1

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 127347 November 25, 1999

ALFREDO N. AGUILA, JR., petitioner,

vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of

Appeals, dated November 29, 1990, which reversed the decision of the
Regional Trial Court, Branch 273, Marikina, Metro Manila, dated April 11,
1995. The trial court dismissed the petition for declaration of nullity of a
deed of sale filed by private respondent Felicidad S. Vda. de Abrogar
against petitioner Alfredo N. Aguila, Jr.

The facts are as follows:

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged
in lending activities. Private respondent and her late husband, Ruben M.
Abrogar, were the registered owners of a house and lot, covered by
Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On April
18, 1991, private respondent, with the consent of her late husband, and
A.C. Aguila & Sons, Co., represented by petitioner, entered into a
Memorandum of Agreement, which provided:

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy
the above-described property from the FIRST PARTY [Felicidad
S. Vda. de Abrogar], and pursuant to this agreement, a Deed of
Absolute Sale shall be executed by the FIRST PARTY conveying
the property to the SECOND PARTY for and in consideration of
the sum of Two Hundred Thousand Pesos (P200,000.00),
Philippine Currency;

(2) The FIRST PARTY is hereby given by the SECOND PARTY

the option to repurchase the said property within a period of
ninety (90) days from the execution of this memorandum of
 2

agreement effective April 18, 1991, for the amount of TWO

HUNDRED THIRTY THOUSAND PESOS (P230,000.00);

(3) In the event that the FIRST PARTY fail to exercise her option
to repurchase the said property within a period of ninety (90)
days, the FIRST PARTY is obliged to deliver peacefully the
possession of the property to the SECOND PARTY within fifteen
(15) days after the expiration of the said 90 day grace period;

(4) During the said grace period, the FIRST PARTY obliges
herself not to file any lis pendens or whatever claims on the
property nor shall be cause the annotation of say claim at the
back of the title to the said property;

(5) With the execution of the deed of absolute sale, the FIRST
PARTY warrants her ownership of the property and shall defend
the rights of the SECOND PARTY against any party whom may
have any interests over the property;

(6) All expenses for documentation and other incidental expenses

shall be for the account of the FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession

of the property to the SECOND PARTY after the expiration of the
15-day grace period given in paragraph 3 above, the FIRST
PARTY shall pay an amount equivalent to Five Percent of the
principal amount of TWO HUNDRED PESOS (P200.00) or
P10,000.00 per month of delay as and for rentals and liquidated
damages;

(8) Should the FIRST PARTY fail to exercise her option to

repurchase the property within ninety (90) days period above-
mentioned, this memorandum of agreement shall be deemed
cancelled and the Deed of Absolute Sale, executed by the parties
shall be the final contract considered as entered between the
parties and the SECOND PARTY shall proceed to transfer
ownership of the property above described to its name free from
lines and encumbrances. 2

On the same day, April 18, 1991, the parties likewise executed a deed of
absolute sale, 3 dated June 11, 1991, wherein private respondent, with the
consent of her late husband, sold the subject property to A.C. Aguila &
Sons, Co., represented by petitioner, for P200,000,00. In a special power of
attorney dated the same day, April 18, 1991, private respondent authorized
petitioner to cause the cancellation of TCT No. 195101 and the issuance of
a new certificate of title in the name of A.C. Aguila and Sons, Co., in the
 3

event she failed to redeem the subject property as provided in the

Memorandum of Agreement. 4

Private respondent failed to redeem the property within the 90-day period as
provided in the Memorandum of Agreement. Hence, pursuant to the special
power of attorney mentioned above, petitioner caused the cancellation of
TCT No. 195101 and the issuance of a new certificate of title in the name of
A.C. Aguila and Sons, Co. 5

Private respondent then received a letter dated August 10, 1991 from Atty.
Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that
she vacate the premises within 15 days after receipt of the letter and
surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise,
the latter would bring the appropriate action in court. 6

Upon the refusal of private respondent to vacate the subject premises, A.C.
Aguila & Sons, Co. filed an ejectment case against her in the Metropolitan
Trial Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3,
1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co.
on the ground that private respondent did not redeem the subject property
before the expiration of the 90-day period provided in the Memorandum of
Agreement. Private respondent appealed first to the Regional Trial Court,
Branch 163, Pasig, Metro Manila, then to the Court of Appeals, and later to
this Court, but she lost in all the cases.

Private respondent then filed a petition for declaration of nullity of a deed of

sale with the Regional Trial Court, Branch 273, Marikina, Metro Manila on
December 4, 1993. She alleged that the signature of her husband on the
deed of sale was a forgery because he was already dead when the deed
was supposed to have been executed on June 11, 1991.

