FIRST DIVISION

[ G.R. No. 154486, December 01, 2010 ]

FEDERICO JARANTILLA, JR., PETITIONER, VS. ANTONIETA
JARANTILLA, BUENAVENTURA REMOTIGUE, SUBSTITUTED BY
CYNTHIA REMOTIGUE, DOROTEO JARANTILLA AND TOMAS
JARANTILLA, RESPONDENTS.

DECISION

LEONARDO-DE CASTRO, J.:

This petition for review on certiorari[1] seeks to modify the Decision[2] of the Court of
Appeals dated July 30, 2002 in CA-G.R. CV No. 40887, which set aside the
Decision[3] dated December 18, 1992 of the Regional Trial Court (RTC) of Quezon City,
Branch 98 in Civil Case No. Q-50464.

The pertinent facts are as follows:

The spouses Andres Jarantilla and Felisa Jaleco were survived by eight children:
Federico, Delfin, Benjamin, Conchita, Rosita, Pacita, Rafael and Antonieta. [4]  Petitioner
Federico Jarantilla, Jr. is the grandchild of the late Jarantilla spouses by their son
Federico Jarantilla, Sr. and his wife Leda Jamili.[5]  Petitioner also has two other brothers:
Doroteo and Tomas Jarantilla.

Petitioner was one of the defendants in the complaint before the RTC while Antonieta
Jarantilla, his aunt, was the plaintiff therein.  His co-respondents before he joined his aunt
Antonieta in her complaint, were his late aunt Conchita Jarantilla's husband Buenaventura
Remotigue, who died during the pendency of the case, his cousin Cynthia Remotigue, the
adopted daughter of Conchita Jarantilla and Buenaventura Remotigue, and his brothers
Doroteo and Tomas Jarantilla.[6]

In 1948, the Jarantilla heirs extrajudicially partitioned amongst themselves the real
properties of their deceased parents.[7]  With the exception of the real property adjudicated
to Pacita Jarantilla, the heirs also agreed to allot the produce of the said real properties for
the years 1947-1949 for the studies of Rafael and Antonieta Jarantilla.[8]

In the same year, the spouses Rosita Jarantilla and Vivencio Deocampo entered into an
agreement with the spouses Buenaventura Remotigue and Conchita Jarantilla to provide
mutual assistance to each other by way of financial support to any commercial and
agricultural activity on a joint business arrangement.  This business relationship proved to
be successful as they were able to establish a manufacturing and trading business, acquire
real properties, and construct buildings, among other things.[9]  This partnership ended in
1973 when the parties, in an "Agreement,"[10] voluntarily agreed to completely dissolve
their "joint business relationship/arrangement."[11]

On April 29, 1957, the spouses Buenaventura and Conchita Remotigue executed a
document wherein they acknowledged that while registered only in Buenaventura
Remotigue's name, they were not the only owners of the capital of the businesses Manila
Athletic Supply (712 Raon Street, Manila), Remotigue Trading (Calle Real, Iloilo City)
and Remotigue Trading (Cotabato City).  In this same "Acknowledgement of
Participating Capital," they stated the participating capital of their co-owners as of the
year 1952, with Antonieta Jarantilla's stated as eight thousand pesos (P8,000.00) and
Federico Jarantilla, Jr.'s as five thousand pesos (P5,000.00).[12]

The present case stems from the amended complaint[13] dated April 22, 1987 filed by
Antonieta Jarantilla against Buenaventura Remotigue, Cynthia Remotigue, Federico
Jarantilla, Jr., Doroteo Jarantilla and Tomas Jarantilla, for the accounting of the assets
and income of the co-ownership, for its partition and the delivery of her share
corresponding to eight percent (8%), and for damages. Antonieta claimed that in 1946,
she had entered into an agreement with Conchita and Buenaventura Remotigue, Rafael
Jarantilla, and Rosita and Vivencio Deocampo to engage in business.  Antonieta alleged
that the initial contribution of property and money came from the heirs' inheritance, and
her subsequent annual investment of seven thousand five hundred pesos (P7,500.00) as
additional capital came from the proceeds of her farm.  Antonieta also alleged that from
1946-1969, she had helped in the management of the business they co-owned without
receiving any salary.  Her salary was supposedly rolled back into the business as
additional investments in her behalf.  Antonieta further claimed co-ownership of certain
properties[14] (the subject real properties) in the name of the defendants since the only way
the defendants could have purchased these properties were through the partnership as
they had no other source of income.

The respondents, including petitioner herein, in their Answer,[15] denied having formed a

partnership with Antonieta in 1946.  They claimed that she was in no position to do so as
she was still in school at that time. In fact, the proceeds of the lands they partitioned were
devoted to her studies.  They also averred that while she may have helped in the
businesses that her older sister Conchita had formed with Buenaventura Remotigue, she
was paid her due salary.  They did not deny the existence and validity of the
"Acknowledgement of Participating Capital" and in fact used this as evidence to support
their claim that Antonieta's 8% share was limited to the businesses enumerated therein. 
With regard to Antonieta's claim in their other corporations and businesses, the
respondents said these should also be limited to the number of her shares as specified in
the respective articles of incorporation.  The respondents denied using the partnership's
income to purchase the subject real properties and said that the certificates of title should
be binding on her.[16]

During the course of the trial at the RTC, petitioner Federico Jarantilla, Jr., who was one
of the original defendants, entered into a compromise agreement [17] with Antonieta
Jarantilla wherein he supported Antonieta's claims and asserted that he too was entitled to
six percent (6%) of the supposed partnership in the same manner as Antonieta was.  He
prayed for a favorable judgment in this wise:

Defendant Federico Jarantilla, Jr., hereby joins in plaintiff's prayer for an accounting
from the other defendants, and the partition of the properties of the co-ownership and the
delivery to the plaintiff and to defendant Federico Jarantilla, Jr. of their rightful share of
the assets and properties in the co-ownership.[18]

The RTC, in an Order[19] dated March 25, 1992, approved the Joint Motion to Approve
Compromise Agreement[20] and on December 18, 1992, decided in favor of Antonieta, to
wit:

WHEREFORE, premises above-considered, the Court renders judgment in favor of the

plaintiff Antonieta Jarantilla and against defendants Cynthia Remotigue, Doroteo
Jarantilla and Tomas Jarantilla ordering the latter:

1. to deliver to the plaintiff her 8% share or its equivalent amount on the real
properties covered by TCT Nos. 35655, 338398, 338399 & 335395, all of
the Registry of Deeds of Quezon City; TCT Nos. (18303)23341, 142882 &
490007(4615), all of the Registry of Deeds of Rizal; and TCT No. T-6309
of the Registry of Deeds of Cotabato based on their present market value;

2. to deliver to the plaintiff her 8% share or its equivalent amount on the

Remotigue Agro-Industrial Corporation, Manila Athletic Supply, Inc.,
MAS Rubber Products, Inc. and Buendia Recapping Corporation based on
the shares of stocks present book value;

3. to account for the assets and income of the co-ownership and deliver to
plaintiff her rightful share thereof equivalent to 8%;

4. to pay plaintiff, jointly and severally, the sum of P50,000.00 as moral

damages;

5. to pay, jointly and severally, the sum of P50,000.00 as attorney's fees; and

6. to pay, jointly and severally, the costs of the suit.[21]

Both the petitioner and the respondents appealed this decision to the Court of Appeals. 
The petitioner claimed that the RTC "erred in not rendering a complete judgment and
ordering the partition of the co-ownership and giving to [him] six per centum (6%) of the
properties."[22]

While the Court of Appeals agreed to some of the RTC's factual findings, it also
established that Antonieta Jarantilla was not part of the partnership formed in 1946, and
that her 8% share was limited to the businesses enumerated in the Acknowledgement of
Participating Capital.  On July 30, 2002, the Court of Appeals rendered the herein
challenged decision setting aside the RTC's decision, as follows:

WHEREFORE, the decision of the trial court, dated 18 December 1992 is SET ASIDE
and a new one is hereby entered ordering that:

(1) after accounting, plaintiff Antonieta Jarantilla be given her share of 8% in the assets
and profits of Manila Athletic Supply, Remotigue Trading in Iloilo City and Remotigue
Trading in Cotabato City;

(2) after accounting, defendant Federico Jarantilla, Jr. be given his share of 6% of the
assets and profits of the above-mentioned enterprises; and, holding that

(3) plaintiff Antonieta Jarantilla is a stockholder in the following corporations to the

extent stated in their Articles of Incorporation:
(a) Rural Bank of Barotac Nuevo, Inc.;
(b) MAS Rubber Products, Inc.;
(c) Manila Athletic Supply, Inc.; and
(d) B. Remotigue Agro-Industrial Development Corp.
(4) No costs.[23]

The respondents, on August 20, 2002, filed a Motion for Partial Reconsideration but the
Court of Appeals denied this in a Resolution[24] dated March 21, 2003.

Antonieta Jarantilla filed before this Court her own petition for review
on certiorari[25] dated September 16, 2002, assailing the Court of Appeals' decision on
"similar grounds and similar assignments of errors as this present case"[26] but it was
dismissed on November 20, 2002 for failure to file the appeal within the reglementary
period of fifteen (15) days in accordance with Section 2, Rule 45 of the Rules of Court. [27]

Petitioner filed before us this petition for review on the sole ground that:

THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN NOT

RULING THAT PETITIONER FEDERICO JARANTILLA, JR. IS ENTITLED
TO A SIX PER CENTUM (6%) SHARE OF THE OWNERSHIP OF THE REAL
PROPERTIES ACQUIRED BY THE OTHER DEFENDANTS USING COMMON
FUNDS FROM THE BUSINESSES WHERE HE HAD OWNED SUCH SHARE.[28]

Petitioner asserts that he was in a partnership with the Remotigue spouses, the Deocampo
spouses, Rosita Jarantilla, Rafael Jarantilla, Antonieta Jarantilla and Quintin Vismanos,
as evidenced by the Acknowledgement of Participating Capital the Remotigue spouses
executed in 1957.  He contends that from this partnership, several other corporations and
businesses were established and several real properties were acquired.  In this petition, he
is essentially asking for his 6% share in the subject real properties.  He is relying on the
Acknowledgement of Participating Capital, on his own testimony, and Antonieta
Jarantilla's testimony to support this contention.

The core issue is whether or not the partnership subject of the Acknowledgement of
Participating Capital funded the subject real properties.  In other words, what is the
petitioner's right over these real properties?

It is a settled rule that in a petition for review on certiorari under Rule 45 of the Rules of
Civil Procedure, only questions of law may be raised by the parties and passed upon by
this Court.[29]

A question of law arises when there is doubt as to what the law is on a certain state of
facts, while there is a question of fact when the doubt arises as to the truth or falsity of the
alleged facts. For a question to be one of law, the same must not involve an examination
of the probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact. Thus, the test of whether a question is one of law or of
fact is not the appellation given to such question by the party raising the same; rather, it is
whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case, it is a question of law; otherwise it is a question
of fact.[30]

Since the Court of Appeals did not fully adopt the factual findings of the RTC, this Court,
in resolving the questions of law that are now in issue, shall look into the facts only in so
far as the two courts a quo differed in their appreciation thereof.

The RTC found that an unregistered partnership existed since 1946 which was affirmed
in the 1957 document, the "Acknowledgement of Participating Capital."  The RTC used
this as its basis for giving Antonieta Jarantilla an 8% share in the three businesses listed
therein and in the other businesses and real properties of the respondents as they had
supposedly acquired these through funds from the partnership.[31]
The Court of Appeals, on the other hand, agreed with the RTC as to Antonieta's 8% share
in the business enumerated in the Acknowledgement of Participating Capital, but not as
to her share in the other corporations and real properties.  The Court of Appeals ruled that
Antonieta's claim of 8% is based on the "Acknowledgement of Participating Capital," a
duly notarized document which was specific as to the subject of its coverage.  Hence,
there was no reason to pattern her share in the other corporations from her share in the
partnership's businesses.  The Court of Appeals also said that her claim in the
respondents' real properties was more "precarious" as these were all covered by
certificates of title which served as the best evidence as to all the matters contained
therein.[32]  Since petitioner's claim was essentially the same as Antonieta's, the Court of
Appeals also ruled that petitioner be given his 6% share in the same businesses listed in
the Acknowledgement of Participating Capital.

Factual findings of the trial court, when confirmed by the Court of Appeals, are final and
conclusive except in the following cases: (1) when the inference made is manifestly
mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when
the finding is grounded entirely on speculations, surmises or conjectures; (4) when the
judgment of the Court of Appeals is based on 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 of the Court of Appeals 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 Court of Appeals manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion; and (10) when the findings of fact of the
Court of Appeals are premised on the absence of evidence and are contradicted by the
evidence on record.[33]

In this case, we find no error in the ruling of the Court of Appeals.

Both the petitioner and Antonieta Jarantilla characterize their relationship with the
respondents as a co-ownership, but in the same breath, assert that a verbal partnership
was formed in 1946 and was affirmed in the 1957 Acknowledgement of Participating
Capital.

There is a co-ownership when an undivided thing or right belongs to different persons. [34] 
It is a partnership when 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.[35]  The Court, in Pascual v. The Commissioner of Internal Revenue,
[36]
 quoted the concurring opinion of Mr. Justice Angelo Bautista in Evangelista v. The
Collector of Internal Revenue[37] to further elucidate on the distinctions between a co-
ownership and a partnership, to wit:
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 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.

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.

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.

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 plaintiff's commission, no partnership
existed as between the three parties, whatever their relation may have been as to third
parties.

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 property.  x x x.

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.[38]  (Citations omitted.)

Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership: (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, all the parties in this case 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.[39]  It is not denied that all the parties in
this case have agreed to contribute capital to a common fund to be able to later on share
its profits.  They have admitted this fact, agreed to its veracity, and even submitted one
common documentary evidence to prove such partnership - the Acknowledgement of
Participating Capital.

As this case revolves around the legal effects of the Acknowledgement of Participating
Capital, it would be instructive to examine the pertinent portions of this document:

ACKNOWLEDGEMENT OF
PARTICIPATING CAPITAL

KNOW ALL MEN BY THESE PRESENTS:

That we, the spouses Buenaventura Remotigue and Conchita Jarantilla de Remotigue,
both of legal age, Filipinos and residents of Loyola Heights, Quezon City, P.I. hereby
state:

That the Manila Athletic Supply at 712 Raon, Manila, the Remotigue Trading of Calle
Real, Iloilo City and the Remotigue Trading, Cotabato Branch, Cotabato, P.I., all dealing
in athletic goods and equipments, and general merchandise are recorded in their
respective books with Buenaventura Remotigue as the registered owner and are being
operated by them as such:

That they are not the only owners of the capital of the three establishments and their
participation in the capital of the three establishments together with the other co-owners
as of the year 1952 are stated as follows:

1. Buenaventura Remotigue (TWENTY-FIVE  THOUSAND) P25,000.00

 2. Conchita Jarantilla de Remotigue (TWENTY-FIVE 25,000.00
THOUSAND)...........
3. Vicencio Deocampo (FIFTEEN THOUSAND).................... 15,000.00
4. Rosita J. Deocampo (FIFTEEN THOUSAND).................... 15,000.00
5. Antonieta Jarantilla (EIGHT THOUSAND)........................... 8,000.00
6. Rafael Jarantilla (SIX THOUSAND).................................... 6,000.00
7. Federico Jarantilla, Jr. (FIVE THOUSAND)...................... 5,000.00
8. Quintin Vismanos (TWO THOUSAND)............................ 2,000.00

That aside from the persons mentioned in the next preceding paragraph, no other person
has any interest in the above-mentioned three establishments.

