xxx xxx
(d) Losses:
(1) By Individuals. — In the case of an individual,
losses actually sustained during the taxable year and not
compensated for by an insurance or otherwise —
(A) If incurred in trade or business;
xxx xxx xxx
(2) By Corporations. — In a case of a corporation, all
losses actually sustained and charged off within the
taxable year and not compensated for by insurance or
otherwise.
(3) By Non-resident Aliens or Foreign Corporations. — In
the case of a non-resident alien individual or a foreign
corporation, the losses deductible are those actually
sustained during the year incurred in business or trade
conducted within the Philippines, . . . 32 (Emphasis
supplied)
Section 76 of the Philippine Income Tax Regulations (Revenue
Regulation No. 2, as amended) is even more explicit and
detailed:
Sec. 76. When charges are deductible. — Each year's
return, so far as practicable, both as to gross income and
deductions therefrom should be complete in itself, and
taxpayers are expected to make every reasonable effort
to ascertain the facts necessary to make a correct
return. The expenses, liabilities, or deficit of one year
cannot be used to reduce the income of a subsequent
year. A taxpayer has the right to deduct all authorized
allowances and it follows that if he does not within any
year deduct certain of his expenses, losses, interests,
taxes, or other charges,
he can not deduct them from the income of the next or
any succeeding year. . . .
xxx xxx xxx
. . . . If subsequent to its occurrence, however, a taxpayer
first ascertains the amount of a loss sustained during a
prior taxable year which has not been deducted from
gross income, he may render an amended return for such
preceding taxable year including such amount of loss in
the deduction from gross income and may in proper cases
file a claim for refund of the excess paid by reason of the
failure to deduct such loss in the original return. A loss
from theft or embezzlement occurring in one year and
discovered in another is ordinarily deductible for the year
in which sustained. (Emphases supplied)
It is thus clear that under our law, and outside the special realm of
BOI-registered enterprises, there is no such thing as a carry-over
of net operating loss. To the contrary, losses must be
deducted against current income in the taxable year when such
losses were incurred. Moreover, such losses may be charged
off only against income earned in the same taxable year when
the losses were incurred.
Thus it is that R.A. No. 5186 introduced the carry-over of net operating
losses as a very special incentive to be granted only to registered
pioneer enterprises and only with respect to their registered operations.
The statutory purpose here may be seen to be the encouragement of the
establishment and continued operation of pioneer industries by allowing
the registered enterprise to accumulate its operating losses which may be
expected during the early years of the enterprise and to permit the
enterprise to offset such losses against income earned by it in later years
after successful establishment and regular operations. To promote its
economic development goals, the Republic foregoes or defers taxing the
income of the pioneer enterprise until after that enterprise has recovered
or offset its earlier losses. We consider that the statutory purpose can be
served only if the accumulated operating losses are carried over and
charged off against income subsequently earned and accumulated by the
same enterprise engaged in the same registered operations.
In the instant case, to allow the deduction claimed by Picop would be to
permit one corporation or enterprise, Picop, to benefit from the operating
losses accumulated by another corporation or enterprise, RPPM. RPPM
far from benefiting from the tax incentive granted by the BOI statute, in
fact gave up the struggle and went out of existence and its former
stockholders joined the much larger group of Picop's stockholders. To
grant Picop's claimed deduction would be to permit Picop to shelter its
otherwise taxable income (an objective which Picop had from the very
beginning) which had not been earned by the registered enterprise which
had suffered the accumulated losses. In effect, to grant Picop's claimed
deduction would be to permit Picop to purchase a tax deduction and
RPPM to peddle its accumulated operating losses. Under the CTA and
Court of Appeals decisions, Picop would benefit by immunizing
P44,196,106.00 of its income from taxation thereof although Picop had
not run the risks and incurred the losses which had been encountered
and suffered by RPPM. Conversely, the income that would be shielded
from taxation is not income that was, after much effort, eventually
generated by the same registered operations which earlier had sustained
losses. We consider and so hold that there is nothing in Section 7 (c) of
R.A. No. 5186 which either requires or permits such a result. Indeed, that
result makes non-sense of the legislative purpose which may be seen
clearly to be projected by Section 7 (c), R.A. No. 5186.
The CTA and the Court of Appeals allowed the offsetting of RPPM's
accumulated operating losses against Picop's 1977 gross income,
basically because towards the end of the taxable year 1977, upon the
arrival of the effective date of merger, only one (1) corporation, Picop,
remained. The losses suffered by RPPM's registered operations and the
gross income generated by Picop's own registered operations now came
under one and the same corporate roof. We consider that this
circumstance relates much more to form than to substance. We do not
believe that that single purely technical factor is enough to authorize and
justify the deduction claimed by Picop. Picop's claim for deduction is not
only bereft of statutory basis; it does violence to the legislative intent
which animates the tax incentive granted by Section 7 (c) of R.A. No.
5186. In granting the extraordinary privilege and incentive of a net
operating loss carry-over to BOI-registered pioneer enterprises, the
legislature could not have intended to require the Republic to forego tax
revenues in order to benefit a corporation which had run no risks and
suffered no losses, but had merely purchased another's losses.
Both the CTA and the Court of Appeals appeared much impressed not
only with corporate technicalities but also with the U.S. tax law on this
matter. It should suffice, however, simply to note that in U.S. tax law, the
availability to companies generally of operating loss carry-overs and of