It appears, however, that private respondent had filed a criminal complaint

for falsification against petitioner with the Office of the Prosecutor of Quezon
City which was dismissed in a resolution, dated February 14, 1994.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:

Plaintiff's claim therefore that the Deed of Absolute Sale is a

forgery because they could not personally appear before Notary
Public Lamberto C. Nanquil on June 11, 1991 because her
husband, Ruben Abrogar, died on May 8, 1991 or one month and
2 days before the execution of the Deed of Absolute Sale, while
the plaintiff was still in the Quezon City Medical Center
recuperating from wounds which she suffered at the same
vehicular accident on May 8, 1991, cannot be sustained. The
Court is convinced that the three required documents, to wit: the
Memorandum of Agreement, the Special Power of Attorney, and
 4

the Deed of Absolute Sale were all signed by the parties on the
same date on April 18, 1991. It is a common and accepted
business practice of those engaged in money lending to prepare
an undated absolute deed of sale in loans of money secured by
real estate for various reasons, foremost of which is the evasion
of taxes and surcharges. The plaintiff never questioned receiving
the sum of P200,000.00 representing her loan from the
defendant. Common sense dictates that an established lending
and realty firm like the Aguila & Sons, Co. would not part with
P200,000.00 to the Abrogar spouses, who are virtual strangers to
it, without the simultaneous accomplishment and signing of all the
required documents, more particularly the Deed of Absolute Sale,
to protect its interest.

x x x           x x x          x x x

WHEREFORE, foregoing premises considered, the case in

caption is hereby ORDERED DISMISSED, with costs against the
plaintiff.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between

plaintiff-appellant and defendant-appellee is indubitably an
equitable mortgage. Article 1602 of the New Civil Code finds
strong application in the case at bar in the light of the following
circumstances.

First: The purchase price for the alleged sale with right to
repurchase is unusually inadequate. The property is a two
hundred forty (240) sq. m. lot. On said lot, the residential house of
plaintiff-appellant stands. The property is inside a
subdivision/village. The property is situated in Marikina which is
already part of Metro Manila. The alleged sale took place in 1991
when the value of the land had considerably increased.

For this property, defendant-appellee pays only a measly

P200,000.00 or P833.33 per square meter for both the land and
for the house.

Second: The disputed Memorandum of Agreement specifically

provides that plaintiff-appellant is obliged to deliver peacefully the
possession of the property to the SECOND PARTY within fifteen
(15) days after the expiration of the said ninety (90) day grace
period. Otherwise stated, plaintiff-appellant is to retain physical
possession of the thing allegedly sold.
 5

In fact, plaintiff-appellant retained possession of the property

"sold" as if they were still the absolute owners. There was no
provision for maintenance or expenses, much less for payment of
rent.

Third: The apparent vendor, plaintiff-appellant herein, continued

to pay taxes on the property "sold". It is well-known that payment
of taxes accompanied by actual possession of the land covered
by the tax declaration, constitute evidence of great weight that a
person under whose name the real taxes were declared has a
claim of right over the land.

It is well-settled that the presence of even one of the

circumstances in Article 1602 of the New Civil Code is sufficient to
declare a contract of sale with right to repurchase an equitable
mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price

which is unusually inadequate, has retained possession of the
subject property and has continued paying the realty taxes over
the subject property, (circumstances mentioned in par. (1) (2) and
(5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is
an equitable mortgage, not a sale with right to repurchase. The
factors cited are in support to the finding that the Deed of
Sale/Memorandum of Agreement with right to repurchase is in
actuality an equitable mortgage.

Moreover, it is undisputed that the deed of sale with right of

repurchase was executed by reason of the loan extended by
defendant-appellee to plaintiff-appellant. The amount of loan
being the same with the amount of the purchase price.

x x x           x x x          x x x

Since the real intention of the party is to secure the payment of

debt, now deemed to be repurchase price: the transaction shall
then be considered to be an equitable mortgage.

Being a mortgage, the transaction entered into by the parties is in

the nature of a pactum commissorium which is clearly prohibited
by Article 2088 of the New Civil Code. Article 2088 of the New
Civil Code reads:

Art. 2088. The creditor cannot appropriate the things

given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
 6

The aforequoted provision furnishes the two elements for pactum

commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of
security for the payment of principal obligation; and (2) that there
should be a stipulation for an automatic appropriation by the
creditor of the thing pledged and mortgaged in the event of non-
payment of the principal obligation within the stipulated period.

In this case, defendant-appellee in reality extended a

P200,000.00 loan to plaintiff-appellant secured by a mortgage on
the property of plaintiff-appellant. The loan was payable within
ninety (90) days, the period within which plaintiff-appellant can
repurchase the property. Plaintiff-appellant will pay P230,000.00
and not P200,000.00, the P30,000.00 excess is the interest for
the loan extended. Failure of plaintiff-appellee to pay the
P230,000.00 within the ninety (90) days period, the property shall
automatically belong to defendant-appellee by virtue of the deed
of sale executed.