IN WITNESS WHEREOF, they sign this instrument in the City of Manila, P.I., this
29th day of April, 1957.

[Sgd.]
BUENAVENTURA REMOTIGUE

[Sgd.]
CONCHITA JARANTILLA DE REMOTIGUE[40]

The Acknowledgement of Participating Capital is a duly notarized document voluntarily

executed by Conchita Jarantilla-Remotigue and Buenaventura Remotigue in 1957. 
Petitioner does not dispute its contents and is actually relying on it to prove his
participation in the partnership.  Article 1797 of the Civil Code provides:

Art. 1797.  The losses and profits shall be distributed in conformity with the
agreement.  If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall
be in proportion to what he may have contributed, but the industrial partner shall not
be liable for the losses.  As for the profits, the industrial partner shall receive such share
as may be just and equitable under the circumstances.  If besides his services he has
contributed capital, he shall also receive a share in the profits in proportion to his capital. 
(Emphases supplied.)

It is clear from the foregoing that a partner is entitled only to his share as agreed upon, or
in the absence of any such stipulations, then to his share in proportion to his contribution
to the partnership.  The petitioner himself claims his share to be 6%, as stated in the
Acknowledgement of Participating Capital.  However, petitioner fails to realize that this
document specifically enumerated the businesses covered by the partnership: Manila
Athletic Supply, Remotigue Trading in Iloilo City and Remotigue Trading in Cotabato
City.  Since there was a clear agreement that the capital the partners contributed went to
the three businesses, then there is no reason to deviate from such agreement and go
beyond the stipulations in the document. Therefore, the Court of Appeals did not err
in limiting petitioner's share to the assets of the businesses enumerated in the
Acknowledgement of Participating Capital.

In Villareal v. Ramirez,[41] the Court held that since a partnership is a separate juridical

entity, the shares to be paid out to the partners is necessarily limited only to its total
resources, to wit:

Since it is the partnership, as a separate and distinct entity, that must refund the shares of
the partners, the amount to be refunded is necessarily limited to its total resources.  In
other words, it can only pay out what it has in its coffers, which consists of all its assets. 
However, before the partners can be paid their shares, the creditors of the partnership
must first be compensated. After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners' shares. [42]

There is no evidence that the subject real properties were assets of the partnership
referred to in the Acknowledgement of Participating Capital.

The petitioner further asserts that he is entitled to respondents' properties based on the
concept of trust.  He claims that since the subject real properties were purchased using
funds of the partnership, wherein he has a 6% share, then "law and equity mandates that
he should be considered as a co-owner of those properties in such proportion." [43] 
In Pigao v. Rabanillo,[44] this Court explained the concept of trusts, to wit:

Express trusts are created by the intention of the trustor or of the parties, while implied
trusts come into being by operation of law, either through implication of an intention to
create a trust as a matter of law or through the imposition of the trust irrespective of, and
even contrary to, any such intention. In turn, implied trusts are either resulting or
constructive trusts. Resulting trusts are based on the equitable doctrine that valuable
consideration and not legal title determines the equitable title or interest and are
presumed always to have been contemplated by the parties. They arise from the nature or
circumstances of the consideration involved in a transaction whereby one person thereby
becomes invested with legal title but is obligated in equity to hold his legal title for the
benefit of another.[45]

On proving the existence of a trust, this Court held that:

Respondent has presented only bare assertions that a trust was created. Noting the need to
prove the existence of a trust, this Court has held thus:
"As a rule, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust
and its elements. While implied trusts may be proved by oral evidence, the evidence must
be trustworthy and received by the courts with extreme caution, and should not be made
to rest on loose, equivocal or indefinite declarations. Trustworthy evidence is required
because oral evidence can easily be fabricated." [46]

The petitioner has failed to prove that there exists a trust over the subject real properties. 
Aside from his bare allegations, he has failed to show that the respondents used the
partnership's money to purchase the said properties. Even
assuming arguendo that some partnership income was used to acquire these properties,
the petitioner should have successfully shown that these funds came from his share in the
partnership profits.  After all, by his own admission, and as stated in the
Acknowledgement of Participating Capital, he owned a mere 6% equity in the
partnership.

In essence, the petitioner is claiming his 6% share in the subject real properties, by
relying on his own self-serving testimony and the equally biased testimony of Antonieta
Jarantilla.  Petitioner has not presented evidence, other than these unsubstantiated
testimonies, to prove that the respondents did not have the means to fund their other
businesses and real properties without the partnership's income.  On the other hand, the
respondents have not only, by testimonial evidence, proven their case against the
petitioner, but have also presented sufficient documentary evidence to substantiate their
claims, allegations and defenses.  They presented preponderant proof on how they
acquired and funded such properties in addition to tax receipts and tax declarations. [47]  It
has been held that "while tax declarations and realty tax receipts do not conclusively
prove ownership, they may constitute strong evidence of ownership when accompanied
by possession for a period sufficient for prescription."[48]  Moreover, it is a rule in this
jurisdiction that testimonial evidence cannot prevail over documentary evidence. [49]  This
Court had on several occasions, expressed our disapproval on using mere self-serving
testimonies to support one's claim.  In Ocampo v. Ocampo,[50] a case on partition of a co-
ownership, we held that:

Petitioners assert that their claim of co-ownership of the property was sufficiently proved
by their witnesses -- Luisa Ocampo-Llorin and Melita Ocampo.  We disagree. Their
testimonies cannot prevail over the array of documents presented by Belen.  A claim of
ownership cannot be based simply on the testimonies of witnesses; much less on those of
interested parties, self-serving as they are.[51]

It is true that a certificate of title is merely an evidence of ownership or title over the
particular property described therein. Registration in the Torrens system does not create
or vest title as registration is not a mode of acquiring ownership; hence, this cannot
deprive an aggrieved party of a remedy in law.[52]  However, petitioner asserts ownership
over portions of the subject real properties on the strength of his own admissions and on
the testimony of Antonieta Jarantilla. As held by this Court in Republic of the Philippines
v. Orfinada, Sr.[53]:

Indeed, a Torrens title is generally conclusive evidence of ownership of the land referred
to therein, and a strong presumption exists that a Torrens title was regularly issued and
valid. A Torrens title is incontrovertible against any informacion possessoria, of other
title existing prior to the issuance thereof not annotated on the Torrens title. Moreover,
persons dealing with property covered by a Torrens certificate of title are not required to
go beyond what appears on its face.[54]

As we have settled that this action never really was for partition of a co-ownership, to
permit petitioner's claim on these properties is to allow a collateral, indirect attack on
respondents' admitted titles. In the words of the Court of Appeals, "such evidence cannot
overpower the conclusiveness of these certificates of title, more so since plaintiff's
[petitioner's] claims amount to a collateral attack, which is prohibited under Section 48 of
Presidential Decree No. 1529, the Property Registration Decree."[55]

SEC. 48. Certificate not subject to collateral attack. - A certificate of title shall not be
subject to collateral attack.  It cannot be altered, modified, or cancelled except in a direct
proceeding in accordance with law.

This Court has deemed an action or proceeding to be "an attack on a title when its
objective is to nullify the title, thereby challenging the judgment pursuant to which the
title was decreed."[56]  In Aguilar v. Alfaro,[57] this Court further distinguished between a
direct and an indirect or collateral attack, as follows:

A collateral attack transpires when, in another action to obtain a different relief and as an
incident to the present action, an attack is made against the judgment granting the title.
This manner of attack is to be distinguished from a direct attack against a judgment
granting the title, through an action whose main objective is to annul, set aside, or enjoin
the enforcement of such judgment if not yet implemented, or to seek recovery if the
property titled under the judgment had been disposed of.  x x x.

Petitioner's only piece of documentary evidence is the Acknowledgement of Participating

Capital, which as discussed above, failed to prove that the real properties he is claiming
co-ownership of were acquired out of the proceeds of the businesses covered by such
document. Therefore, petitioner's theory has no factual or legal leg to stand on.

WHEREFORE, the Petition is hereby DENIED and the Decision of the Court of

Appeals in CA-G.R. CV No. 40887, dated July 30, 2002 is AFFIRMED.

SO ORDERED.
 SECOND DIVISION
[ G.R. No. 142293, February 27, 2003 ]
VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION,
AND SBT[1] TRUCKING CORPORATION, PETITIONERS, VS. HON. COURT
OF APPEALS AND JAIME SAHOT, RESPONDENTS.

DECISION

QUISUMBING, J.:

This petition for review seeks the reversal of the decision[2] of the Court of
Appeals dated February 29, 2000, in CA-G.R. SP No. 52671, affirming with modification
the decision[3] of the National Labor Relations Commission promulgated on June 20,
1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the
decision[4] of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-94.

Culled from the records are the following facts of this case:

Sometime in 1958, private respondent Jaime Sahot[5] started working as a truck helper

for petitioners’ family-owned trucking business named Vicente Sy Trucking. In 1965, he
became a truck driver of the same family business, renamed T. Paulino Trucking Service,
later 6B’s Trucking Corporation in 1985, and thereafter known as SBT Trucking
Corporation since 1994. Throughout all these changes in names and for 36 years, private
respondent continuously served the trucking business of petitioners.

In April 1994, Sahot was already 59 years old. He had been incurring absences as he was
suffering from various ailments. Particularly causing him pain was his left thigh, which
greatly affected the performance of his task as a driver. He inquired about his medical
and retirement benefits with the Social Security System (SSS) on April 25, 1994, but
discovered that his premium payments had not been remitted by his employer.

Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically
examined and treated for EOR, presleyopia, hypertensive retinopathy G II (Annexes “G-
5” and “G-3”, pp. 48, 104, respectively),[6] HPM, UTI, Osteoarthritis (Annex “G-4”, p.
105),[7] and heart enlargement (Annex G, p. 107).[8] On said grounds, Belen Paulino of the
SBT Trucking Service management told him to file a formal request for extension of his
leave. At the end of his week-long absence, Sahot applied for extension of his leave for
the whole month of June, 1994. It was at this time when petitioners allegedly
threatened to terminate his employment should he refuse to go back to work.

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to
work, But he could not retire on pension because petitioners never paid his correct SSS
premiums. The fact remained he could no longer work as his left thigh hurt abominably.
Petitioners ended his dilemma. They carried out their threat and dismissed him from
work, effective June 30, 1994. He ended up sick, jobless and penniless.

On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint
for illegal dismissal, docketed as NLRC NCR Case No. 00-09-06717-94. He prayed for the
recovery of separation pay and attorneys fees against Vicente Sy and Trinidad Paulino-
Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service, 6B’s Trucking and SBT
Trucking, herein petitioners.

For their part, petitioners admitted they had a trucking business in the 1950s but denied
employing helpers and drivers. They contend that private respondent was not illegally
dismissed as a driver because he was in fact petitioner’s industrial partner. They add
that it was not until the year 1994, when SBT Trucking Corporation was established, and
only then did respondent Sahot become an employee of the company, with a monthly
salary that reached P4,160.00 at the time of his separation.

Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave
and was not able to report for work for almost seven days. On June 1, 1994, Sahot asked
permission to extend his leave of absence until June 30, 1994. It appeared that from the
expiration of his leave, private respondent never reported back to work nor did he file
an extension of his leave. Instead, he filed the complaint for illegal dismissal against the
trucking company and its owners.

Petitioners add that due to Sahot’s refusal to work after the expiration of his authorized
leave of absence, he should be deemed to have voluntarily resigned from his work. They
contended that Sahot had all the time to extend his leave or at least inform petitioners
of his health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled
“Manuelito Jimenez et al. vs. T. Paulino Trucking Service,” as a defense in view of the
alleged similarity in the factual milieu and issues of said case to that of Sahot’s, hence
they are in pari materia  and Sahot’s complaint ought also to be dismissed.

The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled
that there was no illegal dismissal in Sahot’s case. Private respondent had failed to
report to work. Moreover, said the Labor Arbiter, petitioners and private respondent
were industrial partners before January 1994. The Labor Arbiter concluded by ordering
petitioners to pay “financial assistance” of P15,000 to Sahot for having served the
company as a regular employee since January 1994 only.

On appeal, the National Labor Relations Commission modified the judgment of the
Labor Arbiter. It declared that private respondent was an employee, not an industrial
partner, since the start. Private respondent Sahot did not abandon his job but his
employment was terminated on account of his illness, pursuant to Article 284 [9] of the
Labor Code. Accordingly, the NLRC ordered petitioners to pay private respondent
separation pay in the amount of P60,320.00, at the rate of P2,080.00 per year for 29
years of service.

Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision
dated February 29, 2000, the appellate court affirmed with modification the judgment
of the NLRC. It held that private respondent was indeed an employee of petitioners
since 1958. It also increased the amount of separation pay awarded to private
respondent to P74,880, computed at the rate of P2,080 per year for 36 years of service
from 1958 to 1994. It decreed:
WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB
Trucking Corporation is hereby directed to pay complainant Jaime Sahot the sum of
SEVENTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY (P74,880.00) PESOS as and for his
separation pay.[10]
Hence, the instant petition anchored on the following contentions:
I

RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION

AFFIRMING WITH MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS
COMMISSION DECIDED NOT IN ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402
OF THE CIVIL CODE.[11]

II
RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE
NATIONAL LABOR RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF
THE LABOR ARBITER AS THE LATTER WAS IN A BETTER POSITION TO OBSERVE THE
DEMEANOR AND DEPORTMENT OF THE WITNESSES IN THE CASE OF ASSOCIATION OF
INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS NATIONAL CAPITAL REGION (305
SCRA 233).[12]

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING

CORPORATION.[13]
Three issues are to be resolved: (1) Whether or not an employer-employee
relationship existed between petitioners and respondent Sahot; (2) Whether or not
there was valid dismissal; and (3) Whether or not respondent Sahot is entitled to
separation pay.

Crucial to the resolution of this case is the determination of the first issue. Before a case
for illegal dismissal can prosper, an employer-employee relationship must first be
established.[14]

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found
that respondent Sahot was not an employee but was in fact, petitioners’ industrial
partner.[15] It is contended that it was the Labor Arbiter who heard the case and had the
opportunity to observe the demeanor and deportment of the parties. The same
conclusion, aver petitioners, is supported by substantial evidence. [16] Moreover, it is
argued that the findings of fact of the Labor Arbiter was wrongly overturned by the
NLRC when the latter made the following pronouncement:
We agree with complainant that there was error committed by the Labor Arbiter
when he concluded that complainant was an industrial partner prior to 1994. A
computation of the age of complainant shows that he was only twenty-three (23) years
when he started working with respondent as truck helper. How can we entertain in our
mind that a twenty-three (23) year old man, working as a truck helper, be considered an
industrial partner. Hence we rule that complainant was only an employee, not a partner
of respondents from the time complainant started working for respondent. [17]
Because the Court of Appeals also found that an employer-employee relationship
existed, petitioners aver that the appellate court’s decision gives an “imprimatur” to the
“illegal” finding and conclusion of the NLRC.
Private respondent, for his part, denies that he was ever an industrial partner of
petitioners. There was no written agreement, no proof that he received a share in
petitioners’ profits, nor was there anything to show he had any participation with
respect to the running of the business.[18]

The elements to determine the existence of an employment relationship are: (a) the
selection and engagement of the employee; (b) the payment of wages; (c) the power of
dismissal; and (d) the employer’s power to control the employee’s conduct. The most
important element is the employer’s control of the employee’s conduct, not only as to
the result of the work to be done, but also as to the means and methods to accomplish
it.[19]

As found by the appellate court, petitioners owned and operated a trucking business
since the 1950s and by their own allegations, they determined private respondent’s
wages and rest day.[20] Records of the case show that private respondent actually
engaged in work as an employee. During the entire course of his employment he did not
have the freedom to determine where he would go, what he would do, and how he
would do it. He merely followed instructions of petitioners and was content to do so, as
long as he was paid his wages. Indeed, said the CA, private respondent had worked as a
truck helper and driver of petitioners not for his own pleasure but under the latter’s
control.