operating loss carry-backs is expressly provided and regulated in great
detail by statute. 33 In our jurisdiction, save for Section 7 (c) of R.A. No.
5186, no statute recognizes or permits loss carry-overs and loss carry-
backs. Indeed, as already noted, our tax law expressly rejects the very
notion of loss carry-overs and carry-backs.
We conclude that the deduction claimed by Picop in the amount of
P44,196,106.00 in its 1977 Income Tax Return must be disallowed.
(3) Whether Picop is entitled
to deduct against current
income certain claimed
financial guarantee expenses.
In its Income Tax Return for 1977, Picop also claimed a deduction in the
amount of P1,237,421.00 as financial guarantee expenses.
This deduction is said to relate to chattel and real estate mortgages
required from Picop by the Philippine National Bank ("PNB") and DBP as
guarantors of loans incurred by Picop from foreign creditors. According to
Picop, the claimed deduction represents registration fees and other
expenses incidental to registration of mortgages in favor of DBP and
PNB.
In support of this claimed deduction, Picop allegedly showed its own
vouchers to BIR Examiners to prove disbursements to the Register of
Deeds of Tandag, Surigao del Sur, of particular amounts. In the
proceedings before the CTA, however, Picop did not submit in evidence
such vouchers and instead presented one of its employees to testify that
the amount claimed had been disbursed for the registration of chattel and
real estate mortgages.
The CIR disallowed this claimed deduction upon the ground of
insufficiency of evidence. This disallowance was sustained by the CTA
and the Court of Appeals. The CTA said:
No records are available to support the abovementioned
expenses. The vouchers merely showed that the amounts
were paid to the Register of Deeds and simply cash
 account. Without the supporting papers such as the We consider that entitlement to Picop's claimed deduction of
invoices or official receipts of the Register of Deeds, P1,237,421.00 was not adequately shown and that such deduction must
these vouchers standing alone cannot prove that the be disallowed.
payments made were for the accrued expenses in
question. The best evidence of payment is the official III
receipts issued by the Register of Deeds. The testimony
of petitioner's witness that the official receipts and cash (1) Whether Picop had understated
vouchers were shown to the Bureau of Internal Revenue its sales and overstated its
will not suffice if no records could be presented in court cost of sales for 1977.
for proper marking and identification. 34 Emphasis
supplied)
In its assessment for deficiency income tax for 1977, the CIR claimed that
Picop had understated its sales by P2,391,644.00 and, upon the other
The Court of Appeals added: hand, overstated its cost of sales by P604,018.00. Thereupon, the CIR
added back both sums to Picop's net income figure per its own return.
The mere testimony of a witness for PICOP and the cash
vouchers do not suffice to establish its claim that The 1977 Income Tax Return of Picop set forth the following figures:
registration fees were paid to the Register of Deeds for
the registration of real estate and chattel mortgages in
Sales (per Picop's Income Tax Return):
favor of Development Bank of the Philippines and the
Philippine National Bank as guarantors of PICOP's loans.
The witness could very well have been merely repeating Paper P 537,656,719.00
what he was instructed to say regardless of the truth,
while the cash vouchers, which we do not find on file, are Timber P 263,158,132.00
not said to provide the necessary details regarding the
nature and purpose of the expenses reflected ———————
therein. PICOP should have presented, through the
guarantors, its owner's copy of the registered titles with Total Sales P 800,814,851.00
the lien inscribed thereon as well as an official receipt
from the Register of Deeds evidencing payment of the ============
registration fee. 35 (Emphasis supplied)
Upon the other hand, Picop's Books of Accounts reflected higher
We must support the CTA and the Court of Appeals in their foregoing sales figures:
rulings. A taxpayer has the burden of proving entitlement to a claimed
deduction. 36 In the instant case, even Picop's own vouchers were not Sales (per Picop's Books of Accounts):
submitted in evidence and the BIR Examiners denied that such vouchers
and other documents had been exhibited to them. Moreover, cash
vouchers can only confirm the fact of disbursement but not necessarily Paper P 537,656,719.00
the purpose thereof. 37 The best evidence that Picop should have
presented to support its claimed deduction were the invoices and official Timber P 265,549,776.00
receipts issued by the Register of Deeds. Picop not only failed to present
such documents; it also failed to explain the loss thereof, assuming they ———————
had existed before. 38 Under the best evidence rule, 39 therefore, the
testimony of Picop's employee was inadmissible and was in any case Total Sales P 803,206,495.00
entitled to very little, if any, credence.
 ============
The above figures thus show a discrepancy between the sales
figures reflected in Picop's Books of Accounts and the sales
figures reported in its 1977 Income Tax Return, amounting to:
P2,391,644.00.
The CIR also contended that Picop's cost of sales set out in its 1977
Income Tax Return, when compared with the cost figures in its Books of
Accounts, was overstated:
Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00
———————
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In the
proceedings before the CTA, Picop presented one of its officials to
explain the foregoing discrepancies. That explanation is perhaps best
presented in Picop's own words as set forth in its Memorandum before
this Court:
. . . that the adjustment discussed in the testimony of the
witness, represent the best and most objective method of
determining in pesos the amount of the correct and actual
export sales during the year. It was this correct and actual
export sales and costs of sales that were reflected in the
income tax return and in the audited financial statements.
These corrections did not result in realization of income
and should not give rise to any deficiency tax.
xxx xxx xxx
What are the facts of this case on this matter? Why were
adjustments necessary at the year-end?
Because of PICOP's procedure of recording its export
sales (reckoned in U.S. dollars) on the basis of a fixed
rate, day to day and month to month, regardless of the