Clearly, the agreement entered into by the parties is in the nature

of pactum commissorium. Therefore, the deed of sale should be
declared void as we hereby so declare to be invalid, for being
violative of law.

x x x           x x x          x x x

WHEREFORE, foregoing considered, the appealed decision is

hereby REVERSED and SET ASIDE. The questioned Deed of
Sale and the cancellation of the TCT No. 195101 issued in favor
of plaintiff-appellant and the issuance of TCT No. 267073 issued
in favor of defendant-appellee pursuant to the questioned Deed of
Sale is hereby declared VOID and is hereby ANNULLED.
Transfer Certificate of Title No. 195101 of the Registry of Marikina
is hereby ordered REINSTATED. The loan in the amount of
P230,000.00 shall be paid within ninety (90) days from the finality
of this decision. In case of failure to pay the amount of
P230,000.00 from the period therein stated, the property shall be
sold at public auction to satisfy the mortgage debt and costs and if
there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C.
Aguila & Co., against which this case should have been brought; (2) the
judgment in the ejectment case is a bar to the filing of the complaint for
declaration of nullity of a deed of sale in this case; and (3) the contract
between A.C. Aguila & Sons, Co. and private respondent is a pacto de
retro sale and not an equitable mortgage as held by the appellate court.
 7

The petition is meritorious.

Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this
case was filed, provided that "every action must be prosecuted and
defended in the name of the real party in interest." A real party in interest is
one who would be benefited or injured by the judgment, or who is entitled to
the avails of the suit. 7 This ruling is now embodied in Rule 3, §2 of the 1997
Revised Rules of Civil Procedure. Any decision rendered against a person
who is not a real party in interest in the case cannot be executed. 8 Hence, a
complaint filed against such a person should be dismissed for failure to
state a cause of action. 9

Under Art. 1768 of the Civil Code, a partnership "has a juridical personality
separate and distinct from that of each of the partners." The partners cannot
be held liable for the obligations of the partnership unless it is shown that
the legal fiction of a different juridical personality is being used for
fraudulent, unfair, or illegal purposes. 10 In this case, private respondent has
not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is
being used for fraudulent, unfair, or illegal purposes. Moreover, the title to
the subject property is in the name of A.C. Aguila & Sons, Co. and the
Memorandum of Agreement was executed between private respondent,
with the consent of her late husband, and A.C. Aguila & Sons, Co.,
represented by petitioner. Hence, it is the partnership, not its officers or
agents, which should be impleaded in any litigation involving property
registered in its name. A violation of this rule will result in the dismissal of
the complaint. 11 We cannot understand why both the Regional Trial Court
and the Court of Appeals sidestepped this issue when it was squarely raised
before them by petitioner.

Our conclusion that petitioner is not the real party in interest against whom
this action should be prosecuted makes it unnecessary to discuss the other
issues raised by him in this appeal.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED

and the complaint against petitioner is DISMISSED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19342 May 25, 1972

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LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO

B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and
LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General

Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for
respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case
No. 617, similarly entitled as above, holding that petitioners have constituted
an unregistered partnership and are, therefore, subject to the payment of
the deficiency corporate income taxes assessed against them by
respondent Commissioner of Internal Revenue for the years 1955 and 1956
in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest
from December 15, 1958, subject to the provisions of Section 51 (e) (2) of
the Internal Revenue Code, as amended by Section 8 of Republic Act No.
2343 and the costs of the suit,1 as well as the resolution of said court
denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her

surviving spouse, Lorenzo T. Oña and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was
approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was
approved, Lorenzo T. Oña, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the
persons and property of the aforenamed minors (See p. 3, BIR
rec.).
 9

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.)
shows that the heirs have undivided one-half (1/2) interest in ten
parcels of land with a total assessed value of P87,860.00, six
houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided
among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of
land aforementioned, two were acquired after the death of the
decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).

The project of partition also shows that the estate shares equally
with Lorenzo T. Oña, the administrator thereof, in the obligation of
P94,973.00, consisting of loans contracted by the latter with the
approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR
rec.).

Although the project of partition was approved by the Court on

May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-
end balances:

Y Inve L B
e stm a uil
a ent n di
r d n
g
  Acc A A
ount cc cc
o o
u u
nt nt
1949 — P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
 10

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such

incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests (see
p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T.
Oña where the corresponding shares of the petitioners in the net
income for the year are also known. Every year, petitioners
returned for income tax purposes their shares in the net income
derived from said properties and securities and/or from
transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26).
However, petitioners did not actually receive their shares in the
yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oña who, as heretofore
pointed out, invested them in real properties and securities. (See
Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of

Internal Revenue) decided that petitioners formed an unregistered
partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against the petitioners the
amounts of P8,092.00 and P13,899.00 as corporate income taxes
for 1955 and 1956, respectively. (See Exhibit 5, amended by
Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against
the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership.
Finding no merit in petitioners' request, respondent denied it (See
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).