Article 1767[21] of the Civil Code states that in a 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. [22] Not one of these
circumstances is present in this case. No written agreement exists to prove the
partnership between the parties. Private respondent did not contribute money,
property or industry for the purpose of engaging in the supposed business. There is no
proof that he was receiving a share in the profits as a matter of course, during the
period when the trucking business was under operation. Neither is there any proof that
he had actively participated in the management, administration and adoption of policies
of the business. Thus, the NLRC and the CA did not err in reversing the finding of the
Labor Arbiter that private respondent was an industrial partner from 1958 to 1994.

On this point, we affirm the findings of the appellate court and the NLRC. Private
respondent Jaime Sahot was not an industrial partner but an employee of petitioners
from 1958 to 1994. The existence of an employer-employee relationship is ultimately a
question of fact[23] and the findings thereon by the NLRC, as affirmed by the Court of
Appeals, deserve not only respect but finality when supported by substantial evidence.
Substantial evidence is such amount of relevant evidence which a reasonable mind
might accept as adequate to justify a conclusion.[24]

Time and again this Court has said that “if doubt exists between the evidence presented
by the employer and the employee, the scales of justice must be tilted in favor of the
latter.”[25] Here, we entertain no doubt. Private respondent since the beginning was an
employee of, not an industrial partner in, the trucking business.

Coming now to the second issue, was private respondent validly dismissed by
petitioners?

Petitioners contend that it was private respondent who refused to go back to work. The
decision of the Labor Arbiter pointed out that during the conciliation proceedings,
petitioners requested respondent Sahot to report back for work. However, in the same
proceedings, Sahot stated that he was no longer fit to continue working, and instead he
demanded separation pay. Petitioners then retorted that if Sahot did not like to work as
a driver anymore, then he could be given a job that was less strenuous, such as working
as a checker. However, Sahot declined that suggestion. Based on the foregoing recitals,
petitioners assert that it is clear that Sahot was not dismissed but it was of his own
volition that he did not report for work anymore.

In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue
working with respondents despite his alleged illness, there is no direct evidence that will
prove that complainant’s illness prevents or incapacitates him from performing the
function of a driver. The fact remains that complainant suddenly stopped working due
to boredom or otherwise when he refused to work as a checker which certainly is a
much less strenuous job than a driver.[26]
But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by
the Court of Appeals, held that:
While it was very obvious that complainant did not have any intention to report
back to work due to his illness which incapacitated him to perform his job, such
intention cannot be construed to be an abandonment. Instead, the same should have
been considered as one of those falling under the just causes of terminating an
employment. The insistence of respondent in making complainant work did not change
the scenario.

It is worthy to note that respondent is engaged in the trucking business where physical
strength is of utmost requirement (sic). Complainant started working with respondent
as truck helper at age twenty-three (23), then as truck driver since 1965. Complainant
was already fifty-nine (59) when the complaint was filed and suffering from various
illness triggered by his work and age.

x x x [27]
In termination cases, the burden is upon the employer to show by substantial
evidence that the termination was for lawful cause and validly made. [28] Article 277(b) of
the Labor Code puts the burden of proving that the dismissal of an employee was for a
valid or authorized cause on the employer, without distinction whether the employer
admits or does not admit the dismissal.[29] For an employee’s dismissal to be valid, (a)
the dismissal must be for a valid cause and (b) the employee must be afforded due
process.[30]

Article 284 of the Labor Code authorizes an employer to terminate an employee on the
ground of disease, viz:
Art. 284. Disease as a ground for termination- An employer may terminate the
services of an employee who has been found to be suffering from any disease and
whose continued employment is prohibited by law or prejudicial to his health as well as
the health of his co-employees: xxx
However, in order to validly terminate employment on this ground, Book VI, Rule
I, Section 8 of the Omnibus Implementing Rules of the Labor Code requires:
Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a
disease and his continued employment is prohibited by law or prejudicial to his health
or to the health of his co-employees, the employer shall not terminate his employment
unless there is a certification by competent public health authority that the disease is of
such nature or at such a stage that it cannot be cured within a period of six (6) months
even with proper medical treatment. If the disease or ailment can be cured within the
period, the employer shall not terminate the employee but shall ask the employee to
take a leave. The employer shall reinstate such employee to his former position
immediately upon the restoration of his normal health. (Italics supplied).
As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC,[31] the
requirement for a medical certificate under Article 284 of the Labor Code cannot be
dispensed with; otherwise, it would sanction the unilateral and arbitrary determination
by the employer of the gravity or extent of the employee’s illness and thus defeat the
public policy in the protection of labor.

In the case at bar, the employer clearly did not comply with the medical certificate
requirement before Sahot’s dismissal was effected. In the same case of Sevillana vs. I.T.
(International) Corp., we ruled:
Since the burden of proving the validity of the dismissal of the employee rests on
the employer, the latter should likewise bear the burden of showing that the requisites
for a valid dismissal due to a disease have been complied with. In the absence of the
required certification by a competent public health authority, this Court has ruled
against the validity of the employee’s dismissal. It is therefore incumbent upon the
private respondents to prove by the quantum of evidence required by law that
petitioner was not dismissed, or if dismissed, that the dismissal was not illegal;
otherwise, the dismissal would be unjustified. This Court will not sanction a dismissal
premised on mere conjectures and suspicions, the evidence must be substantial and not
arbitrary and must be founded on clearly established facts sufficient to warrant his
separation from work.[32]
In addition, we must likewise determine if the procedural aspect of due process
had been complied with by the employer.

From the records, it clearly appears that procedural due process was not observed in
the separation of private respondent by the management of the trucking company. The
employer is required to furnish an employee with two written notices before the latter
is dismissed: (1) the notice to apprise the employee of the particular acts or omissions
for which his dismissal is sought, which is the equivalent of a charge; and (2) the notice
informing the employee of his dismissal, to be issued after the employee has been given
reasonable opportunity to answer and to be heard on his defense. [33] These, the
petitioners failed to do, even only for record purposes. What management did was to
threaten the employee with dismissal, then actually implement the threat when the
occasion presented itself because of private respondent’s painful left thigh.

All told, both the substantive and procedural aspects of due process were violated.
Clearly, therefore, Sahot’s dismissal is tainted with invalidity.

On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to
separation pay. The law is clear on the matter. An employee who is terminated because
of disease is entitled to “separation pay equivalent to at least one month salary or to
one-half month salary for every year of service, whichever is greater xxx.” [34] Following
the formula set in Art. 284 of the Labor Code, his separation pay was computed by the
appellate court at P2,080 times 36 years (1958 to 1994) or P74,880. We agree with the
computation, after noting that his last monthly salary was P4,160.00 so that one-half
thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the
part of appellate court, we are constrained to sustain its decision. To avoid further delay
in the payment due the separated worker, whose claim was filed way back in 1994, this
decision is immediately executory. Otherwise, six percent (6%) interest per annum
should be charged thereon, for any delay, pursuant to provisions of the Civil Code.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated
February 29, 2000 is AFFIRMED. Petitioners must pay private respondent Jaime Sahot
his separation pay for 36 years of service at the rate of one-half monthly pay for every
year of service, amounting to P74,880.00, with interest of six per centum (6%) per
annum from finality of this decision until fully paid.

Costs against petitioners.

SO ORDERED.

THIRD DIVISION
[ G.R. No. 134559, December 09, 1999 ]
ANTONIA TORRES, ASSISTED BY HER HUSBAND, ANGELO TORRES;
AND EMETERIA BARING, PETITIONERS, VS. COURT OF APPEALS AND
MANUEL TORRES, RESPONDENTS.

DECISION

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. 
That the terms of a contract turn out to be financially disadvantageous to them will not
relieve them of their obligations therein.  The lack of an inventory of real property will
not ipso facto release the contracting partners from their respective obligations to each
other  arising from acts executed in accordance with their agreement.
 The Case

The Petition for Review on Certiorari before us assails the March 5, 1998
Decision[1] Second Division of the Court of Appeals[2] (CA) in CA-GR CV No. 42378 and its
June 25, 1998 Resolution denying reconsideration.  The assailed Decision affirmed the
ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which
disposed as follows:
"WHEREFORE, for all the foregoing considerations, the Court, finding for the
defendant and against the plaintiffs, orders the dismissal of the plaintiff's complaint. 
The counterclaims of the defendant are likewise ordered dismissed.  No pronouncement
as to costs."[3]

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint
venture agreement" with Respondent Manuel Torres for the development of a parcel of
land into a subdivision.  Pursuant to the contract, they executed a Deed of Sale covering
the said parcel of land in favor of respondent, who then had it registered in his name. 
By mortgaging the property, respondent obtained from Equitable Bank a loan of
P40,000 which, under the Joint Venture Agreement, was to be used for the
development of the subdivision.[4] All three of them also agreed to share the proceeds
from the sale of the subdivided lots.

The project did not push through, and the land was subsequently foreclosed by the
bank.

According to petitioners, the project failed because of "respondent's lack of funds or

means and skills." They add that respondent used the loan not for the development of
the subdivision, but in furtherance of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the
Agreement.  With the said amount, he was able to effect the survey and the subdivision
of the lots. He secured the Lapu Lapu City Council's approval of the subdivision project
which he advertised in a local newspaper.  He also caused the construction of roads,
curbs and gutters.  Likewise, he entered into a contract with an engineering firm for the
building of sixty low-cost housing units and actually even set up a model house on one
of the subdivision lots.  He did all of these for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners
and their relatives had separately caused the annotations of adverse claims on the title
to the land, which eventually scared away prospective buyers.  Despite his requests,
petitioners refused to cause the clearing of the claims, thereby forcing him to give up on
the project.[5]

Subsequently, petitioners filed a criminal case for estafa against respondent and his
wife, who were however acquitted.  Thereafter, they filed the present civil case which,
upon respondent's motion, was later dismissed by the trial court in an Order dated
September 6, 1982.  On appeal, however, the appellate court remanded the case for
further proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier
stated,  was affirmed by the CA.

Hence, this Petition.[6]

Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent
had formed a partnership for the development of the subdivision.  Thus, they must bear
the loss suffered by the partnership in the same proportion as their share in the profits
stipulated in the contract.  Disagreeing with the trial court's pronouncement that losses
as well as profits in a joint venture should be distributed equally, [7] the CA invoked
Article 1797 of the Civil Code which provides:
"Article 1797 - The losses and profits shall be distributed in conformity with the
agreement.  If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion."
The CA elucidated further:
"In the absence of stipulation, the share of each partner in the profits and losses
shall be in proportion to what he may have contributed, but the industrial partner shall
not be liable for the losses.  As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances.  If besides his services he
has contributed capital, he shall also receive a share in the profits in proportion to his
capital."
The Issue

Petitioners impute to the Court of Appeals the following error:

 "x x x [The] Court of Appeals erred in concluding that the transaction x x x
between the petitioners and respondent was that of a joint venture/partnership,
ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines."[8]
The Court's Ruling

The Petition is bereft of merit.

Main Issue:
Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the
Joint Venture Agreement and the earlier Deed of Sale, both of which were the bases of
the appellate court's finding of a partnership, were void.

In the same breath, however, they assert that under those very same contracts,
respondent is liable for his failure to implement the project. Because the agreement
entitled them to receive 60 percent of the proceeds from the sale of the subdivision
lots, they pray that respondent pay them damages equivalent to 60 percent of the value
of the property.[9]

The pertinent portions of the Joint Venture Agreement read as follows:

"KNOW ALL MEN BY THESE PRESENTS:

"This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of
March, 1969, by and between MR. MANUEL R. TORRES, x x x the FIRST PARTY, likewise,
MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x the SECOND PARTY:

W I T N E S S E T H:

"That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property
located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184
with a total area of 17,009 square meters, to be sub-divided by the FIRST PARTY;

"Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:  TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the execution of this contract
for the property entrusted by the SECOND PARTY, for sub-division projects and
development purposes;
"NOW THEREFORE, for and in consideration of the above covenants and promises
herein contained the respective parties hereto do hereby stipulate and agree as follows:

"ONE:  That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5,
1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY
CTVS. (P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY
CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY
did not actually receive the payment.

"SECOND:  That the SECOND PARTY, had received from the FIRST PARTY, the necessary
amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their
personal obligations and this particular amount will serve as an advance payment from
the FIRST PARTY for the property mentioned to be sub-divided  and to be deducted from
the sales.

"THIRD:  That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and
the principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, until the sub-division project is terminated and ready for sale to any
interested parties, and the amount of TWENTY THOUSAND (P20,000.00) pesos,
Philippine currency, will be deducted accordingly.

"FOURTH:  That all general expense[s] and all cost[s] involved in the sub-division project
should be paid by the FIRST PARTY, exclusively and all the expenses will not be deducted
from the sales after the development of the sub-division project.

"FIFTH:  That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM
60% for the SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and
additional profits or whatever income deriving from the sales will be divided equally
according to the x x x percentage [agreed upon] by both parties.

"SIXTH:  That the intended sub-division project of the property involved will start the
work and all improvements upon the adjacent lots will be negotiated in both parties[']
favor and all sales shall [be] decided by both parties.

"SEVENTH:  That the SECOND PARTIES, should be given an option to get back the
property mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST
PARTY, including all necessary improvements spent by the FIRST PARTY, and the FIRST
PARTY will be given a grace period to turnover the property mentioned above.

"That this AGREEMENT shall be binding and obligatory to the parties who executed
same freely and voluntarily for the uses and purposes therein stated." [10]
A reading of the terms embodied in the Agreement indubitably shows the
existence of a partnership pursuant to Article 1767 of the Civil Code, which provides:
"ART. 1767.  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."
Under the above-quoted Agreement, petitioners would contribute property to
the partnership in the form of land which was to be developed into a subdivision; while
respondent would give, in addition to his industry, the amount needed for general
expenses and other costs.  Furthermore, the income from the said project would be
divided according to the stipulated percentage.  Clearly, the contract manifested the
intention of the parties to form a partnership.[11]

It should be stressed that the parties implemented the contract. Thus,  petitioners
transferred the title to the land to facilitate its use in the name of the respondent.  On
the other hand, respondent caused the subject land to be mortgaged, the proceeds of
which were used for the survey and the subdivision of the land.  As noted earlier, he
developed the roads, the curbs and the gutters of the subdivision and entered into a
contract to construct low-cost housing units on the property.

Respondent's actions clearly belie petitioners' contention that he made no contribution

to the partnership.  Under Article 1767 of the Civil Code, a partner may contribute not
only money or property, but also industry.

Petitioners Bound by
Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has
been expressly stipulated, but also to all necessary consequences thereof, as follows:
"ART. 1315.  Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law."
It is undisputed that petitioners are educated and are thus presumed to have
understood the terms of the contract they voluntarily signed. If it was not in consonance
with their expectations, they should have objected to it and insisted on the provisions
they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their
acts, and the fact that the contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their obligations.  They cannot now
disavow the relationship formed from such agreement due to their supposed
misunderstanding of its terms.