actual exchange rate and without waiting when the actual
proceeds are received. In other words, PICOP recorded
its export sales at a pre-determined fixed exchange rate.
That pre-determined rate was decided upon at the
beginning of the year and continued to be used
throughout the year.
At the end of the year, the external auditors made an
examination. In that examination, the auditors determined
with accuracy the actual dollar proceeds of the export
sales received. What exchange rate was used by the
auditors to convert these actual dollar proceeds into
Philippine pesos? They used the average of the
differences between (a) the recorded fixed exchange rate
and (b) the exchange rate at the time the proceeds were
actually received. It was this rate at time of receipt of the
proceeds that determined the amount of pesos credited
by the Central Bank (through the agent banks) in favor of
PICOP. These accumulated differences were averaged
by the external auditors and this was what was used at
the year-end for income tax and other government-report
purposes. (T.s.n., Oct. 17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court,
raises more questions than it resolves. Firstly, the explanation assumes
that all of Picop's sales were export sales for which U.S. dollars (or other
foreign exchange) were received. It also assumes that the expenses
summed up as "cost of sales" were all dollar expenses and that no peso
expenses had been incurred. Picop's explanation further assumes that a
substantial part of Picop's dollar proceeds for its export sales were not
actually surrendered to the domestic banking system and seasonably
converted into pesos; had all such dollar proceeds been converted into
pesos, then the peso figures could have been simply added up to reflect
the actual peso value of Picop's export sales. Picop offered no evidence
in respect of these assumptions, no explanation why and how a "pre-
determined fixed exchange rate" was chosen at the beginning of the year
and maintained throughout. Perhaps more importantly, Picop was unable
to explain why its Books of Accounts did not pick up the same
adjustments that Picop's External Auditors were alleged to have made for
purposes of Picop's Income Tax Return. Picop attempted to explain away
the failure of its Books of Accounts to reflect the same adjustments (no
correcting entries, apparently) simply by quoting a passage from a case
where this Court refused to ascribe much probative value to the Books of
Accounts of a corporate taxpayer in a tax case. 41 What appears to have
eluded Picop, however, is that its Books of Accounts, which are kept by
its own employees and are prepared under its control and supervision,
reflect what may be deemed to be admissions against interest in the
instant case. For Picop's Books of Accounts precisely show higher sales
figures and lower cost of sales figures than Picop's Income Tax Return.
It is insisted by Picop that its Auditors' adjustments simply present the
"best and most objective" method of reflecting in pesos the "correct
and ACTUAL export sales" 42 and that the adjustments or "corrections"
"did not result in realization of [additional] income and should not give rise
to any deficiency tax." The correctness of this contention is not self-
evident. So far as the record of this case shows, Picop did not submit in
evidence the aggregate amount of its U.S. dollar proceeds of its export
sales; neither did it show the Philippine pesos it had actually received or
been credited for such U.S. dollar proceeds. It is clear to this Court that
the testimonial evidence submitted by Picop fell far short of
demonstrating the correctness of its explanation.
Upon the other hand, the CIR has made out at least a prima facie case
that Picop had understated its sales and overstated its cost of sales as
set out in its Income Tax Return. For the CIR has a right to assume that
Picop's Books of Accounts speak the truth in this case since, as already
noted, they embody what must appear to be admissions against Picop's
own interest.
Accordingly, we must affirm the findings of the Court of Appeals and the
CTA.
(2) Whether Picop is liable for
the corporate development
tax of five percent (5%)
of its income for 1977.
The five percent (5%) corporate development tax is an additional
corporate income tax imposed in Section 24 (e) of the 1977 Tax Code
which reads in relevant part as follows:
(e) Corporate development tax. — In addition to the tax
imposed in subsection (a) of this section, an additional tax
in an amount equivalent to 5 per cent of the same taxable
net income shall be paid by a domestic or a resident
foreign corporation; Provided, That this additional tax shall
be imposed only if the net income exceeds 10 per cent of
the net worth, in case of a domestic corporation, or net
assets in the Philippines in case of a resident foreign
corporation: . . . .
The additional corporate income tax imposed in this
subsection shall be collected and paid at the same time
and in the same manner as the tax imposed in subsection
(a) of this section.
Since this five percent (5%) corporate development tax is
an income tax, Picop is not exempted from it under the provisions
of Section 8 (a) of R.A. No. 5186.
For purposes of determining whether the net income of a corporation
exceeds ten percent (10%) of its net worth, the term "net worth" means
the stockholders' equity represented by the excess of the total assets
over liabilities as reflected in the corporation's balance sheet provided
such balance sheet has been prepared in accordance with generally
accepted accounting principles employed in keeping the books of the
corporation. 43
The adjusted net income of Picop for 1977, as will be seen below, is
P48,687,355.00. Its net worth figure or total stockholders' equity as
reflected in its Audited Financial Statements for 1977 is P464,749,528.00.
Since its adjusted net income for 1977 thus exceeded ten percent (10%)
of its net worth, Picop must be held liable for the five percent (5%)
corporate development tax in the amount of P2,434,367.75.
Recapitulating, we hold:
(1) Picop is liable for the thirty-five percent (35%) transaction tax in the
amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction
tax.
(3) Picop is exempt from payment of documentary and science stamp
taxes in the amount of P300,000.00 and the compromise penalty of
P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for ——————
interest payments on loans for, among other things, the purchase of
machinery and equipment. Total P 48,429,189.00