The original assessment was as follows:

1955
 11

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was

eliminated in line with the ruling of the Supreme Court in Collector
v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958,
so that the questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the "Compromise for
non-filing," the latter item obviously referring to the compromise in
lieu of the criminal liability for failure of petitioners to file the
corporate income tax returns for said years. (See Exh. 17, page
86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT

THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING

THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT

PETITIONERS WERE LIABLE FOR CORPORATE INCOME
 12

TAXES FOR 1955 AND 1956 AS AN UNREGISTERED

PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS

CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL
INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE
UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions:
(1) Under the facts found by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties inherited by them from the
deceased Julia Buñales and the profits derived from transactions involving
the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in
common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as
that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should
not the various amounts already paid by them for the same years 1955 and
1956 as individual income taxes on their respective shares of the profits
accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
 13

Pondering on these questions, the first thing that has struck the Court is that
whereas petitioners' predecessor in interest died way back on March 23,
1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the
administration or management of the head of the family, the widower and
father Lorenzo T. Oña, the assessment in question refers to the later years
1955 and 1956. We believe this point to be important because, apparently,
at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate
tax, and it was only from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case,
and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-
partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition approved in
1949, "the properties remained under the management of Lorenzo T. Oña
who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said properties
and investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in
"building account" in 1956. And all these became possible because,
admittedly, petitioners never actually received any share of the income or
profits from Lorenzo T. Oña and instead, they allowed him to continue using
said shares as part of the common fund for their ventures, even as they paid
the corresponding income taxes on the basis of their respective shares of
the profits of their common business as reported by the said Lorenzo T.
Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention,

merely limit themselves to holding the properties inherited by them. Indeed,
it is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with
their respective shares in the inheritance. In these circumstances, it is Our
considered view that from the moment petitioners allowed not only the
 14

incomes from their respective shares of the inheritance but even the
inherited properties themselves to be used by Lorenzo T. Oña as a common
fund in undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was tantamonut
to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when

the heirs can be considered as co-owners rather than unregistered co-
partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the
income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily
follow that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common
management of the administrator or executor or of anyone chosen by them
and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and
render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated,
among the reasons for holding the appellants therein to be unregistered co-
partners for tax purposes, that their common fund "was not something they
found already in existence" and that "it was not a property inherited by
them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is
not actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited properties
is automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as
a common fund with intent to produce profits for the heirs in proportion to
their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court
in the corresponding testate or intestate proceeding. The reason for this is
simple. From the moment of such partition, the heirs are entitled already to
their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in
 15

proportion to his share, there can be no doubt that, even if no document or

instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened to
petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the

Civil Code, providing that: "The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon

"corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most
typical forms of partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms, or in confirmity
with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly
registered general co-partnerships" — which are possessed of
the aforementioned personality — have been expressly excluded
by law (sections 24 and 84[b]) from the connotation of the term
"corporation." ....

xxx xxx xxx

 16

Similarly, the American Law

... provides its own concept of a partnership. Under the

term "partnership" it includes not only a partnership as
known in common law but, as well, a syndicate, group,
pool, joint venture, or other unincorporated
organization which carries on any business, financial
operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal Income
Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group,

pool, joint venture or other unincorporated organization,
through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis
ours.)

For purposes of the tax on corporations, our National Internal

Revenue Code includes these partnerships — with the exception
only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind
that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for
corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.

Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968,
24 SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.

As regards the second question raised by petitioners about the segregation,

for the purposes of the corporate taxes in question, of their inherited
properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion
for reconsideration:

In connection with the second ground, it is alleged that, if there

was an unregistered partnership, the holding should be limited to
the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and
sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived
 17

therefrom were used in the business of buying and selling other

real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from
the purchase and sale of other properties but also the income of
the inherited properties.

Besides, as already observed earlier, the income derived from inherited

properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part
of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the
clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately

resolved by the Tax Court in the aforementioned resolution denying
petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this

Honorable Court that the herein petitioners have formed
an unregistered partnership and, therefore, have to be
taxed as such, it might be recalled that the petitioners in
their individual income tax returns reported their shares
of the profits of the unregistered partnership. We think it
only fair and equitable that the various amounts paid by
the individual petitioners as income tax on their
respective shares of the unregistered partnership
should be deducted from the deficiency income tax
found by this Honorable Court against the unregistered
partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28,
1961.)

In other words, it is the position of petitioners that the taxable

income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for
the years in question, but the income tax due from the partnership
 18

has been correctly assessed. Since the individual income tax

liabilities of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever
excess they might have paid as individual income tax cannot be credited as
part payment of the taxes herein in question. It is argued that to sanction the
view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate taxes in question was not
deliberate. Of course, such taxpayer has the right to be reimbursed what he
has erroneously paid, but the law is very clear that the claim and action for
such reimbursement are subject to the bar of prescription. And since the
period for the recovery of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is
precisely because the taxpayers failed to make the proper return and
payment of the corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of persons who are
not exactly above suspicion in their conduct vis-a-vis their tax obligation to
the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax

Appeals appealed from is affirm with costs against petitioners.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and

REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

 19

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who
sold two parcels of land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co.,
Ltd. on two lots with areas of 1,124 and 963 square meters located at
Greenhills, San Juan, Rizal. The next day he transferred his rights to his
four children, the petitioners, to enable them to build their residences. The
company sold the two lots to petitioners for P178,708.12 on March 13 (Exh.
A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would
show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the
petitioners resold them to the Walled City Securities Corporation and Olga
Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived
from the sale a total profit of P134,341.88 or P33,584 for each of them.
They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive
period, the Commissioner of Internal Revenue required the four petitioners
to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as
42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the
sum of P33,584 as a " taxable in full (not a mere capital gain of which ½ is
taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated
interest.