Alleged Nullity of the

Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the
Civil Code, which provides:
"ART. 1773.  A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument."
They contend that since the parties did not make, sign or attach to the public
instrument an inventory of the real property contributed, the partnership is void.

We clarify.  First, Article 1773 was intended primarily to protect third persons. Thus, the
eminent Arturo M. Tolentino states that under the aforecited provision which is a
complement of Article 1771,[12] "the execution of a public instrument would be useless if
there is no inventory of the property contributed, because without its designation and
description, they cannot be subject to inscription in the Registry of Property, and their
contribution cannot prejudice third persons.  This will result in fraud to those who
contract with the partnership in the belief [in] the efficacy of the guaranty in which the
immovables may consist. Thus, the contract is declared void by the law when no such
inventory is made."  The case at bar does not involve third parties who may be
prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim
that respondent should pay them 60 percent of the value of the property. [13] They
cannot in one breath deny the contract and in another recognize it, depending on what
momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard
to a contract and courts will not tolerate, much less approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering
the Joint Venture Agreement an ordinary contract from which the parties' rights and
obligations to each other may be inferred and enforced.

Partnership Agreement Not the Result

of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article
1422[14] of the Civil Code, because it is the direct result of an earlier illegal contract,
which was for the sale of the land without valid consideration.

This argument is puerile.  The Joint Venture Agreement clearly states that the
consideration for the sale was the expectation of profits from the subdivision project. Its
first stipulation states that petitioners did not actually receive payment for the parcel of
land sold to respondent.  Consideration, more properly denominated as cause, can take
different forms, such as the prestation or promise of a thing or service by another. [15]

In this case, the cause of the contract of sale consisted not in the stated peso value of
the land, but in the expectation of profits from the subdivision project, for which the
land was intended to be used.  As explained by the trial court, "the land was in effect
given to the partnership as [petitioner's] participation therein.  x x x There was therefore
a consideration for the sale, the [petitioners] acting in  the expectation that, should the
venture come into fruition, they [would] get sixty percent  of the net profits."

Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision
project, petitioners maintain that he should be made to pay damages equivalent to 60
percent of the value of the property, which was their share in the profits under the Joint
Venture Agreement.

We are not persuaded.  True, the Court of Appeals held that petitioners' acts were not
the cause of the failure of the project.[16] But it also ruled that neither was respondent
responsible therefor.[17] In imputing the blame solely to him, petitioners failed to give
any reason why we should disregard the factual findings of the appellate court relieving
him of fault.  Verily, factual issues cannot be resolved in a petition for review under Rule
45, as in this case.  Petitioners have not alleged, not to say shown, that their Petition
constitutes one of the exceptions to this doctrine. [18] Accordingly, we find no reversible
error in the CA's ruling that petitioners are not entitled to damages.

WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED.

Costs against petitioners.

SO ORDERED.

THIRD DIVISION
[ G.R. No. 136448, November 03, 1999 ]
LIM TONG LIM, PETITIONER, VS. PHILIPPINE FISHING GEAR
INDUSTRIES, INC., RESPONDENT.

DECISION

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow

money to pursue a business and to divide the profits or losses that may arise therefrom,
even if it is shown that they have not contributed any capital of their own to a "common
fund." Their contribution may be in the form of credit or industry, not necessarily cash
or fixed assets. Being partners, they are all liable for debts incurred by or on behalf of
the partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November
26, 1998 Decision of the Court of Appeals in CA-GR CV 41477, [1] which disposed as
follows:
 "WHEREFORE, [there being] no reversible error in the appealed decision, the
same is hereby affirmed."[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which
was affirmed by the CA, reads as follows:
"WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing the unpaid price of the floats not covered
by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and computed on
their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February
9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February
13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February
19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per
appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);

e. Cost of suit.
"With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration of the nets
during the pendency of this case, it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of
the sale paid for by plaintiff was deposited in court. In effect, the amount of
P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in
effect, the plaintiff attached its own properties. It [was] for this reason also that this
Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff
to serve as its bond in favor of defendants.

"From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of P900,000.00
as this amount replaced the attached nets and floats. Considering, however, that the
total judgment obligation as computed above would amount to only P840,216.92, it
would be inequitable, unfair and unjust to award the excess to the defendants who are
not entitled to damages and who did not put up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not the owners of the nets and floats. For
this reason, the defendants are hereby relieved from any and all liabilities arising from
the monetary judgment obligation enumerated above and for plaintiff to retain
possession and ownership of the nets and floats and for the reimbursement of the
P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED."[3]
The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered
into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that
they were engaged in a business venture with Petitioner Lim Tong Lim, who however
was not a signatory to the agreement. The total price of the nets amounted to
P532,045. Four hundred pieces of floats worth P68,000 were also sold to the
Corporation.[4]

The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a
prayer for a writ of preliminary attachment. The suit was brought against the three in
their capacities as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission.[5] On September 20, 1990, the lower court issued a
Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes  which was then docked at the Fisheries Port, Navotas, Metro
Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability
and requesting a reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his possession. Peter Yao filed an Answer,
after which he was deemed to have waived his right to cross-examine witnesses and to
present evidence on his behalf, because of his failure to appear in subsequent hearings.
Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and
moved for the lifting of the Writ of Attachment.[6] The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the said
court the sales proceeds of P900,000.[7]

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and
Lim, as general partners, were jointly liable to pay respondent. [8]

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on
the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three[9] in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of
fishing boats; (d) an injunction and (e) damages.[10] The Compromise Agreement
provided:
"a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in
 the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as
full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

"b If the four (4) vessel[s] and the fishing net will be sold at a higher price than
) P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;

"c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter Yao."[11]
The trial court noted that the Compromise Agreement was silent as to the nature
of their obligations, but that joint liability could be presumed from the equal distribution
of the profit and loss.[12]

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in
a fishing business and may thus be held liable as a such for the fishing nets and floats
purchased by and for the use of the partnership. The appellate court ruled:
"The evidence establishes that all the defendants including herein appellant Lim
Tong Lim undertook a partnership for a specific undertaking, that is for commercial
fishing x x x. Obviously, the ultimate undertaking of the defendants was to divide the
profits among themselves which is what a partnership essentially is x x x. By a 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
(Article 1767, New Civil Code)."[13]
Hence, petitioner brought this recourse before this Court. [14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on
the following grounds:
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE
CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.

"III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS."
In determining whether petitioner may be held liable for the fishing nets and
floats purchased from respondent, the Court must resolve this key issue: whether by
their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed between
him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the
Compromise Agreement alone. Furthermore, he disclaims any direct participation in the
purchase of the nets, alleging that the negotiations were conducted by Chua and Yao
only, and that he has not even met the representatives of the respondent company.
Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990, showed that he had merely leased to the
two the main asset of the purported partnership -- the fishing boat F/B Lourdes. The
lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross
catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two
lower courts clearly showed that there existed a partnership among Chua, Yao and him,
pursuant to Article 1767 of the Civil Code which provides:
"Article 1767 - 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."
Specifically, both lower courts ruled that a partnership among the three existed
based on the following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim,
to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne Mel  and
Yao's FB Tracy  to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72
by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c) declaration of ownership of
fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim
had decided to engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother.
In their Compromise Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide equally among them the
excess or loss. These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like
credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat,
but also to that of the nets and the floats. The fishing nets and the floats, both essential
to fishing, were obviously acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the business could not have
proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve
only questions of law. Thus, the foregoing factual findings of the RTC and the CA are
binding on this Court, absent any cogent proof that the present action is embraced by
one of the exceptions to the rule.[16] In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under Rule
45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was
entered into only to end the dispute among them, but not to adjudicate their
preexisting rights and obligations. His arguments are baseless. The Agreement was but
an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have found,
correctly, a preexisting partnership among the parties. In implying that the lower courts
have decided on the basis of one piece of document alone, petitioner fails to appreciate
that the CA and the RTC delved into the history of the document and explored all the
possible consequential combinations in harmony with law, logic and fairness. Verily, the
two lower courts' factual findings mentioned above nullified petitioner's argument that
the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly finds
support in the Contract of Lease and the registration papers showing that he was the
owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of
the proceeds to be divided among the three of them. No lessor would do what
petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken in order to finance the acquisition and
the upgrading of the vessels which would be used in their fishing business. The sale of
the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his
name, was not his own property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person the lender trusts,
who in this case is the petitioner himself. After all, he is the brother of the creditor,
Jesus Lim.

We stress that it is unreasonable - indeed, it is absurd -- for petitioner to sell his

property to pay a debt he did not incur, if the relationship among the three of them was
merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

 "Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided however,  That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate personality.

"One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation."
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a
party may be estopped from denying its corporate existence. "The reason behind this
doctrine is obvious - an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation
as provided by law; it cannot create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded
as the principal, possessed of all the right and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent." [17]

The doctrine of corporation by estoppel may apply to the alleged corporation and to a
third party. In the first instance, an unincorporated association, which represented itself
to be a corporation, will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated,

nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged corporation. In
such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to
be paid for the nets it sold. The only question here is whether petitioner should be held
jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only
those who dealt in the name of the ostensible corporation should be held liable. Since
his name does not appear on any of the contracts and since he never directly transacted
with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes,  the boat which has earlier been proven to be an asset of the partnership. He in
fact questions the attachment of the nets, because the Writ has effectively stopped his
use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form
a corporation. Although it was never legally formed for unknown reasons, this fact alone
does not preclude the liabilities of the three as contracting parties in representation of
it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general
partners.

Technically, it is true that petitioner did not directly act on behalf of the

corporation. However, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of corporation by
estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:[19]
"A litigation is not a game of technicalities in which one, more deeply schooled
and skilled in the subtle art of movement and position , entraps and destroys the other.
It is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance and
chief enemy, deserves scant consideration from courts. There should be no vested rights
in technicalities."
Third Issue:
Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As
previously discussed, F/B Lourdes  was an asset of the partnership and that it was placed
in the name of petitioner, only to assure payment of the debt he and his partners owed.
The nets and the floats were specifically manufactured and tailor-made according to
their own design, and were bought and used in the fishing venture they agreed upon.
Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against

petitioner.

SO ORDERED.

THIRD DIVISION
[ G.R. No. 112675, January 25, 1999 ]
AFISCO INSURANCE CORPORATION; CCC INSURANCE
CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY &
SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE
INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION
INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS’ INSURANCE
CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN
INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.;
MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE
COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW
ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE
CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE’S
TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.;
PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE &
SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE
CORPORATION; PROVIDENT INSURANCE COMPANY OF THE
PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY &
INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY;
 SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN
INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY &
INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO.,
INC.—ALL ASSESSED AS “POOL OF MACHINERY INSURERS,”
PETITIONERS, VS. COURT OF APPEALS, COURT OF TAX APPEALS AND
COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.

DECISION

PANGANIBAN, J.:

Pursuant to “reinsurance treaties,” a number of local insurance firms formed

themselves into a “pool” in order to facilitate the handling of business contracted with a
nonresident foreign reinsurance company.  May the “clearing house” or “insurance
pool” so formed be deemed a partnership or an association that is taxable as a
corporation under the National Internal Revenue Code (NIRC)?  Should the pool’s
remittances to the member companies and to the said foreign firm be taxable as
dividends?  Under the facts of this case, has the government’s right to assess and collect
said tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502,
which dismissed petitioners’ appeal of the October 19, 1992 Decision [3] of the Court of
Tax Appeals[4] (CTA) which had previously sustained petitioners’ liability for deficiency
income tax, interest and withholding tax.  The Court of Appeals ruled:
“WHEREFORE, the petition is DISMISSED, with costs against petitioners.” [5]
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

“The petitioners are 41 non-life insurance corporations, organized and existing
under the laws of the Philippines.  Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors’  All Risk insurance policies, the petitioners
on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus
Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter
called Munich), a non-resident foreign insurance corporation.  The reinsurance treaties
required petitioners to form a [p]ool.  Accordingly, a pool composed of the petitioners
was formed on the same day.

“On April 14, 1976, the pool of machinery insurers submitted a financial statement and
filed an “Information Return of Organization Exempt from Income Tax” for the year
ending in 1975, on the basis of which it was assessed by the Commissioner of Internal
Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding
taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and
to the petitioners, respectively.  These assessments were protested by the petitioners
through its auditors Sycip, Gorres, Velayo and Co.

“On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as “Pool of Machinery Insurers,” to pay deficiency
income tax, interest, and with[h]olding  tax, itemized as follows:

Net income
per information  P3,737,370.00
return ===========
Income tax
due thereon P1,298,080.00
Add: 14% Int. fr.
4/15/76 to 4/15/79 545,193.60
TOTAL
AMOUNT DUE                            P1,843,273.60
&COLLECTIBLE     ===========
Dividend
paid to Munich 
Reinsurance P3,728,412.00
Company ===========
35%
withholding tax at 
source due thereon P1,304,944.20
Add: 25%
surcharge 326,236.05
14%
interest from 
1/25/76 to 1/25/79 137,019.14
Compromis 300.00
e penalty-non-filing
of return
late
payment 300.00
TOTAL
AMOUNT DUE &                            P1,768,799.39
COLLECTIBLE ===========
Dividend
paid to Pool P   655,636.00
Members ===========
10%
withholding tax at 
source due thereon P     65,563.60
Add: 25%
surcharge 16,390.90
14%
interest from 
1/25/76 to 1/25/79 6,884.18
Compromis
e penalty-non-filing
of return 300.00
late
payment 300.00
TOTAL                            P    89,438.68
AMOUNT DUE &                                    
COLLECTIBLE ===========“[8]

The CA ruled in the main that the pool of machinery insurers was a partnership
taxable as a corporation, and that the latter’s collection of premiums on behalf of its
members, the ceding companies, was taxable income.  It added that prescription did not
bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because “the
taxpayer cannot be located at the address given in the information return filed.”  Hence,
this Petition for Review before us.[9]
The Issues

Before this Court, petitioners raise the following issues:

“1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name,
was a partnership or association subject to tax as a corporation;
“2.Whether or not the remittances to petitioners and MUNICHRE of their respective
shares of reinsurance premiums, pertaining to their individual and separate contracts of
reinsurance, were “dividends” subject to tax; and

“3.Whether or not the respondent Commissioner’s right to assess the Clearing House
had already prescribed.”[10]
The Court’s Ruling

The petition is devoid of merit.  We sustain the ruling of the Court of Appeals that the
pool is taxable as a corporation, and that the government’s right to assess and collect
the taxes had not prescribed.