(5) Picop's claimed deduction in the amount of P44,196,106.00 for the ——————
operating losses previously incurred by RPPM, is disallowed for lack of
merit. Net Income as Adjusted P 48,687,355.00

(6) Picop's claimed deduction for certain financial guarantee expenses in ===========
the amount P1,237,421.00 is disallowed for failure adequately to prove
such expenses.
Income Tax Due Thereon 44 P 17,030,574.00
(7) Picop has understated its sales by P2,391,644.00 and overstated its
Less:
cost of sales by P604,018.00, for 1977.
Tax Already Assessed per
(8) Picop is liable for the corporate development tax of five percent (5%)
Return 80,358.00
of its adjusted net income for 1977 in the amount of P2,434,367.75.
——————
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to
hold Picop liable for deficiency income tax for the year 1977 computed as
follows: Deficiency Income Tax P 16,560,216.00

Deficiency Income Tax Add:

Net Income Per Return P 258,166.00 Five percent (5%) Corporate

Development Tax P 2,434,367.00
Add:
Total Deficiency Income Tax P 18,994,583.00
Unallowable Deductions
===========
(1) Deduction of net
operating losses Add:
incurred by RPPM P 44,196,106.00
Five percent (5%) surcharge 45 P 949,729.15
(2) Unexplained financial
guarantee expenses P 1,237,421.00 ——————

(3) Understatement of Total Deficiency Income Tax

Sales P 2,391,644.00
with surcharge P 19,944,312.15
(4) Overstatement of
Cost of Sales P 604,018.00 Add:
 Fourteen percent (14%) Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno,
Kapunan, Mendoza, Francisco, Hermosisima, Jr. and Panganiban, JJ.,
interest from 15 April concur.

1978 to 14 April 1981 46 P 8,376,610.80 Padilla, J., took no part.