Thus, the petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the
tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed
an unregistered partnership or joint venture within the meaning of sections
24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court
sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a

partnership under article 1767 of the Civil Code simply because they
 20

allegedly contributed P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered

partnership would result in oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy. That eventuality should be
obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-
owners pure and simple. To consider them as partners would obliterate the
distinction between a co-ownership and a partnership. The petitioners were
not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the lots because of
the high cost of construction, then they had no choice but to resell the same
to dissolve the co-ownership. The division of the profit was merely incidental
to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later. Castan Tobeñas
says:

Como establecer el deslinde entre la comunidad ordinaria o

copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta:

por razon del origen, en que la sociedad presupone
necesariamente la convencion, mentras que la comunidad puede
existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el
de la indivision es solo mantener en su integridad la cosa comun
y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940,

en la que se dice que si en nuestro Derecho positive se ofrecen a
veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica señala como nota
fundamental de diferenciacion aparte del origen de fuente de que
surgen, no siempre uniforme, la finalidad perseguida por los
interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns
does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the
 21

returns are derived". There must be an unmistakable intention to form a

partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67

Phil. 666, where 15 persons contributed small amounts to purchase a two-
peso sweepstakes ticket with the agreement that they would divide the prize
The ticket won the third prize of P50,000. The 15 persons were held liable
for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties
engaged in joint ventures for profit. Thus, in Oña vs.

** This view is supported by the following rulings of respondent

Commissioner:

Co-owership distinguished from partnership.—We find that the

case at bar is fundamentally similar to the De Leon case. Thus,
like the De Leon heirs, the Longa heirs inherited the 'hacienda' in
question pro-indiviso from their deceased parents; they did not
contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears;
they individually reported in their tax returns their corresponding
shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the 'hacienda') value
and to continue the existing contractual relations with the Central
Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA
Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-

Ownership who own properties which produce income should not
automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax
law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations,
inasmuch as if a property does not produce an income at all, it is
not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De Leon vs. CI R,
CTA Case No. 738, September 11, 1961, cited in Arañas, 1977
Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74,

where after an extrajudicial settlement the co-heirs used the inheritance or
the incomes derived therefrom as a common fund to produce profits for
 22

themselves, it was held that they were taxable as an unregistered

partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24

SCRA 198, where father and son purchased a lot and building, entrusted
the administration of the building to an administrator and divided equally the
net income, and from Evangelista vs. Collector of Internal Revenue, 102
Phil. 140, where the three Evangelista sisters bought four pieces of real
property which they leased to various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had formed an unregistered
partnership.

In the instant case, what the Commissioner should have investigated was
whether the father donated the two lots to the petitioners and whether he
paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this
matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside.
The assessments are cancelled. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or

joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3)
 23

parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson
on March 19,1970. Petitioners realized a net profit in the sale made in 1968
in the amount of P165,224.70, while they realized a net profit of P60,000.00
in the sale made in 1970. The corresponding capital gains taxes were paid
by petitioners in 1973 and 1974 by availing of the tax amnesties granted in
the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners were assessed and required to pay a total amount
of P107,101.70 as alleged deficiency corporate income taxes for the years
1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979

asserting that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed

petitioners that in the years 1968 and 1970, petitioners as co-owners in the
real estate transactions formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its income was subject to
the taxes prescribed under Section 24, both of the National Internal
Revenue Code 1 that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by
them which is subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners
of their individual income tax liabilities but did not relieve them from the tax
liability of the unregistered partnership. Hence, the petitioners were required
to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax
Appeals docketed as CTA Case No. 3045. In due course, the respondent
court by a majority decision of March 30, 1987, 2 affirmed the decision and
action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an

unregistered partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that imposed
on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin

stated that considering the circumstances of this case, although there might
in fact be a co-ownership between the petitioners, there was no adequate
basis for the conclusion that they thereby formed an unregistered
partnership which made "hem liable for corporate income tax under the Tax
Code.
 24

Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE

DETERMINATION OF THE RESPONDENT COMMISSIONER,
TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF

ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED
PARTNERSHIP EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE

EVANGELISTA CASE AND THEREFORE SHOULD BE
DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE

THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR
THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13,
Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this
Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father
which together with their own personal funds they used in buying several
real properties. They appointed their brother to manage their properties with
full power to lease, collect, rent, issue receipts, etc. They had the real
properties rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of Internal
Revenue demanded the payment of income tax on a corporation, among
others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax
on corporations provided for in section 24 of Commonwealth Act
No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real
 25

estate dealers' fixed tax. With respect to the tax on corporations,

the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the
pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied,

assessed, collected, and paid annually upon the total net income
received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including
duly registered general co-partnerships (companies collectives), a
tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no

matter how created or organized, joint-stock companies, joint
accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-
partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind

themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.