First Issue:
Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing
house was an informal partnership, which was taxable as a corporation under the NIRC. 
They point out that the reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of their allocated share in
the original risks thus reinsured.[11]  Hence, the pool did not act or earn income as a
reinsurer.[12]  Its role was limited to its principal function of “allocating and distributing
the risk(s) arising from the original insurance among the signatories to the treaty or the
members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and
custody of funds, etc.”[13]

Petitioners belie the existence of a partnership in this case, because  (1) they, the
reinsurers, did not share the same risk or solidary liability; [14] (2)  there was no common
fund;[15]  (3)  the executive board of the pool did not exercise control and management
of its funds, unlike the board of directors of a corporation; [16] and  (4)  the pool or
clearing house “was not and could not possibly have engaged in the business of
reinsurance from which it could have derived income for itself.” [17]

The Court is not persuaded.  The opinion or ruling of the Commission of Internal
Revenue, the agency tasked with the enforcement of  tax  laws,   is accorded much
weight and even finality, when there is no showing that it is patently wrong,
[18]
 particularly in this case where the findings and conclusions of the internal revenue
commissioner were subsequently affirmed by the CTA, a specialized body created for
the exclusive purpose of reviewing tax cases, and the Court of Appeals. [19]  Indeed,
“[I]t has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority.” [20]
This Court rules that the Court of Appeals, in affirming the CTA which had
previously sustained the internal revenue commissioner, committed no reversible error. 
Section 24 of the NIRC, as worded in the year ending 1975, provides:
“SEC. 24.  Rate of tax on corporations.  --  (a)  Tax on domestic corporations.  --  A
tax is hereby imposed upon the taxable net income received during each 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-partnership (compañias colectivas), general professional partnerships,
private educational institutions, and building and loan associations xxx.”
Ineludibly, the Philippine legislature included in the concept of corporations
those entities that resembled them such as unregistered partnerships and associations. 
Parenthetically, the NLRC’s inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997,[21] which amended the Tax Code. 
Pertinent provisions of the new law read as follows:
“SEC. 27.  Rates of Income Tax on Domestic Corporations.  --

(A)  In General.  --  Except as otherwise provided in this Code, an income tax of thirty-
five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation, as
defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”

“SEC. 22.  --  Definition.  --  When used in this Title:

xxx  xxx  xxx

(B)  The term ‘corporation’ shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations,
or insurance companies, but does not include general professional partnerships [or] a
joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract without the
Government.  ‘General professional partnerships’ are partnerships formed by persons
for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.

xxx  xxx  xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue [22] held that Section
24 covered these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from their individual members. [23] The Court of
Appeals astutely applied Evangelista:[24]
“xxx Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the Tax Code
in Evangelista v. Collector of Internal Revenue, supra.  The Supreme Court said:
‘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)’”
Article 1767 of the Civil Code recognizes the creation of a contract of partnership
when “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.” [25] Its
requisites are:  “(1)  mutual contribution to a common stock, and  (2)  a joint interest in
the profits.”[26] In other words, a partnership is formed when persons contract “to
devote to a common purpose either money, property, or labor with the intention of
dividing the profits between themselves.” [27] Meanwhile, an association implies
associates who enter into a “joint enterprise x x x for the transaction of business.” [28]

In the case before us, the ceding companies entered into a Pool Agreement [29] or an
association[30] that would handle all the insurance businesses covered under their quota-
share reinsurance treaty[31] and surplus reinsurance treaty[32]with Munich.  The following
unmistakably indicates a partnership or an association covered by Section 24 of the
NIRC:

(1)  The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.[33] This common fund pays for the
administration and operation expenses of the pool.[34]

(2)  The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.[35]

(3)  True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the business of
the ceding companies and Munich, because without it they would not have received
their premiums.  The ceding companies share “in the business ceded to the pool” and in
the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement.
[36]
  Profit motive or business is, therefore, the primordial reason for the pool’s
formation.  As aptly found by the CTA:
“xxx The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction of business
for profit.  It is apparent, and petitioners admit, that their association or coaction was
indispensable [to] the transaction of the business.  x x x If together they have conducted
business, profit must have been the object as, indeed, profit was earned.  Though the
profit was apportioned among the members, this is only a matter of consequence, as it
implies that profit actually resulted.”[37]
The petitioners’ reliance on Pascual v. Commissioner[38] is misplaced, because the
facts obtaining therein are not on all fours with the present case.  In Pascual, there was
no unregistered partnership, but merely a co-ownership which took up only two
isolated transactions.[39]  The Court of Appeals did not err in applying Evangelista, which
involved a partnership that engaged in a series of transactions spanning more than ten
years, as in the case before us.

Second Issue:
Pool’s Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies
and Munich are not dividends subject to tax.  They insist that taxing such remittances
contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and “would be tantamount to
an illegal double taxation, as it would result in taxing the same premium income twice in
the hands of the same taxpayer.”[40] Moreover, petitioners argue that since Munich was
not a signatory to the Pool Agreement, the remittances it received from the pool cannot
be deemed dividends.[41] They add that even if such remittances were treated as
dividends, they would have been exempt under the previously mentioned sections of
the 1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and Article 5 of paragraph 5[44] of
the RP-West German Tax Treaty.[45]
Petitioners are clutching at straws.  Double taxation means taxing the same property
twice when it should be taxed only once.  That is, “xxx taxing the same person twice by
the same jurisdiction for the same thing.” [46] In the instant case, the pool is a taxable
entity distinct from the individual corporate entities of the ceding companies.  The tax
on its income is obviously different from the tax on the dividends received by the said
companies.  Clearly, there is no double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement
thereto remains unproven and unsubstantiated.  It is axiomatic in the law of taxation
that taxes are the lifeblood of the nation.  Hence, “exemptions therefrom are highly
disfavored in law and he who claims tax exemption must be able to justify his claim or
right.”[47]  Petitioners have failed to discharge this burden of proof.  The sections of the
1977 NIRC which they cite are inapplicable, because these were not yet in effect when
the income was earned and when the subject information return for the year ending
1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed.  Section 255 provides that no tax shall “xxx be
paid upon reinsurance by any company that has already paid the tax xxx.”  This cannot
be applied to the present case because, as previously discussed, the pool is a taxable
entity distinct from the ceding companies; therefore, the latter cannot individually claim
the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations.  Nor can
Munich, a foreign corporation, be granted exemption based solely on this provision of
the Tax Code, because the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool.  Although not a signatory to the Pool
Agreement, Munich is patently an associate of the ceding companies in the entity
formed, pursuant to their reinsurance treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared in their income
and loss.  This is manifest from a reading of Articles 3[49] and 10[50] of the Quota Share
Reinsurance Treaty and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty.  The
foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the statutory exemption claimed
must be expressed in a language too plain to be mistaken.[53]
Finally, the petitioners’ claim that Munich is tax-exempt based on the RP-West German
Tax Treaty is likewise unpersuasive, because the internal revenue commissioner
assessed the pool for corporate taxes on the basis of the information return it had
submitted for the year ending 1975, a taxable year when said treaty was not yet in
effect.[54] Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14,
1984.[55]

Third Issue:
Prescription

Petitioners also argue that the government’s right to assess and collect the subject tax
had prescribed.  They claim that the subject information return was filed by the pool on
April 14, 1976. On the basis of this return, the BIR telephoned petitioners on November
11, 1981, to give them notice of its letter of assessment dated March 27, 1981.  Thus,
the petitioners contend that the five-year statute of limitations then provided in the
NIRC had already lapsed, and that the internal revenue commissioner was already
barred by prescription from making an assessment.[56]

We cannot sustain the petitioners.  The CA and the CTA categorically found that the
prescriptive period was tolled under then  Section 333 of the NIRC,[57] because “the
taxpayer cannot be located at the address given in the information return filed and for
which reason there was delay in sending the assessment.” [58] Indeed, whether the
government’s right to collect and assess the tax has prescribed involves facts which have
been ruled upon by the lower courts.  It is axiomatic that in the absence of a clear
showing of palpable error or grave abuse of discretion, as in this case, this Court must
not overturn the factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court
of Appeals that the pool changed its address,  for they stated that the pool’s information
return filed in 1980 indicated therein its “present address.”  The Court finds that this
falls short of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period.  The law clearly states that the said period will be suspended only “if
the taxpayer informs the Commissioner of Internal Revenue of any change in the
address.”

WHEREFORE, the petition is DENIED.  The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED.  Costs against
petitioners.

SO ORDERED.

THIRD DIVISION
[ G.R. No. 148187, April 16, 2008 ]
PHILEX MINING CORPORATION, Petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, Respondent.

DECISION

YNARES-SATIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision [1] of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision [2] of the Court of
Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3, 2001
Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining Company ("Baguio Gold") for the former to
manage and operate the latter's mining claim, known as the Sto. Nino mine, located in
Atok and Tublay, Benguet Province.  The parties' agreement was denominated as
"Power of Attorney" and provided for the following terms:
4.         Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold)
shall make available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO.
NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for
internal audit purposes, as the owner's account in the Sto. Nino PROJECT. Any part of
any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owner's account. 
5.         Whenever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the following arrangements: 

(a)        The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the MANAGERS'
account.

(b)        The total of the MANAGERS' account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino PROJECT,
the amount not so paid in cash shall be added to the MANAGERS' account.

(c)        The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.

(d)        The MANAGERS' account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the MANAGERS'
account has to the owner's account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the claims, shall be
transferred to the MANAGERS, except that such transferred assets shall not include
mine development, roads, buildings, and similar property which will be valueless, or of
slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their
option that property originally transferred by them to the Sto. Nino PROJECT be re-
transferred to them. Until such assets are transferred to the MANAGERS, this Agency
shall remain subsisting.

 x x x x

 12.       The compensation of the MANAGER shall be fifty per cent (50%) of the net profit
of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall
pay income tax on their compensation, while the PRINCIPAL shall pay income tax on the
net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS'
compensation.

x x x x 
16.       The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and,
in the future, may incur other obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL
in favor of the MANAGERS is outstanding, inclusive of the MANAGERS' account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in
full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the
MANAGERS. 

17.       Notwithstanding any agreement or understanding between the PRINCIPAL and

the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be
held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof
shall be operative in case of the MANAGERS' withdrawal. 

x x x x[5]
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the agreement. 
However, the mine suffered continuing losses over the years which resulted to
petitioner's withdrawal as manager of the mine on January 28, 1982 and in the eventual
cessation of mine operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"[7] wherein Baguio Gold admitted an indebtedness to petitioner in the amount
of P179,394,000.00 and agreed to pay the same in three segments by first assigning
Baguio Gold's tangible assets to petitioner, transferring to the latter Baguio Gold's
equitable title in its Philodrill assets and finally settling the remaining liability through
properties that Baguio Gold may acquire in the future.

On December 31, 1982, the parties executed an "Amendment to Compromise with

Dation in Payment"[8] where the parties determined that Baguio Gold's indebtedness to
petitioner actually amounted to P259,137,245.00, which sum included liabilities of
Baguio Gold to other creditors that petitioner had assumed as guarantor.  These
liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted by
Baguio Gold from the Bank of America NT & SA and Citibank N.A.  This time, Baguio Gold
undertook to pay petitioner in two segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00.  The parties then ascertained that Baguio Gold had a remaining
outstanding indebtedness to petitioner in the amount of P114,996,768.00. 

Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to allowances
and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations. 

In its 1982 annual income tax return, petitioner deducted from its gross income the
amount of P112,136,000.00 as "loss on settlement of receivables from Baguio Gold
against reserves and allowances."[9]  However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all
requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and
existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off
within the taxable year when it was determined to be worthless. 

Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold.  The bad debt deduction represented advances made by
petitioner which, pursuant to the management contract, formed part of Baguio Gold's
"pecuniary obligations" to petitioner. It also included payments made by petitioner as
guarantor of Baguio Gold's long-term loans which legally entitled petitioner to be
subrogated to the rights of the original creditor. 

Petitioner also asserted that due to Baguio Gold's irreversible losses, it became evident
that it would not be able to recover the advances and payments it had made in behalf of
Baguio Gold.  For a debt to be considered worthless, petitioner claimed that it was
neither required to institute a judicial action for collection against the debtor nor to sell
or dispose of collateral assets in satisfaction of the debt.  It is enough that a taxpayer
exerted diligent efforts to enforce collection and exhausted all reasonable means to
collect. 

On October 28, 1994, the BIR denied petitioner's protest for lack of legal and factual
basis.  It held that the alleged debt was not ascertained to be worthless since Baguio
Gold remained existing and had not filed a petition for bankruptcy; and that the
deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the project's net
profit.[10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as
follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED. 

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY

respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995, which is the date after the
20-day grace period given by the respondent within which petitioner has to pay the
deficiency amount x x x up to actual date of payment. 

SO ORDERED.[11]
The CTA rejected petitioner's assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan.  It instead characterized the advances as
petitioner's investment in a partnership with Baguio Gold for the development and
exploitation of the Sto. Nino mine.  The CTA held that the "Power of Attorney" executed
by petitioner and Baguio Gold was actually a partnership agreement.  Since the
advanced amount partook of the nature of an investment, it could not be deducted as a
bad debt from petitioner's gross income. 

The CTA likewise held that the amount paid by petitioner for the long-term loan
obligations of Baguio Gold could not be allowed as a bad debt deduction.  At the time
the payments were made, Baguio Gold was not in default since its loans were not yet
due and demandable.  What petitioner did was to pre-pay the loans as evidenced by the
notice sent by Bank of America showing that it was merely demanding payment of the
installment and interests due.  Moreover, Citibank imposed and collected a "pre-
termination penalty" for the pre-payment. 

The Court of Appeals affirmed the decision of the CTA.[12]  Hence, upon denial of its
motion for reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules
of Court, alleging that:
 I.

The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan. 

II.

The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the
Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of
the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of Philex
and Baguio Gold to form a partnership. 

III.

The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement
when it construed the nature of the advances made by Philex. 

IV.

The Court of Appeals erred in refusing to delve upon the issue of the propriety of the
bad debts write-off.[14]
Petitioner insists that in determining the nature of its business relationship with
Baguio Gold, we should not only rely on the "Power of Attorney", but also on the
subsequent "Compromise with Dation in Payment" and "Amended Compromise with
Dation in Payment" that the parties executed in 1982.  These documents, allegedly
evinced the parties' intent to treat the advances and payments as a loan and establish a
creditor-debtor relationship between them. 

The petition lacks merit. 

The lower courts correctly held that the "Power of Attorney" is the instrument that is
material in determining the true nature of the business relationship between petitioner
and Baguio Gold.  Before resort may be had to the two compromise agreements, the
parties' contractual intent must first be discovered from the expressed language of the
primary contract under which the parties' business relations were founded.  It should be
noted that the compromise agreements were mere collateral documents executed by
the parties pursuant to the termination of their business relationship created under the
"Power of Attorney".  On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another. 

The execution of the two compromise agreements can hardly be considered as a

subsequent or contemporaneous act that is reflective of the parties' true intent.  The
compromise agreements were executed eleven years after the "Power of Attorney" and
merely laid out a plan or procedure by which petitioner could recover the advances and
payments it made under the "Power of Attorney".  The parties entered into the
compromise agreements as a consequence of the dissolution of their business
relationship.  It did not define that relationship or indicate its real character. 

An examination of the "Power of Attorney" reveals that a partnership or joint venture

was indeed intended by the parties.  Under a 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. [15]  While a corporation, like
petitioner, cannot generally enter into a contract of partnership unless authorized by
law or its charter, it has been held that it may enter into a joint venture which is akin to
a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise
legal definition, but it has been generally understood to mean an organization formed
for some temporary purpose. x x x It is in fact hardly distinguishable from the
partnership, since their elements are similar - community of interest in the business,
sharing of profits and losses, and a mutual right of control. x x x The main distinction
cited by most opinions in common law jurisdictions is that the partnership contemplates
a general business with some degree of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus of a temporary nature. x x x This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its
object a specific undertaking. x x x It would seem therefore that under Philippine law, a
joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these
two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. x x x
(Citations omitted) [16]
Perusal of the agreement denominated as the "Power of Attorney" indicates that
the parties had intended to create a partnership and establish a common fund for the
purpose.  They also had a joint interest in the profits of the business as shown by a 50-
50 sharing in the income of the mine. 

Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute
money, property and industry to the common fund known as the Sto. Niño mine. [17]  In
this regard, we note that there is a substantive equivalence in the respective
contributions of the parties to the development and operation of the mine.  Pursuant to
paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute
equally to the joint venture assets under their respective accounts. Baguio Gold would
contribute P11M under its owner's account plus any of its income that is left in the
project, in addition to its actual mining claim.  Meanwhile, petitioner's contribution
would consist of its expertise in the management and operation of mines, as well as the
manager's account which is comprised of P11M in funds and property and
petitioner's "compensation" as manager that cannot be paid in cash. 

However, petitioner asserts that it could not have entered into a partnership agreement
with Baguio Gold because it did not "bind" itself to contribute money or property to the
project; that under paragraph 5 of the agreement, it was only optional for petitioner to
transfer funds or property to the Sto. Niño project "(w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO.
NIÑO MINE."[18]

The wording of the parties' agreement as to petitioner's contribution to the common

fund does not detract from the fact that petitioner transferred its funds and property to
the project as specified in paragraph 5, thus rendering effective the other stipulations of
the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing
the advances until termination of the parties' business relations.  As can be seen,
petitioner became bound by its contributions once the transfers were made. The
contributions acquired an obligatory nature as soon as petitioner had chosen to exercise
its option under paragraph 5. 

There is no merit to petitioner's claim that the prohibition in paragraph 5(c) against
withdrawal of advances should not be taken as an indication that it had entered into a
partnership with Baguio Gold; that the stipulation only showed that what the parties
entered into was actually a contract of agency coupled with an interest which is not
revocable at will and not a partnership. 
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends upon it, or
the mutual interest of both principal and agent.[19]  In this case, the non-revocation or
non-withdrawal under paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract.  Thus, it cannot be
inferred from the stipulation that the parties' relation under the agreement is one of
agency coupled with an interest and not a partnership. 

Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of the parties was one of agency and not a partnership. Although the said
provision states that "this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS'
account," it does not necessarily follow that the parties entered into an agency contract
coupled with an interest that cannot be withdrawn by Baguio Gold. 

It should be stressed that the main object of the "Power of Attorney" was not to confer
a power in favor of petitioner to contract with third persons on behalf of Baguio Gold
but to create a business relationship between petitioner and Baguio Gold, in which the
former was to manage and operate the latter's mine through the parties' mutual
contribution of material resources and industry.  The essence of an agency, even one
that is coupled with interest,  is the  agent's  ability to  represent his  principal and  bring
about business relations between the latter and third persons. [20]  Where representation
for and in behalf of the principal is merely incidental or necessary for the proper
discharge of one's paramount undertaking under a contract, the latter may not
necessarily be a contract of agency, but some other agreement depending on the
ultimate undertaking of the parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties'
agreement indubitably lead to the conclusion that a partnership was formed between
petitioner and Baguio Gold. 

First, it does not appear that Baguio Gold was unconditionally obligated to return the
advances made by petitioner under the agreement. Paragraph 5 (d) thereof provides
that upon termination of the parties' business relations, "the ratio which the
MANAGER'S account has to the owner's account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims" shall be transferred to petitioner.[22]  As pointed out by the Court of Tax Appeals,
petitioner was merely entitled to a proportionate return of the mine's assets upon
dissolution of the parties' business relations.  There was nothing in the agreement that
would require Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or "accounts payable" for Baguio Gold. 

Thus, the tax court correctly concluded that the agreement provided for a distribution
of assets of the Sto. Niño mine upon termination, a provision that is more consistent
with a partnership than a creditor-debtor relationship.  It should be pointed out that in a
contract of loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kind
and quality.[23]  In this case, however, there was no stipulation for Baguio Gold to
actually repay petitioner the cash and property that it had advanced, but only the return
of an amount pegged at a ratio which the manager's account had to the owner's
account. 

In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of petitioner,
which supposedly arose from the termination of their business relations over the Sto.
Nino mine.  The "Power of Attorney" clearly provides that petitioner would only be
entitled to the return of a proportionate share of the mine assets to be computed at a
ratio that the manager's account had to the owner's account.  Except to provide a basis
for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to
hold itself liable to petitioner under the compromise agreements, for any amount over
and above the proportion agreed upon in the "Power of Attorney". 

Next, the tax court correctly observed that it was unlikely for a business corporation to
lend hundreds of millions of pesos to another corporation with neither security, or
collateral, nor a specific deed evidencing the terms and conditions of such loans.  The
parties also did not provide a specific maturity date for the advances to become due and
demandable, and the manner of payment was unclear.  All these point to the inevitable
conclusion that the advances were not loans but capital contributions to a partnership. 

The strongest indication that petitioner was a partner in the Sto Niño mine is the fact
that it would receive 50% of the net profits as "compensation" under paragraph 12 of
the agreement.  The entirety of the parties' contractual stipulations simply leads to no
other conclusion than that petitioner's "compensation" is actually its share in the
income of the joint venture. 
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a
share in the profits of a business is prima facie evidence that he is a partner in the
business."  Petitioner asserts, however, that no such inference can be drawn against it
since its share in the profits of the Sto Niño project was in the nature of compensation
or "wages of an employee", under the exception provided in Article 1769 (4) (b). [24]

On this score, the tax court correctly noted that petitioner was not an employee of
Baguio Gold who will be paid "wages" pursuant to an employer-employee relationship. 
To begin with, petitioner was the manager of the project and had put substantial sums
into the venture in order to ensure its viability and profitability.  By pegging its
compensation to profits, petitioner also stood not to be remunerated in case the mine
had no income. It is hard to believe that petitioner would take the risk of not being paid
at all for its services, if it were truly just an ordinary employee. 

Consequently, we find that petitioner's "compensation" under paragraph 12 of the

agreement actually constitutes its share in the net profits of the partnership.  Indeed,
petitioner would not be entitled to an equal share in the income of the mine if it were
just an employee of Baguio Gold.[25]  It is not surprising that petitioner was to receive a
50% share in the net profits, considering that the "Power of Attorney" also provided for
an almost equal contribution of the parties to the St. Nino mine.  The "compensation"
agreed upon only serves to reinforce the notion that the parties' relations were indeed
of partners and not employer-employee. 

All told, the lower courts did not err in treating petitioner's advances as investments in a
partnership known as the Sto. Nino mine.  The advances were not "debts" of Baguio
Gold to petitioner inasmuch as the latter was under no unconditional obligation to
return the same to the former under the "Power of Attorney".  As for the amounts that
petitioner paid as guarantor to Baguio Gold's creditors, we find no reason to depart
from the tax court's factual finding that Baguio Gold's debts were not yet due and
demandable at the time that petitioner paid the same.  Verily, petitioner pre-paid
Baguio Gold's outstanding loans to its bank creditors and this conclusion is supported by
the evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income.  Deductions for income tax purposes partake of the nature of tax exemptions
and are strictly construed against the taxpayer, who must prove by convincing evidence
that he is entitled to the deduction claimed.[27]  In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of Baguio Gold that
could be deducted from its gross income.  Consequently, it could not claim the advances
as a valid bad debt deduction. 

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals
in C.T.A. Case No. 5200 is AFFIRMED.  Petitioner Philex Mining Corporation is ORDERED
to PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20%
delinquency interest computed from February 10, 1995, which is the due date given for
the payment of the deficiency income tax, up to the actual date of payment. 

SO ORDERED. 

FIRST DIVISION
[ G.R. No. 193138, August 20, 2018 ]
ANICETO G. SALUDO, JR., PETITIONER, VS. PHILIPPINE NATIONAL
BANK, RESPONDENT.

DECISION

JARDELEZA, J.:

In this petition, we emphasize that a partnership for the practice of law,

constituted in accordance with the Civil Code provisions on partnership, acquires
juridical personality by operation of law. Having a juridical personality distinct and
separate from its partners, such partnership is the real party-in-interest in a suit brought
in connection with a contract entered into in its name and by a person authorized to act
on its behalf.

Petitioner Aniceto G. Saludo, Jr. (Saludo) filed this petition for review
on certiorari[1] assailing the February 8, 2010 Decision[2] and August 2, 2010
Resolution[3] issued by the Court of Appeals (CA) in CA-G.R. SP No. 98898. The CA
affirmed with modification the January 11, 2007 Omnibus Order[4] issued by Branch 58
of the Regional Trial Court (RTC) of Makati City in Civil Case No. 06-678, and ruled that
respondent Philippine National Bank's (PNB) counterclaims against Saludo and the
Saludo Agpalo Fernandez and Aquino Law Office (SAFA Law Office) should be reinstated
in its answer.

Records show that on June 11, 1998, SAFA Law Office entered into a Contract of
Lease[5] with PNB, whereby the latter agreed to lease 632 square meters of the second
floor of the PNB Financial Center Building in Quezon City for a period of three years and
for a monthly rental fee of P189,600.00. The rental fee is subject to a yearly escalation
rate of 10%.[6] SAFA Law Office then occupied the leased premises and paid advance
rental fees and security deposit in the total amount of P1,137,600.00.[7]

On August 1, 2001, the Contract of Lease expired.[8] According to PNB, SAFA Law Office
continued to occupy the leased premises until February 2005, but discontinued paying
its monthly rental obligations after December 2002.[9] Consequently, PNB sent a demand
letter[10] dated July 17, 2003 for SAFA Law Office to pay its outstanding unpaid rents in
the amount of P4,648,086.34. PNB sent another letter[11] demanding the payment of
unpaid rents in the amount of P5,856,803.53 which was received by SAFA Law Office on
November 10, 2003.

In a letter[12] to PNB dated June 9, 2004, SAFA Law Office expressed its intention to
negotiate. It claimed that it was enticed by the former management of PNB into renting
the leased premises by promising to: (1) give it a special rate due to the large area of the
place; (2) endorse PNB's cases to the firm with rents to be paid out of attorney's fees;
and (3) retain the firm as one of PNB's external counsels. When new management took
over, it allegedly agreed to uphold this agreement to facilitate rental payments.
However, not a single case of significance was referred to the firm. SAFA Law Office then
asked PNB to review and discuss its billings, evaluate the improvements in the area and
agree on a compensatory sum to be applied to the unpaid rents, make good its
commitment to endorse or refer cases to SAFA Law Office under the intended terms and
conditions, and book the rental payments due as receivables payable every time
attorney's fees are due from the bank on the cases it referred. The firm also asked PNB
to give a 50% discount on its unpaid rents, noting that while it was waiting for case
referrals, it had paid a total amount of P13,457,622.56 from January 1999 to December
2002, which included the accelerated rates of 10% per annum beginning August 1999
until July 2003.

In February 2005, SAFA Law Office vacated the leased premises. [13] PNB sent a demand
letter[14] dated July 7, 2005 requiring the firm to pay its rental arrears in the total amount
of P10,951,948.32. In response, SAFA Law Office sent a letter dated June 8, 2006,
proposing a settlement by providing a range of suggested computations of its
outstanding rental obligations, with deductions for the value of improvements it
introduced in the premises, professional fees due from Macroasia Corporation, and the
50% discount allegedly promised by Dr. Lucio Tan.[15] PNB, however, declined the
settlement proposal in a letter[16] dated July 17, 2006, stating that it was not amenable
to the settlement's terms. Besides, PNB also claimed that it cannot assume the liabilities
of Macroasia Corporation to SAFA Law Office as Macroasia Corporation has a
personality distinct and separate from the bank. PNB then made a final demand for
SAFA Law Office to pay its outstanding rental obligations in the amount of
P25,587,838.09.

On September 1, 2006, Saludo, in his capacity as managing partner of SAFA Law Office,
filed an amended complaint[17] for accounting and/or recomputation of unpaid rentals
and damages against PNB in relation to the Contract of Lease.

On October 4, 2006, PNB filed a motion to include an indispensable party as plaintiff,

[18]
 praying that Saludo be ordered to amend anew his complaint to include SAFA Law
Office as principal plaintiff. PNB argued that the lessee in the Contract of Lease is not
Saludo but SAFA Law Office, and that Saludo merely signed the Contract of Lease as the
managing partner of the law firm. Thus, SAFA Law Office must be joined as a plaintiff in
the complaint because it is considered an indispensable party under Section 7, Rule 3 of
the Rules of Court.[19]

On October 13, 2006, PNB filed its answer.[20] By way of compulsory counterclaim, it
sought payment from SAFA Law Office in the sum of P25,587,838.09, representing
overdue rentals.[21] PNB argued that as a matter of right and equity, it can claim that
amount from SAFA Law Office in solidum with Saludo.[22]

On October 23, 2006, Saludo filed his motion to dismiss counterclaims, [23] mainly arguing
that SAFA Law Office is neither a legal entity nor party litigant. As it is only a relationship
or association of lawyers in the practice of law and a single proprietorship which may
only be sued through its owner or proprietor, no valid counterclaims may be asserted
against it.[24]

On January 11, 2007, the RTC issued an Omnibus Order denying PNB's motion to include
an indispensable party as plaintiff and granting Saludo's motion to dismiss counterclaims
in this wise:
The Court DENIES the motion of PNB to include the SAFA Law Offices. Plaintiff
has shown by documents attached to his pleadings that indeed SAFA Law Offices is a
mere single proprietorship and not a commercial and business partnership. More
importantly, plaintiff has admitted and shown sole responsibility in the affairs entered
into by the SAFA Law Office. PNB has even admitted that the SAFA Law Office, being a
partnership in the practice of law, is a non-legal entity. Being a non-legal entity, it
cannot be a proper party, and therefore, it cannot sue or be sued.

Consequently, plaintiff's Motion to Dismiss Counterclaims (claimed by defendant PNB)

should be GRANTED. The counterclaims prayed for to the effect that the SAFA Law
Offices be made to pay in solidum with plaintiff the amounts stated in defendant's
Answer is disallowed since no counterclaims can be raised against a non-legal entity. [25]
PNB filed its motion for reconsideration[26] dated February 5, 2007, alleging that
SAFA Law Office should be included as a co-plaintiff because it is the principal party to
the contract of lease, the one that occupied the leased premises, and paid the monthly
rentals and security deposit. In other words, it was the main actor and direct beneficiary
of the contract. Hence, it is the real party-in-interest. [27] The RTC, however, denied the
motion for reconsideration in an Order[28] dated March 8, 2007.

Consequently, PNB filed a petition for certiorari[29] with the CA. On February 8, 2010, the
CA rendered its assailed Decision,[30] the dispositive portion of which reads:
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Omnibus Order
dated 11 January 2007 and Order dated 8 March 2007, issued by respondent Court in
Civil Case No. 06-678, respectively, are AFFIRMED with MODIFICATION in that
petitioner's counterclaims should be reinstated in its Answer.