Fourteen percent (14%)

interest from 21 April

47
1983 to 20 April 1986   P 11,894,787.00
——————
Total Deficiency Income Tax
Due and Payable P 40,215,709.00
===========
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals
is hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the
aggregate amount of P43,794,252.51 itemized as follows:
Separate Opinions
VITUG, J., concurring and dissenting:
In usual erudite manner, Mr. Justice Florentino P. Feliciano has written
for the Court the ponencia that presents in clear and logical sequence the
issues, the facts and the law involved. While I share, in most part, the
conclusions expressed in the opinion, I regrettably find it difficult,
nevertheless, not to propose a re-examination of the Court's holding
in Western Minolco Corporation vs. Commissioner of Internal
Revenue (124 SCRA 121), reiterated in Marinduque Mining and
Industrial Corporation vs. Commissioner of Internal Revenue (137 SCRA
88), that has taken the 35% transaction tax on commercial papers issued
in the primary market under the 1977 Revenue Code, in relation to
Republic Act ("R.A.") 5186, to be an income tax.

(1) Thirty-five percent (35%) R.A. No. 5186, also known as the Investment Incentives Act, has
provided for incentives by, among other things, granting to registered
transaction tax P 3,578,543.51 pioneer enterprises an exemption from all taxes, except income tax,
under the National Internal Revenue Code. The income tax, referred to,
(2) Total Deficiency Income in my view, is that imposed in Title II, entitled "Income Tax," of the
Revenue Code. Nowhere under that title is there a 35% transaction tax.
Tax Due 40,215,709.00
There was, to be sure, a 35% transaction tax still in effect in 1977 but it
——————— was a tax not on the investor-lender in whose favor the interest income
on the commercial paper accrues. The tax was, instead, levied on the
Aggregate Amount Due and Payable P 43,794,252.51 borrower-issuer of commercial papers transacted in the primary market.
Being the principal taxpayer, the borrower-issuer could not have been
likewise contemplated to be a mere tax withholding agent. The tax was
============
conceived as a tax on business transaction, and so it was rightly
incorporated in Title V, entitled "Privilege Taxes on Business and
No pronouncement as to costs. Occupation" of the Tax Code.