Pursuant to this article, the essential elements of a partnership

are two, namely: (a) an agreement to contribute money, property
or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed
to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as
they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was
to engage in real estate transactions for monetary gain and then
divide the same among themselves, because:

1. Said common fund was not something they found already in

existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a

series of transactions. On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the
 26

acquisition of another real estate for P108,825.00. Five (5) days

later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transcations undertaken, as well
as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design
that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or

to other personal uses, of petitioners herein. The properties were
leased separately to several persons, who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not
even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the

management of one person, namely, Simeon Evangelists, with full
power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business
enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10)
years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either

on their purpose in creating the set up already adverted to, or on
the causes for its continued existence. They did not even try to
offer an explanation therefor.

Although, taken singly, they might not suffice to establish the

intent necessary to constitute a partnership, the collective effect
of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two
of the aforementioned circumstances were present in the cases
cited by petitioners herein, and, hence, those cases are not in
point. 5
 27

In the present case, there is no evidence that petitioners entered into an

agreement to contribute money, property or industry to a common fund, and
that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels
of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners

purchased twenty-four (24) lots showing that the purpose was not limited to
the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and
ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista

in Evangelista he said:

I wish however to make the following observation Article 1769 of

the new Civil Code lays down the rule for determining when a
transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a

partnership, whether such co-owners or co-possessors do or do
not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns
are derived;

From the above it appears that the fact that those who agree to
form a co- ownership share or do not share any profits made by
the use of the property held in common does not convert their
 28

venture into a partnership. Or the sharing of the gross returns

does not of itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance
of profit, the presence of other elements constituting partnership
is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the
individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I,
1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more

persons contribute funds to buy certain real estate for profit in the
absence of other circumstances showing a contrary intention
cannot be considered a partnership.

Persons who contribute property or funds for a common

enterprise and agree to share the gross returns of that enterprise
in proportion to their contribution, but who severally retain the title
to their respective contribution, are not thereby rendered partners.
They have no common stock or capital, and no community of
interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord
D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-

partnership in respect thereto; nor does an agreement to share
the profits and losses on the sale of land create a partnership; the
parties are only tenants in common. (Clark vs. Sideway, 142 U.S.
682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become

owners of a single tract of realty, holding as tenants in common,
and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their
relation may have been as to third parties. (Magee vs. Magee 123
N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a)

An intent to form the same; (b) generally participating in both
profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole
 29

property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III

470.)

The common ownership of property does not itself create a

partnership between the owners, though they may use it for the
purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and
use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or

not the persons sharing therein have a joint or common right or interest in
the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the

petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits
and availed of the tax amnesty thereby. Under the circumstances, they
cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner
proposes.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can
be held liable for said deficiency corporate income tax, then petitioners can
be held individually liable as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the

respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED
and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.

SO ORDERED.
 30

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 172690               March 3, 2010

HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,

vs.
JULIET VILLA LIM, Respondent.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the

Rules of Civil Procedure, assailing the Court of Appeals (CA)
Decision2 dated June 29, 2005, which reversed and set aside the
decision3 of the Regional Trial Court (RTC) of Lucena City, dated April 12,
2004.

The facts of the case are as follows:

Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow
Cresencia Palad (Cresencia); and their children Elenito, Evelia, Imelda,
Edelyna and Edison, all surnamed Lim (petitioners), represented by Elenito
Lim (Elenito). They filed a Complaint4 for Partition, Accounting and
Damages against respondent Juliet Villa Lim (respondent), widow of the late
Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.

Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in
Cagsiay, Mauban, Quezon. Sometime in 1980, Jose, together with his
friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership
to engage in the trucking business. Initially, with a contribution of
₱50,000.00 each, they purchased a truck to be used in the hauling and
transport of lumber of the sawmill. Jose managed the operations of this
trucking business until his death on August 15, 1981. Thereafter, Jose's
heirs, including Elfledo, and partners agreed to continue the business under
the management of Elfledo. The shares in the partnership profits and
income that formed part of the estate of Jose were held in trust by Elfledo,
with petitioners' authority for Elfledo to use, purchase or acquire properties
using said funds.

Petitioners also alleged that, at that time, Elfledo was a fresh commerce
graduate serving as his father’s driver in the trucking business. He was
never a partner or an investor in the business and merely supervised the
 31

purchase of additional trucks using the income from the trucking business of
the partners. By the time the partnership ceased, it had nine trucks, which
were all registered in Elfledo's name. Petitioners asseverated that it was
also through Elfledo’s management of the partnership that he was able to
purchase numerous real properties by using the profits derived therefrom,
all of which were registered in his name and that of respondent. In addition
to the nine trucks, Elfledo also acquired five other motor vehicles.

On May 18, 1995, Elfledo died, leaving respondent as his sole surviving
heir. Petitioners claimed that respondent took over the administration of the
aforementioned properties, which belonged to the estate of Jose, without
their consent and approval. Claiming that they are co-owners of the
properties, petitioners required respondent to submit an accounting of all
income, profits and rentals received from the estate of Elfledo, and to
surrender the administration thereof. Respondent refused; thus, the filing of
this case.