SO ORDERED.[31]
The CA ruled that an order granting Saludo's motion to dismiss counterclaim,
being interlocutory in nature, is not appealable until after judgment shall have been
rendered on Saludo's complaint. Since the Omnibus Order is interlocutory, and there
was an allegation of grave abuse of discretion, a petition for certiorari is the proper
remedy.[32]

On the merits, the CA held that Saludo is estopped from claiming that SAFA Law Office is
his single proprietorship. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. Here, SAFA Law Office was the one
that entered into the lease contract and not Saludo. In fact, the latter signed the
contract as the firm's managing partner. The alleged Memorandum of
Understanding[33] (MOU) executed by the partners of SAFA Law Office, .which states,
among others, that Saludo alone would be liable for the firm's losses and liabilities, and
the letter of Saludo to PNB confirming that SAFA Law Office is his single proprietorship
did not convert the firm to a single proprietorship. Moreover, SAFA Law Office sent a
letter to PNB regarding its unpaid rentals which Saludo signed as a managing partner.
The firm is also registered as a partnership with the Securities and Exchange
Commission (SEC).[34]

On the question of whether SAFA Law Office is an indispensable party, the CA held that
it is not. As a partnership, it may sue or be sued in its name or by its duly authorized
representative. Saludo, as managing partner, may execute all acts of administration,
including the right to sue. Furthermore, the CA found that SAFA Law Office is not a legal
entity. A partnership for the practice of law is not a legal entity but a mere relationship
or association for a particular purpose. Thus, SAFA Law Office cannot file an action in
court. Based on these premises, the CA held that the RTC did not gravely abuse its
discretion in denying PNB's motion to include an indispensable party as plaintiff. [35]

Nonetheless, the CA ruled that PNB's counterclaims against SAFA Law Office should not
be dismissed. While SAFA Law Office is not a legal entity, it can still be sued under
Section 15,[36] Rule 3 of the Rules of Court considering that it entered into the Contract
of Lease with PNB.[37]

The CA further ruled that while it is true that SAFA Law Office's liability is not in
solidum with Saludo as PNB asserts, it does not necessarily follow that both of them
cannot be made parties to PNB's counterclaims. Neither should the counterclaims be
dismissed on the ground that the nature of the alleged liability is solidary. According to
the CA, the presence ofSAFA Law Office is required for the granting of complete relief in
the determination of PNB's counterclaim. The court must, therefore, order it to be
brought in as defendant since jurisdiction over it can be obtained pursuant to Section
12,[38] Rule 6 of the Rules of Court.[39]

Finally, the CA emphasized that PNB's counterclaims are compulsory, as they arose from
the filing of Saludo's complaint. It cannot be made subject of a separate action but
should be asserted in the same suit involving the same transaction. Thus, the Presiding
Judge of the RTC gravely abused his discretion in dismissing PNB's counterclaims as the
latter may forever be barred from collecting overdue rental fees if its counterclaims
were not allowed.[40]

Saludo and PNB filed their respective motions for partial reconsideration dated February
25, 2010[41] and February 26, 2010.[42] In a Resolution dated August 2, 2010, the CA
denied both motions on the ground that no new or substantial matters had been raised
therein. Nonetheless, the CA addressed the issue on the joining of SAFA Law Office as a
defendant in PNB's compulsory counterclaim. Pertinent portions of the CA Resolution
read:
The Private Respondent claims that a compulsory counterclaim is one directed
against an opposing party. The SAFA Law Office is not a party to the case below and to
require it to be brought in as a defendant to the compulsory counterclaim would entail
making it a co-plaintiff. Otherwise, the compulsory counterclaim would be changed into
a third-party complaint. The Private Respondent also argues that Section 15, Rule 3 of
the Rules of Court (on entities without juridical personality) is only applicable to
initiatory pleadings and not to compulsory counterclaims. Lastly, it is claimed that since
the alleged obligations of the SAFA Law Office is solidary with the Private Respondent,
there is no need to make the former a defendant to the counterclaim.

We disagree with the reasoning of the Private Respondent. That a compulsory

counterclaim can only be brought against an opposing party is belied by considering one
of the requisites of a compulsory counterclaim it does not require for its adjudication
the presence of third parties of whom the court cannot acquire jurisdiction. This shows
that non-parties to a suit may be brought in as defendants to such a counterclaim. x x x

xxxx

In the case at bench, the trial court below can acquire jurisdiction over the SAFA Law
Office considering the amount and the nature of the counterclaim. Furthermore, the
inclusion of the SAFA Law Office as a defendant to the counterclaim will enable the
granting of complete relief in view [of] the liability of a partner to the partnership's
creditors under the law.[43]
Hence, this petition, where Saludo raises the following issues for our resolution:
(1 Whether the CA erred in including SAFA Law Office as defendant to PNB's
) counterclaim despite its holding that SAFA Law Office is neither an indispensable party nor a
legal entity;
 (2 Whether the CA went beyond the issues in the petition for certiorari and prematurely
) dealt with the merits of PNB's counterclaim; and
(3 Whether the CA erred when it gave due course to PNB's petition for certiorari to
) annul and set aside the RTC's Omnibus Order dated January 11, 2007. [44]
The petition is bereft of merit.

We hold that SAFA Law Office is a juridical entity and the real party-in-interest in the suit
filed with the RTC by Saludo against PNB. Hence, it should be joined as plaintiff in that
case.

I.

Contrary to Saludo's submission, SAFA Law Office is a partnership and not a single
proprietorship.

Article 1767 of the Civil Code provides that by a 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. Two or more persons may
also form a partnership for the exercise of a profession. Under Article 1771, a
partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary.
Article 1784, on the other hand, provides that a partnership begins from the moment of
the execution of the contract, unless it is otherwise stipulated.

Here, absent evidence of an earlier agreement, SAFA Law Office was constituted as a
partnership at the time its partners signed the Articles of Partnership [45] wherein they
bound themselves to establish a partnership for the practice of law, contribute capital
and industry for the purpose, and receive compensation and benefits in the course of its
operation. The opening paragraph of the Articles of Partnership reveals the unequivocal
intention of its signatories to form a partnership, to wit:
WE, the undersigned ANICETO G. SALUDO, JR., RUBEN E. AGPALO, FILEMON L.
FERNANDEZ, AND AMADO D. AQUINO, all of legal age, Filipino citizens and members of
the Philippine Bar, have this day voluntarily associated ourselves for the purpose of
forming a partnership engaged in the practice of law, effective this date, under the
terms and conditions hereafter set forth, and subject to the provisions of existing laws[.]
[46]
 The subsequent registration of the Articles of Partnership with the SEC, on the
other hand, was made in compliance with Article 1772 of the Civil Code, since the initial
capital of the partnership was P500,000.00.[47] Said provision states:
Art. 1772. Every contract of partnership having a capital ofThree thousand pesos
or more, in money or property, shall appear in a public instrument, which must be
recorded in the Office of the Securities and Exchange Commission.

xxxx
The other provisions of the Articles of Partnership also positively identify SAFA
Law Office as a partnership. It constantly used the words "partners" and "partnership."
It designated petitioner Saludo as managing partner,[48] and Attys. Ruben E. Agpalo,
Filemon L. Fernandez, and Amado D. Aquino as industrial partners. [49] It also provided for
the term of the partnership,[50] distribution of net profits and losses, and management of
the firm in which "the partners shall have equal interest in the conduct of [its]
affairs."[51] Moreover, it provided for the cause and manner of dissolution of the
partnership.[52] These provisions would not have been necessary if what had been
established was a sole proprietorship. Indeed, it may only be concluded from the
circumstances that, for all intents and purposes, SAFA Law Office is a partnership
created and organized in accordance with the Civil Code provisions on partnership.

Saludo asserts that SAFA Law Office is a sole proprietorship on the basis of the MOU
executed by the partners of the firm. The MOU states in full:[53]
MEMORANDUM OF UNDERSTANDING

WHEREAS, the undersigned executed and filed with the SEC the Articles of Incorporation
of SALUDO, AGPALO, FERNANDEZ and AQUINO on March 13, 1997;

WHEREAS, among the provisions of said Articles of Incorporation are the following:

1. That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall be industrial

partners, and they shall not contribute capital to the partnership and shall not in any
way be liable for any loss or liability that may be incurred by the law firm in the course of
its operation.

2. That the partnership shall be dissolved by agreement of the partners or for any cause
as and in accordance with the manner provided by law, in which event the Articles of
Dissolution of said partnership shall be filed with the Securities and Exchange
Commission. All remaining assets upon dissolution shall accrue exclusively to A. G.
Saludo, Jr. and all liabilities shall be solely for his account.

WHEREAS, the SEC has not approved the registration of the Articles of Incorporation and
its Examiner required that the phrase "shall not in any way be liable for any loss or
liability that may be incurred by the law firm in the course of its operation" in Article VII
be deleted;

WHEREAS, the SEC Examiner likewise required that the sentence "All remaining assets
upon dissolution shall accrue exclusively to A. G. Saludo, Jr. and all liabilities shall be
solely for his account" in Article X be likewise deleted;

WHEREAS, in order to meet the objections of said Examiner, the objectionable provisions
have been deleted and new Articles of Incorporation deleting said objectionable
provisions have been executed by the parties and filed with the SEC.

NOW, THEREFORE, for and in consideration of the premises and the mutual covenant of
the parties, the parties hereby agree as follows:

1. Notwithstanding the deletion of the portions objected to by the said Examiner, by

reason of which entirely new Articles of Incorporation have been executed by the parties
removing the objected portions, the actual and real intent of the parties is still as
originally envisioned, namely:

a) That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall not in any

way be liable for any loss or liability that may be incurred by the law firm in the course of
its operation;

b) That all remaining assets upon dissolution shall accrue exclusively to A. G.

Saludo, Jr. and all liabilities shall be solely for his account.

2. That the parties hereof hereby bind and obligate themselves to adhere and observe
the real intent of the parties as above-stated, any provisions in the Articles of
Incorporation as filed to meet the objections of the SEC Examiner to the contrary
notwithstanding.

IN WITNESS WHEREOF, we have set our hands this _____ day of May, 1997 at Makati
City, Philippines.
 [Sgd.]
A.G. SALUDO, JR.
[Sgd.] [Sgd.] [Sgd.]
FILEMON L.
RUBEN E. AGPALO AMADO D. AQUINO
FERNANDEZ
The foregoing evinces the parties' intention to entirely shift any liability that may
be incurred by SAFA Law Office in the course of its operation to Saludo, who shall also
receive all the remaining assets of the firm upon its dissolution. This MOU, however,
does not serve to convert SAFA Law Office into a sole proprietorship. As discussed, SAFA
Law Office was manifestly established as a partnership based on the Articles of
Partnership. The MOU, from its tenor, reinforces this fact. It did not change the nature
of the organization of SAFA Law Office but only excused the industrial partners from
liability.

The law, in its wisdom, recognized the possibility that partners in a partnership may
decide to place a limit on their individual accountability. Consequently, to protect third
persons dealing with the partnership, the law provides a rule, embodied in Article 1816
of the Civil Code, which states:
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all
their property and after all the partnership assets have been exhausted, for the contract
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract.
The foregoing provision does not prevent partners from agreeing to limit their
liability, but such agreement may only be valid as among them. Thus, Article 1817 of the
Civil Code provides:
Art. 1817. Any stipulation against the liability laid down in the preceding article
shall be void, except as among the partners.
The MOU is an agreement forged under the foregoing provision. Consequently,
the sole liability being undertaken by Saludo serves to bind only the parties to the MOU,
but never third persons like PNB.

Considering that the MOU is sanctioned by the law on partnership, it cannot change the
nature of a duly-constituted partnership. Hence, we cannot sustain Saludo's position
that SAFA Law Office is a sole proprietorship.

II.
Having settled that SAFA Law Office is a partnership, we hold that it acquired juridical
personality by operation of law. The perfection and validity of a contract of partnership
brings about the creation of a juridical person separate and distinct from the individuals
comprising the partnership. Thus, Article 1768 of the Civil Code provides:
Art. 1768. The partnership has a juridical personality separate and distinct from
that of each of the partners, even in case of failure to comply with the requirements of
Article 1772, first paragraph.
Article 44 of the Civil Code likewise provides that partnerships are juridical
persons, to wit:
Art. 44. The following are juridical persons:

(1 The State and its political subdivisions;

)
(2 Other corporations, institutions and entities for public interest or purpose, created by
) law; their personality begins as soon as they have been constituted according to law;
(3 Corporations, partnerships and associations for private interest or purpose to which
) the law grants a juridical personality, separate and distinct from that of each shareholder,
partner or member.[54]
It is this juridical personality that allows a partnership to enter into business
transactions to fulfill its purposes. Article 46 of the Civil Code provides that "[j]uridical
persons may acquire and possess property of all kinds, as well as incur obligations and
bring civil or criminal actions, in conformity with the laws and regulations of their
organization."

SAFA Law Office entered into a contract of lease with PNB as a juridical person to pursue
the objectives of the partnership. The terms of the contract and the manner in which
the parties implemented it are a glaring recognition of SAFA Law Office's juridical
personality. Thus, the contract stated that it is being executed by PNB as the lessor and
"SALUDO AGPALO FERNANDEZ & AQUINO, a partnership organized and existing under
the laws of the Republic of the Philippines," as the lessee.[55] It also provided that the
lessee, i.e., SAFA Law Office, shall be liable in case of default. [56]

Furthermore, subsequent communications between the parties have always been made
for or on behalf ofPNB and SAFA Law Office, respectively.[57]

In view of the above, we see nothing to support the position of the RTC and the CA, as
well as Saludo, that SAFA Law Office is not a partnership and a legal entity. Saludo's
claims that SAFA Law Office is his sole proprietorship and not a legal entity fail in light of
the clear provisions of the law on partnership. To reiterate, SAFA Law Office was created
as a partnership, and as such, acquired juridical personality by operation of law. Hence,
its rights and obligations, as well as those of its partners, are determined by law and not
by what the partners purport them to be.

III.

In holding that SAFA Law Office, a partnership for the practice of law, is not a legal
entity, the CA cited[58] the case of Petition for Authority to Continue Use of the Firm
Name "Sycip, Salazar, Feliciano, Hernandez & Castillo" [59] (Sycip case) wherein the Court
held that "[a] partnership for the practice of law is not a legal entity. It is a mere
relationship or association for a particular purpose. x x x It is not a partnership formed
for the purpose of carrying on trade or business or of holding property." [60] These are
direct quotes from the US case of In re Crawford's Estate.[61] We hold, however, that our
reference to this US case is an obiter dictum which cannot serve as a binding precedent.
[62]

An obiter dictum is an opinion of the court upon a question which was not necessary to
the decision of the case before it. It is an opinion uttered by the way, not upon the point
or question pending, as if turning aside from the main topic of the case to collateral
subjects, or an opinion that does not embody the court's determination and is made
without argument or full consideration of the point. It is not a professed deliberate
determination of the judge himself.[63]

The main issue raised for the court's determination in the Sycip case is whether the two
petitioner law firms may continue using the names of their deceased partners in their
respective firm names. The court decided the issue in the negative on the basis of "legal
and ethical impediments."[64] To be sure, the pronouncement that a partnership for the
practice of law is not a legal entity does not bear on either the legal or ethical obstacle
for the continued use of a deceased partner's name, inasmuch as it merely describes the
nature of a law firm. The pronouncement is not determinative of the main issue. As a
matter of fact, if deleted from the judgment, the rationale of the decision is neither
affected nor altered.

Moreover, reference of the Sycip case to the In re Crawford's Estate case was made

without a full consideration of the nature of a law firm as a partnership possessed with
legal personality under our Civil Code. First, we note that while the Court mentioned
that a partnership for the practice of law is not a legal entity, it also identified petitioner
law firms as partnerships over whom Civil Code provisions on partnership apply. [65] The
Court thus cannot hold that a partnership for the practice of law is not a legal entity
without running into conflict with Articles 44 and 1768 of the Civil Code which provide
that a partnership has a juridical personality separate and distinct from that of each of
the partners.

Second, our law on partnership does not exclude partnerships for the practice of law
from its coverage. Article 1767 of the Civil Code provides that "[t]wo or more persons
may also form a partnership for the exercise of a profession." Article 1783, on the other
hand, states that "[a] particular partnership has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or vocation." Since
the law uses the word "profession" in the general sense, and does not distinguish which
professional partnerships are covered by its provisions and which are not, then no valid
distinction may be made.