SO ORDERED.
The fact that a taxpayer on whom the tax is imposed can shift,
characteristic of indirect taxes, the burden thereof to another does not
make the latter the taxpayer and the former the withholding agent.
Indeed, the facility of shifting the burden of the tax is opposed to the idea
of a direct tax to which class the income tax actually belongs.
Accordingly, I vote to so reduce the tax liability of petitioners as adjudged
by the amount corresponding to the 35% transaction tax. In all other
respects, I concur with the majority in the judgment.
Separate Opinions
VITUG, J., concurring and dissenting:
In usual erudite manner, Mr. Justice Florentino P. Feliciano has written
for the Court the ponencia that presents in clear and logical sequence the
issues, the facts and the law involved. While I share, in most part, the
conclusions expressed in the opinion, I regrettably find it difficult,
nevertheless, not to propose a re-examination of the Court's holding
in Western Minolco Corporation vs. Commissioner of Internal
Revenue (124 SCRA 121), reiterated in Marinduque Mining and
Industrial Corporation vs. Commissioner of Internal Revenue (137 SCRA
88), that has taken the 35% transaction tax on commercial papers issued
in the primary market under the 1977 Revenue Code, in relation to
Republic Act ("R.A.") 5186, to be an income tax.
R.A. No. 5186, also known as the Investment Incentives Act, has
provided for incentives by, among other things, granting to registered
pioneer enterprises an exemption from all taxes, except income tax,
under the National Internal Revenue Code. The income tax, referred to,
in my view, is that imposed in Title II, entitled "Income Tax," of the
Revenue Code. Nowhere under that title is there a 35% transaction tax.
There was, to be sure, a 35% transaction tax still in effect in 1977 but it
was a tax not on the investor-lender in whose favor the interest income
on the commercial paper accrues. The tax was, instead, levied on the
borrower-issuer of commercial papers transacted in the primary market.
Being the principal taxpayer, the borrower-issuer could not have been
likewise contemplated to be a mere tax withholding agent. The tax was
conceived as a tax on business transaction, and so it was rightly
incorporated in Title V, entitled "Privilege Taxes on Business and
Occupation" of the Tax Code.
The fact that a taxpayer on whom the tax is imposed can shift,
characteristic of indirect taxes, the burden thereof to another does not
make the latter the taxpayer and the former the withholding agent.
Indeed, the facility of shifting the burden of the tax is opposed to the idea
of a direct tax to which class the income tax actually belongs.
Accordingly, I vote to so reduce the tax liability of petitioners as adjudged
by the amount corresponding to the 35% transaction tax. In all other
respects, I concur with the majority in the judgment.
G.R. No. 144653. August 28, 2001.]
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision, dated
April 14, 2000, of the Court of Appeals, 1 affirming the decision
of the Court of Tax Appeals (which denied petitioner Bank of the
Philippine Islands’ claim for tax refund for 1985), and the
appeals court’s resolution, dated August 21, 2000, denying
reconsideration.chanrob1es virtua1 1aw 1ibrary
The facts are as follows:chanrob1es virtual 1aw library
Prior to its merger with petitioner Bank of the Philippine Islands
(BPI) on July 1, 1985, the Family Bank and Trust Co. (FBTC)
earned income consisting of rentals from its leased properties
and interest from its treasury notes for the period January 1 to
June 30, 1985. As required by the Expanded Withholding Tax
Regulation, the lessees of FBTC withheld 5 percent of the rental
income, in the amount of P118,609.17, while the Central Bank,
from which the treasury notes were purchased by FBTC,
withheld P55,456.60 from the interest earned thereon.
Creditable withholding taxes in the total amount of P174,065.77
were remitted to respondent Commissioner of Internal Revenue.
FBTC, however, suffered a net loss of about P64,000,000.00
during the period in question. It also had an excess credit of
P2,146,072.57 from the previous year. Thus, upon its
dissolution in 1985, FBTC had a refundable amount of
P2,320,138.34, representing that year’s tax credit of
P174,065.77 and the previous year’s excess credit of
P2,146,072.57.
As FBTC’s successor-in-interest, petitioner BPI claimed this
amount as tax refund, but respondent Commissioner of Internal
Revenue refunded only the amount of P2,146,072.57, leaving a
balance of P174,065.77. Accordingly, petitioner filed a petition
for review in the Court of Tax Appeals on December 29, 1987,
seeking the refund of the aforesaid amount. 2 However, in its
decision rendered on July 19, 1994, the Court of Tax Appeals
dismissed petitioner’s petition for review and denied its claim
for refund on the ground that the claim had already prescribed.
3 In its resolution, dated August 4, 1995, the Court of Tax
Appeals denied petitioner’s motion for reconsideration. 4
Petitioner appealed to the Court of Appeals, but, in its decision
rendered on April 14, 2000, the appeals court affirmed the
decision of the CTA. 5 The appeals court subsequently denied
petitioner’s motion for reconsideration. 6 Hence this petition.
The sole issue in this case is whether petitioner’s claim is barred
by prescription. The resolution of this question requires a
determination of when the two-year period of prescription under
§292 of the Tax Code started to run. This provision
states:chanrob1es virtual 1aw library
Recovery of tax erroneously or illegally collected. — No suit or
proceeding shall be maintained in any court for the recovery of
any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed
with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.chanrob1es virtua1 1aw 1ibrary
In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid.
There is no dispute that FBTC ceased operations on June 30,
1985 upon its merger with petitioner BPI. The merger was
approved by the Securities and Exchange Commission on July 1,
1985. Petitioner contends, however, that its claim for refund
has not yet prescribed because the two-year prescriptive period
commenced to run only after it had filed FBTC’s Final
Adjustment Return on April 15, 1986, pursuant to §46(a) of the
National Internal Revenue Code of 1977 (the law applicable at
the time of this transaction) which provided that —
Corporation returns. — (a) Requirement. — Every corporation
subject to the tax herein imposed, except foreign corporations
not engaged in trade or business in the Philippines shall render,
in duplicate, a true and accurate quarterly income tax return
and final or adjustment return in accordance with the provisions
of Chapter X of this Title. The return shall be filed by the
president, vice-president, or other principal officer, and shall be
sworn to by such officer and by the treasurer or assistant
treasurer.
On the other hand, the Court of Tax Appeals ruled that the
prescriptive period should be counted from July 31, 1985, 30
days after the approval by the SEC of the plan of dissolution in
view of §78 of the Code, which provided that —
Every corporation shall, within thirty days after the adoption by
the corporation of a resolution or plan for the dissolution of the
corporation or for the liquidation of the whole or any part of its
capital stock, including corporations which have been notified of
possible involuntary dissolution by the Securities and Exchange
Commission, render a correct return to the Commissioner of
Internal Revenue, verified under oath, setting forth the terms of
such resolution or plan and such other information as the
Minister of Finance shall, by regulations, prescribe. The
dissolving corporation prior to the issuance of the Certificate of
Dissolution by the Securities and Exchange Commission shall
secure a certificate of tax clearance from the Bureau of Internal
Revenue which certificate shall be submitted to the Securities
and Exchange Commission.
Failure to render the return and secure the certificate of tax
clearance as above-mentioned shall subject the officer(s) of the
corporation required by law to file the return under Section
46(a) of this Code, to a fine of not less than Five Thousand
Pesos or imprisonment of not less than two years and shall