Respondent traversed petitioners' allegations and claimed that Elfledo was

himself a partner of Norberto and Jimmy. Respondent also claimed that per
testimony of Cresencia, sometime in 1980, Jose gave Elfledo ₱50,000.00
as the latter's capital in an informal partnership with Jimmy and Norberto.
When Elfledo and respondent got married in 1981, the partnership only had
one truck; but through the efforts of Elfledo, the business flourished. Other
than this trucking business, Elfledo, together with respondent, engaged in
other business ventures. Thus, they were able to buy real properties and to
put up their own car assembly and repair business. When Norberto was
ambushed and killed on July 16, 1993, the trucking business started to
falter. When Elfledo died on May 18, 1995 due to a heart attack, respondent
talked to Jimmy and to the heirs of Norberto, as she could no longer run the
business. Jimmy suggested that three out of the nine trucks be given to him
as his share, while the other three trucks be given to the heirs of Norberto.
However, Norberto's wife, Paquita Uy, was not interested in the vehicles.
Thus, she sold the same to respondent, who paid for them in installments.

Respondent also alleged that when Jose died in 1981, he left no known
assets, and the partnership with Jimmy and Norberto ceased upon his
demise. Respondent also stressed that Jose left no properties that Elfledo
could have held in trust. Respondent maintained that all the properties
involved in this case were purchased and acquired through her and her
husband’s joint efforts and hard work, and without any participation or
contribution from petitioners or from Jose. Respondent submitted that these
are conjugal partnership properties; and thus, she had the right to refuse to
render an accounting for the income or profits of their own business.

Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision
in favor of petitioners, thus:
 32

WHEREFORE, premises considered, judgment is hereby rendered:

1) Ordering the partition of the above-mentioned properties equally

between the plaintiffs and heirs of Jose Lim and the defendant Juliet
Villa-Lim; and

2) Ordering the defendant to submit an accounting of all incomes,

profits and rentals received by her from said properties.

SO ORDERED.

Aggrieved, respondent appealed to the CA.

On June 29, 2005, the CA reversed and set aside the RTC's decision,
dismissing petitioners' complaint for lack of merit. Undaunted, petitioners
filed their Motion for Reconsideration,5 which the CA, however, denied in its
Resolution6 dated May 8, 2006.

Hence, this Petition, raising the sole question, viz.:

IN THE APPRECIATION BY THE COURT OF THE EVIDENCE

SUBMITTED BY THE PARTIES, CAN THE TESTIMONY OF ONE OF THE
PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A
FORMER PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER
PARTNERS IN THE PARTNERSHIP?7

In essence, petitioners argue that according to the testimony of Jimmy, the

sole surviving partner, Elfledo was not a partner; and that he and Norberto
entered into a partnership with Jose. Thus, the CA erred in not giving that
testimony greater weight than that of Cresencia, who was merely the
spouse of Jose and not a party to the partnership.8

Respondent counters that the issue raised by petitioners is not proper in a

petition for review on certiorari under Rule 45 of the Rules of Civil
Procedure, as it would entail the review, evaluation, calibration, and re-
weighing of the factual findings of the CA. Moreover, respondent invokes
the rationale of the CA decision that, in light of the admissions of Cresencia
and Edison and the testimony of respondent, the testimony of Jimmy was
effectively refuted; accordingly, the CA's reversal of the RTC's findings was
fully justified.9

We resolve first the procedural matter regarding the propriety of the instant
Petition.

Verily, the evaluation and calibration of the evidence necessarily involves

consideration of factual issues — an exercise that is not appropriate for a
petition for review on certiorari under Rule 45. This rule provides that the
parties may raise only questions of law, because the Supreme Court is not a
 33

trier of facts. Generally, we are not duty-bound to analyze again and weigh
the evidence introduced in and considered by the tribunals below.10 When
supported by substantial evidence, the findings of fact of the CA are
conclusive and binding on the parties and are not reviewable by this Court,
unless the case falls under any of the following recognized exceptions:

(1) When the conclusion is a finding grounded entirely on speculation,

surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or

impossible;

(3) Where there is a grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both
appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of specific
evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioners'
main and reply briefs are not disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on
the supposed absence of evidence and contradicted by the evidence
on record.11

We note, however, that the findings of fact of the RTC are contrary to those
of the CA. Thus, our review of such findings is warranted.

On the merits of the case, we find that the instant Petition is bereft of merit.

A partnership exists when two or more persons agree to place their money,
effects, labor, and skill in lawful commerce or business, with the
understanding that there shall be a proportionate sharing of the profits and
losses among them. A contract of partnership is defined by the Civil Code
as one where two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the
profits among themselves.12
 34

Undoubtedly, the best evidence would have been the contract of partnership
or the articles of partnership. Unfortunately, there is none in this case,
because the alleged partnership was never formally organized.
Nonetheless, we are asked to determine who between Jose and Elfledo
was the "partner" in the trucking business.

A careful review of the records persuades us to affirm the CA decision. The

evidence presented by petitioners falls short of the quantum of proof
required to establish that: (1) Jose was the partner and not Elfledo; and (2)
all the properties acquired by Elfledo and respondent form part of the estate
of Jose, having been derived from the alleged partnership.

Petitioners heavily rely on Jimmy's testimony. But that testimony is just one
piece of evidence against respondent. It must be considered and weighed
along with petitioners' other evidence vis-à-vis respondent's contrary
evidence. In civil cases, the party having the burden of proof must establish
his case by a preponderance of evidence. "Preponderance of evidence" is
the weight, credit, and value of the aggregate evidence on either side and is
usually considered synonymous with the term "greater weight of the
evidence" or "greater weight of the credible evidence." "Preponderance of
evidence" is a phrase that, in the last analysis, means probability of the
truth. It is evidence that is more convincing to the court as worthy of belief
than that which is offered in opposition thereto.13 Rule 133, Section 1 of the
Rules of Court provides the guidelines in determining preponderance of
evidence, thus:

SECTION I. Preponderance of evidence, how determined. In civil cases, the

party having burden of proof must establish his case by a preponderance of
evidence. In determining where the preponderance or superior weight of
evidence on the issues involved lies, the court may consider all the facts
and circumstances of the case, the witnesses' manner of testifying, their
intelligence, their means and opportunity of knowing the facts to which they
are testifying, the nature of the facts to which they testify, the probability or
improbability of their testimony, their interest or want of interest, and also
their personal credibility so far as the same may legitimately appear upon
the trial. The court may also consider the number of witnesses, though the
preponderance is not necessarily with the greater number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals14 is
enlightening. Therein, we cited Article 1769 of the Civil Code, which
provides:

Art. 1769. In determining whether a partnership exists, these rules shall

apply:
 35

(1) Except as provided by Article 1825, persons who are not partners
as to each other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a

partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived;

(4) The receipt by a person of a share of the profits of a business is a

prima facie evidence that he is a partner in the business, but no such
inference shall be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased

partner;

(d) As interest on a loan, though the amount of payment vary with

the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or

other property by installments or otherwise.

Applying the legal provision to the facts of this case, the following
circumstances tend to prove that Elfledo was himself the partner of Jimmy
and Norberto: 1) Cresencia testified that Jose gave Elfledo ₱50,000.00, as
share in the partnership, on a date that coincided with the payment of the
initial capital in the partnership;15 (2) Elfledo ran the affairs of the
partnership, wielding absolute control, power and authority, without any
intervention or opposition whatsoever from any of petitioners herein;16 (3) all
of the properties, particularly the nine trucks of the partnership, were
registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not
receive wages or salaries from the partnership, indicating that what he
actually received were shares of the profits of the business;17 and (5) none
of the petitioners, as heirs of Jose, the alleged partner, demanded periodic
accounting from Elfledo during his lifetime. As repeatedly stressed in Heirs
of Tan Eng Kee,18 a demand for periodic accounting is evidence of a
partnership.

Furthermore, petitioners failed to adduce any evidence to show that the real
and personal properties acquired and registered in the names of Elfledo and
 36

respondent formed part of the estate of Jose, having been derived from
Jose's alleged partnership with Jimmy and Norberto. They failed to refute
respondent's claim that Elfledo and respondent engaged in other
businesses. Edison even admitted that Elfledo also sold Interwood lumber
as a sideline.19 Petitioners could not offer any credible evidence other than
their bare assertions. Thus, we apply the basic rule of evidence that
between documentary and oral evidence, the former carries more weight.20

Finally, we agree with the judicious findings of the CA, to wit:

The above testimonies prove that Elfledo was not just a hired help but one
of the partners in the trucking business, active and visible in the running of
its affairs from day one until this ceased operations upon his demise. The
extent of his control, administration and management of the partnership and
its business, the fact that its properties were placed in his name, and that he
was not paid salary or other compensation by the partners, are indicative of
the fact that Elfledo was a partner and a controlling one at that. It is
apparent that the other partners only contributed in the initial capital but had
no say thereafter on how the business was ran. Evidently it was through
Elfredo’s efforts and hard work that the partnership was able to acquire
more trucks and otherwise prosper. Even the appellant participated in the
affairs of the partnership by acting as the bookkeeper sans salary.1avvphi1

It is notable too that Jose Lim died when the partnership was barely a year
old, and the partnership and its business not only continued but also
flourished. If it were true that it was Jose Lim and not Elfledo who was the
partner, then upon his death the partnership should have

been dissolved and its assets liquidated. On the contrary, these were not
done but instead its operation continued under the helm of Elfledo and
without any participation from the heirs of Jose Lim.

Whatever properties appellant and her husband had acquired, this was
through their own concerted efforts and hard work. Elfledo did not limit
himself to the business of their partnership but engaged in other lines of
businesses as well.

In sum, we find no cogent reason to disturb the findings and the ruling of the
CA as they are amply supported by the law and by the evidence on record.

WHEREFORE, the instant Petition is DENIED. The assailed Court of

Appeals Decision dated June 29, 2005 is AFFIRMED. Costs against
petitioners.

SO ORDERED.