make them liable for all outstanding or unpaid tax liabilities of
the dissolving corporation.chanrob1es virtua1 1aw 1ibrary
Its ruling was sustained by the Court of Appeals.
After due consideration of the parties’ arguments, we are of the
opinion that, in case of the dissolution of a corporation, the
period of prescription should be reckoned from the date of filing
of the return required by §78 of the Tax Code. Accordingly, we
hold that petitioner’s claim for refund is barred by prescription.
First. Generally speaking, it is the Final Adjustment Return, in
which amounts of the gross receipts and deductions have been
audited and adjusted, which is reflective of the results of the
operations of a business enterprise. It is only when the return,
covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or a refund can be claimed
based on the adjusted and audited figures. 7 Hence, this Court
has ruled that, at the earliest, the two-year prescriptive period
for claiming a refund commences to run on the date of filing of
the adjusted final tax return. 8 SEC of its plan or resolution of dissolution. Indeed, it would be
In the case at bar, however, the Court of Tax Appeals, applying
§78 of the Tax Code, held:chanrob1es virtual 1aw library
Before this Court can rule on the issue of prescription, it is
noteworthy to point out that based on the financial statements
of FBTC and the independent auditor’s opinion (Exhs. "A-7" to
"A-17"), FBTC operates on a calendar year basis. Its twelve
(12) months accounting period was shortened at the time it was
merged with BPI. Thereby, losing its corporate existence on July
1, 1985 when the Articles of Merger was approved by the
Security and Exchange Commission. Thus, respondent[’s] stand
that FBTC operates on a fiscal year basis, based on its income
tax return, holds no ground. This Court believes that FBTC is
operating on a calendar year period based on the audited
financial statements and the opinion thereof. The fiscal period
ending June 30, 1985 on the upper left corner of the income tax
return can be concluded as an error on the part of FBTC. It
should have been for the six month period ending June 30,
1985. It should also be emphasized that "where one corporation
succeeds another both are separate entities and the income
earned by the predecessor corporation before organization of its
successor is not income to the successor" (Mertens, Law of
Federal Income Taxation, Vol. 7 S 38.36).
Ruling now on the issue of prescription, this court finds that the
petition for review is filed out of time. FBTC, after the end of its
corporate life on June 30, 1985, should have filed its income tax
return within thirty days after the cessation of its business or
thirty days after the approval of the Articles of Merger. This is
bolstered by Sec. 78 of the Tax Code and under Sec. 244 of
Revenue Regulation No. 2. . . 9
As the FBTC did not file its quarterly income tax returns for the
year 1985, there was no need for it to file a Final adjustment
Return because there was nothing for it to adjust or to audit.
After it ceased operations on June 30, 1985, its taxable year
was shortened to six months, from January 1, 1985 to June 30,
1985. The situation of FBTC is precisely what was contemplated
under §78 of the Tax Code. It thus became necessary for FBTC
to file its income tax return within 30 days after approval by the
absurd for FBTC to wait until the fifteenth day of April, or almost
10 months after it ceased its operations, before filing its income
tax return.chanrob1es virtua1 1aw library
Thus, §46(a) of the Tax Code applies only to instances in which
the corporation remains subsisting and its business operations
are continuing. In instances in which the corporation is
contemplating dissolution, §78 of the Tax Code applies. It is a
rule of statutory construction that" [w]here there is in the same
statute a particular enactment and also a general one which in
its most comprehensive sense would include what is embraced
in the former, the particular enactment must be operative, and
the general enactment must be taken to affect only such cases
within its general language as are not within the provisions of
the particular enactment." 10
Petitioner argues that to hold, as the Court of Tax Appeals and
the Court of Appeals do, that §78 applies in case a corporation
contemplates dissolution would lead to absurd results. It
contends that it is not feasible for the certified public
accountants to complete their report and audited financial
statements, which are required to be submitted together with
the plan of dissolution to the SEC, within the period
contemplated by §78. It maintains that, in turn, the SEC would
not have sufficient time to process the papers considering that
§78 also requires the submission of a tax clearance certificate
before the SEC can approve the plan of dissolution.
As the Court of Tax Appeals observed, however, petitioner could
have asked for an extension of time to file its income tax return
under §47 of the NIRC which provides:chanrob1es virtual 1aw
library
Extension of time to file returns. — The Commissioner of
Internal Revenue may, in meritorious cases, grant a reasonable
extension of time for filing returns of income (or final and
adjustment returns in the case of corporations), subject to the
provisions of section fifty-one of this Code.
Petitioner further argues that the filing of a Final Adjustment
Return would fall due on July 30, 1985, even before the due
date for filing the quarterly return. This argument begs the
question. It assumes that a quarterly return was required when
the fact is that, because its taxable year was shortened, the
FBTC did not have to file a quarterly return. In fact, petitioner
presented no evidence that the FBTC ever filed such quarterly
return in 1985.
Finally, petitioner cites a hypothetical situation wherein the
directors of a corporation would convene on June 30, 2000 to
plan the dissolution of the corporation on December 31, 2000,
but would submit the plan for dissolution earlier with the SEC,
which, in turn, would approve the same on October 1, 2000.
Following §78 of the Tax Code, the corporation would be
required to submit its complete return on October 31, 2000,
although its actual dissolution would take place only on
December 31, 2000.chanrob1es virtua1 1aw 1ibrary
Suffice it to say that such a situation may likewise be remedied
by resort to §47 of the Tax Code. The corporation can ask for an
extension of time to file a complete income tax return until
December 31, 2000, when it would cease operations. This would
obviate any difficulty which may arise out of the discrepancies
not covered by §78 of the Tax Code.
In any case, as held in Commissioner of Internal Revenue v.
Santos, 11 "Debatable questions are for the legislature to
decide. The courts do not sit to resolve the merits of conflicting
issues."cralaw virtua1aw library
Second. Petitioner contents that what §78 required was an
information return, not an income tax return. It cites Revenue
Memorandum Circular No. 14-85, of then Acting Commissioner
of Internal Revenue Ruben B. Ancheta, referring to an
"information return" in interpreting Executive Order No. 1026,
which amended §78. 12
The contention has no merit. The circular in question must be
considered merely as an administrative interpretation of the law
which in no case is binding on the courts. 13 The opinion in
question cannot be given any effect inasmuch as it is contrary
to §244 of Revenue Regulation No. 2, as amended, which was
issued by the Minister of Finance pursuant to the authority
granted to him by §78 of the Tax Code. This provision
states:chanrob1es virtual 1aw library
SECTION 244. Return of corporations contemplating dissolution
or retiring from business. — All corporations, partnership, joint
accounts and associations, contemplating dissolution or retiring
from business without formal dissolution shall, within 30 days
after the approval of such resolution authorizing their
dissolution, and within the same period after their retirement
from business, file their income tax returns covering the profit
earned or business done by them from the beginning of the
year up to the date of such dissolution or retirement and pay
the corresponding income tax due thereon upon demand by the SO ORDERED.
Commissioner of Internal Revenue. . .

This regulation prevails over the memorandum circular of the

Acting Commissioner of Internal Revenue, which petitioner
invokes.

Thus, as required by §244 of Revenue Regulation No. 2, any

corporation contemplating dissolution must submit tax return on
the income earned by it from the beginning of the year up to
the date of its dissolution or retirement and pay the
corresponding tax due upon demand by the Commissioner of
Internal Revenue. Nothing in §78 of the Tax Code limited the
return to be filed by the corporation concerned to a mere
information return.chanrob1es virtua1 1aw 1ibrary

It is noteworthy that §78 of the Tax Code was substantially

reproduced first in §45(c), of the amendments to the same Tax
Code, and later in §52(C) of the National Internal Revenue Code
of 1997. Through all the re-enactments of the law, there has
been no change in the authority granted to the Secretary
(formerly Minister) of Finance to require corporations to submit
such other information as he may prescribe. Indeed, Revenue
Regulation No. 2 had been in existence prior to these
amendments. Had Congress intended only information returns,
it would have expressly provided so.

Third. Considering that §78 of the Tax Code, in relation to §244

of Revenue Regulation No. 2, applies to FBTC, the two-year
prescriptive period should be counted from July 30, 1985, i.e.,
30 days after the approval by the SEC of its plan for dissolution.
In accordance with §292 of the Tax Code, July 30, 1985 should
be considered the date of payment by FBTC of the taxes
withheld on the earned income. Consequently, the two-year
period of prescription ended on July 30, 1987. As petitioner’s
claim for tax refund before the Court of Tax Appeals was filed
only on December 29, 1987, it is clear that the claim is barred
by prescription.

WHEREFORE, the petition is DENIED for lack of merit.