Finally, we stress that unlike Philippine law, American law does not treat of partnerships
as forming a separate juridical personality for all purposes. In the case of Bellis v. United
States,[66] the US Supreme Court stated that law firms, as a form of partnership, are
generally regarded as distinct entities for specific purposes, such as employment,
capacity to be sued, capacity to hold title to property, and more. [67] State and federal
laws, however, do not treat partnerships as distinct entities for all purposes. [68]

Our jurisprudence has long recognized that American common law does not treat of
partnerships as a separate juridical entity unlike Philippine law. Hence, in the case
of Campos Rueda & Co. v. Pacific Commercial Co.,[69] which was decided under the old
Civil Code, we held:
Unlike the common law, the Philippine statutes consider a limited partnership as
a juridical entity for all intents and purposes, which personality is recognized in all its
acts and contracts (art. 116, Code of Commerce). This being so and the juridical
personality of a limited partnership being different from that of its members, it must, on
general principle, answer for, and suffer, the consequence of its acts as such an entity
capable of being the subject of rights and obligations. [70] x x x
On the other hand, in the case of Commissioner of Internal Revenue v. Suter.
[71]
 which was decided under the new Civil Code, we held:
It being a basic tenet of the Spanish and Philippine law that the partnership has a
juridical personality of its own, distinct and separate from that of its partners (unlike
American and English law that does not recognize such separate juridical personality),
the bypassing of the existence of the limited partnership as a taxpayer can only be done
by ignoring or disregarding clear statutory mandates and basic principles of our law. [72] x
xx
Indeed, under the old and new Civil Codes, Philippine law has consistently
treated partnerships as having a juridical personality separate from its partners. In view
of the clear provisions of the law on partnership, as enriched by jurisprudence, we hold
that our reference to In re Crawford's Estate in the Sycip case is an obiter dictum.

IV.

Having settled that SAFA Law Office is a juridical person, we hold that it is also the real
party-in-interest in the case filed by Saludo against PNB.

Section 2, Rule 3 of the Rules of Court defines a real party-in-interest as the one "who
stands to be benefited or injured by the judgment in the suit, or the party entitled to the
avails of the suit." In Lee v. Romillo, Jr.,[73] we held that the "real [party-in-interest]-
plaintiffis one who has a legal right[,] while a real [party-in-interest]-defendant is one
who has a correlative legal obligation whose act or omission violates the legal rights of
the former."[74]

SAFA Law Office is the party that would be benefited or injured by the judgment in the
suit before the RTC. Particularly, it is the party interested in the accounting and/or
recomputation of unpaid rentals and damages in relation to the contract of lease. It is
also the party that would be liable for payment to PNB of overdue rentals, if that claim
would be proven. This is because it is the one that entered into the contract of lease
with PNB. As an entity possessed of a juridical personality, it has concomitant rights and
obligations with respect to the transactions it enters into. Equally important, the general
rule under Article 1816 of the Civil Code is that partnership assets are primarily liable for
the contracts entered into in the name of the partnership and by a person authorized to
act on its behalf. All partners, including industrial ones, are only liable pro rata with all
their property after all the partnership assets have been exhausted.

In Guy v. Gacott,[75] we held that under Article 1816 of the Civil Code, the partners'
obligation with respect to the partnership liabilities is subsidiary in nature. It is merely
secondary and only arises if the one primarily liable fails to sufficiently satisfy the
obligation. Resort to the properties of a partner may be made only after efforts in
exhausting partnership assets have failed or if such partnership assets are insufficient to
cover the entire obligation.[76] Consequently, considering that SAFA Law Office is
primarily liable under the contract of lease, it is the real party-in-interest that should be
joined as plaintiff in the RTC case.

Section 2, Rule 3 of the Rules of Court requires that every action must be prosecuted or
defended in the name of the real party-in-interest. As the one primarily affected by the
outcome of the suit, SAFA Law Office should have filed the complaint with the RTC and
should be made to respond to any counterclaims that may be brought in the course of
the proceeding.

In Aguila, Jr. v. Court of Appeals,[77] a case for declaration of nullity of a deed of sale was
filed against a partner of A.C. Aguila & Sons, Co. We dismissed the complaint and held
that it was the partnership, not its partners, which should be impleaded for a cause of
action against the partnership itself. Moreover, the partners could not be held liable for
the obligations of the partnership unless it was shown that the legal fiction of a different
juridical personality was being used for fraudulent, unfair, or illegal purposes. We held:
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. 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. Hence, a complaint filed against such a person should be dismissed for failure
to state a cause of action.

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. 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.[78]
 In this case, there is likewise no showing that SAFA Law Office, as a separate
juridical entity, is being used for fraudulent, unfair, or illegal purposes. Hence, its
partners cannot be held primarily liable for the obligations of the partnership. As it was
SAFA Law Office that entered into a contract of lease with respondent PNB, it should
also be impleaded in any litigation concerning that contract.

Accordingly, the complaint filed by Saludo should be amended to include SAFA Law
Office as plaintiff. Section 11,[79] Rule 3 of the Rules of Court gives power to the court to
add a party to the case on its own initiative at any stage of the action and on such tenns
as are just. We have also held in several cases[80] that the court has full powers, apart
from that power and authority which are inherent, to amend processes, pleadings,
proceedings, and decisions by substituting as party-plaintiff the real party-in-interest.

In view of the above discussion, we find it unnecessary to discuss the other issues raised
in the petition. It is unfortunate that the case has dragged on for more than 10 years
even if it involves an issue that may be resolved by a simple application of Civil Code
provisions on partnership. It is time for trial to proceed so that the parties' substantial
rights may be adjudicated without further unnecessary delay.

WHEREFORE, the petition is DENIED. Petitioner is hereby ordered to amend his

complaint to include SAFA Law Office as plaintiff in Civil Case No. 06-678 pending before
Branch 58 of the Regional Trial Court of Makati City, it being the real party-in-interest.

SO ORDERED.

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.

DECISION

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 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
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 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.

....

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.

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.

....

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.
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.

....

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.

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.

THIRD DIVISION
[ G.R. No. 144214, July 14, 2003 ]
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL AND
CARMELITO JOSE, PETITIONERS, VS. DONALDO EFREN C. RAMIREZ
AND SPOUSES CESAR G. RAMIREZ JR. AND CARMELITA C. RAMIREZ,
RESPONDENTS.

DECISION

PANGANIBAN, J.:
A share in a partnership can be returned only after the completion of the latter's
dissolution, liquidation and winding up of the business.

The Case

The Petition for Review on Certiorari before us challenges the March 23, 2000
Decision[1] and the July 26, 2000 Resolution[2] of the Court of Appeals[3] (CA) in CA-GR
CV No. 41026. The assailed Decision disposed as follows:
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992
rendered by the Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE
and NULLIFIED and in lieu thereof a new decision is rendered ordering the [petitioners]
jointly and severally to pay and reimburse to [respondents] the amount of P253,114.00.
No pronouncement as to costs."[4]
Reconsideration was denied in the impugned Resolution.

The Facts

On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a
partnership with a capital of P750,000 for the operation of a restaurant and catering
business under the name "Aquarius Food House and Catering Services."[5] Villareal was
appointed general manager and Carmelito Jose, operations manager.

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September

5, 1984. His capital contribution of P250,000 was paid by his parents, Respondents Cesar
and Carmelita Ramirez.[6]

After Jesus Jose withdrew from the partnership in January 1987, his capital contribution
of P250,000 was refunded to him in cash by agreement of the partners.[7]

In the same month, without prior knowledge of respondents, petitioners closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment
were deposited in the respondents' house for storage.[8]

On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer
interested in continuing their partnership or in reopening the restaurant, and that they
were accepting the latter's offer to return their capital contribution. [9]

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also
reiterated the request for the return of their one-third share in the equity of the
partnership. The repeated oral and written requests were, however, left unheeded. [10]

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently
filed a Complaint[11] dated November 10, 1987, for the collection of a sum of money from
petitioners.

In their Answer, petitioners contended that respondents had expressed a desire to

withdraw from the partnership and had called for its dissolution under Articles 1830 and
1831 of the Civil Code; that respondents had been paid, upon the turnover to them of
furniture and equipment worth over P400,000; and that the latter had no right to demand
a return of their equity because their share, together with the rest of the capital of the
partnership, had been spent as a result of irreversible business losses. [12]

In their Reply, respondents alleged that they did not know of any loan encumbrance on
the restaurant. According to them, if such allegation were true, then the loans incurred by
petitioners should be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business. Respondents also
alleged that they expected the equipment and the furniture stored in their house to be
removed by petitioners as soon as the latter found a better location for the restaurant. [13]

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of

Restaurant Furniture and Equipment[14] on July 8, 1988. The furniture and the equipment
stored in their house were inventoried and appraised at P29,000.[15] The display freezer
was sold for P5,000 and the proceeds were paid to them.[16]

After trial, the RTC[17] ruled that the parties had voluntarily entered into a partnership,
which could be dissolved at any time. Petitioners clearly intended to dissolve it when
they stopped operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision,
held them liable as follows:[18]
"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the
[petitioners] ordering the [petitioners] to pay jointly and severally the following:

(a) Actual damages in the amount of P250,000.00

(b) Attorney's fee in the amount of P30,000.00
(c) Costs of suit."
The CA Ruling

The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in
continuing the restaurant business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and because no sufficient
evidence was presented to show financial losses, the CA computed their liability as
follows:
"Consequently, since what has been proven is only the outstanding obligation of the
partnership in the amount of P240,658.00, although contracted by the partnership before
[respondents'] have joined the partnership but in accordance with Article 1826 of the
New Civil Code, they are liable which must have to be deducted from the remaining
capitalization of the said partnership which is in the amount of P1,000,000.00 resulting in
the amount of P759,342.00, and in order to get the share of [respondents], this amount of
P759,342.00 must be divided into three (3) shares or in the amount of P253,114.00 for
each share and which is the only amount which [petitioner] will return to [respondents']
representing the contribution to the partnership minus the outstanding debt thereof."[19]
Hence, this Petition.[20]

Issues

In their Memorandum,[21] petitioners submit the following issues for our consideration:

"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the
capital contribution, instead of the net capital after the dissolution and liquidation of a
partnership, thereby treating the capital contribution like a loan, is in accordance with law
and jurisprudence;

"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly
and severally pay and reimburse the amount of [P]253,114.00 is supported by the
evidence on record; and

"9.3. Whether the Honorable Court of Appeals was correct in making [n]o
pronouncement as to costs."[22]
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to
respondents for the latter's share in the partnership; (2) whether the CA's computation of
P253,114 as respondents' share is correct; and (3) whether the CA was likewise correct in
not assessing costs.

This Court's Ruling

The Petition has merit.

First Issue:
Share in Partnership

Both the trial and the appellate courts found that a partnership had indeed existed, and
that it was dissolved on March 1, 1987. They found that the dissolution took place when
respondents informed petitioners of the intention to discontinue it because of the former's
dissatisfaction with, and loss of trust in, the latter's management of the partnership affairs.
These findings were amply supported by the evidence on record. Respondents
consequently demanded from petitioners the return of their one-third equity in the
partnership.
We hold that respondents have no right to demand from petitioners the return of their
equity share. Except as managers of the partnership, petitioners did not personally hold
its equity or assets. "The partnership has a juridical personality separate and distinct from
that of each of the partners."[23] Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring partners. [24]

Second Issue:
What Must Be Returned?

Since it is the partnership, as a separate and distinct entity, that must refund the shares of
the partners, the amount to be refunded is necessarily limited to its total resources. In
other words, it can only pay out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the creditors of the partnership
must first be compensated.[25] After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners' shares.

Evidently, in the present case, the exact amount of refund equivalent to respondents' one-
third share in the partnership cannot be determined until all the partnership assets will
have been liquidated -- in other words, sold and converted to cash -- and all partnership
creditors, if any, paid. The CA's computation of the amount to be refunded to respondents
as their share was thus erroneous.

First, it seems that the appellate court was under the misapprehension that the total
capital contribution was equivalent to the gross assets to be distributed to the partners at
the time of the dissolution of the partnership. We cannot sustain the underlying idea that
the capital contribution at the beginning of the partnership remains intact, unimpaired and
available for distribution or return to the partners. Such idea is speculative, conjectural
and totally without factual or legal support.

Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the
changing fortunes of the business. In the present case, the financial statements presented
before the trial court showed that the business had made meager profits. [26] However,
notable therefrom is the omission of any provision for the depreciation[27] of the furniture
and the equipment. The amortization of the goodwill[28] (initially valued at P500,000) is
not reflected either. Properly taking these non-cash items into account will show that the
partnership was actually sustaining substantial losses, which consequently decreased the
capital of the partnership. Both the trial and the appellate courts in fact recognized the
decrease of the partnership assets to almost nil, but the latter failed to recognize the
consequent corresponding decrease of the capital.

Second, the CA's finding that the partnership had an outstanding obligation in the amount
of P240,658 was not supported by evidence. We sustain the contrary finding of the RTC,
which had rejected the contention that the obligation belonged to the partnership for the
following reason:
"x x x [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh. `4') does not reveal the total loan. The Agreement
(Exh. `A') par. 6 shows an outstanding obligation of P240,055.00 which the partnership
owes to different creditors, while the Certification issued by Mercator Finance (Exh. `8')
shows that it was Sps. Diogenes P. Villareal and Luzviminda J. Villareal, the former
being the nominal party defendant in the instant case, who obtained a loan of
P355,000.00 on Oct. 1983, when the original partnership was not yet formed."
Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid
by the partnership to Jesus Jose when he withdrew from the partnership.

Because of the above-mentioned transactions, the partnership capital was actually

reduced. When petitioners and respondents ventured into business together, they should
have prepared for the fact that their investment would either grow or shrink. In the
present case, the investment of respondents substantially dwindled. The original amount
of P250,000 which they had invested could no longer be returned to them, because one
third of the partnership properties at the time of dissolution did not amount to that much.

It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required
formalities and with full awareness of what they were doing. Courts have no power to
relieve them from obligations they have voluntarily assumed, simply because their
contracts turn out to be disastrous deals or unwise investments. [29]

Petitioners further argue that respondents acted negligently by permitting the partnership
assets in their custody to deteriorate to the point of being almost worthless. Supposedly,
the latter should have liquidated these sole tangible assets of the partnership and
considered the proceeds as payment of their net capital. Hence, petitioners argue that the
turnover of the remaining partnership assets to respondents was precisely the manner of
liquidating the partnership and fully settling the latter's share in the partnership.

We disagree. The delivery of the store furniture and equipment to private respondents
was for the purpose of storage. They were unaware that the restaurant would no longer be
reopened by petitioners. Hence, the former cannot be faulted for not disposing of the
stored items to recover their capital investment.

Third Issue:
Costs

Section 1, Rule 142, provides:

"SECTION 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these
rules, costs shall be allowed to the prevailing party as a matter of course, but the court
shall have power, for special reasons, to adjudge that either party shall pay the costs of an
action, or that the same be divided, as may be equitable. No costs shall be allowed against
the Republic of the Philippines unless otherwise provided by law."
Although, as a rule, costs are adjudged against the losing party, courts have discretion,
"for special reasons," to decree otherwise. When a lower court is reversed, the higher
court normally does not award costs, because the losing party relied on the lower court's
judgment which is presumed to have been issued in good faith, even if found later on to
be erroneous. Unless shown to be patently capricious, the award shall not be disturbed by
a reviewing tribunal.

WHEREFORE, the Petition is GRANTED, and the assailed Decision and

Resolution SET ASIDE. This disposition is without prejudice to proper proceedings for
the accounting, the liquidation and the distribution of the remaining partnership assets, if
any. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION
[ G.R. No. 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.

DECISION

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 on 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 "distributive dividend" 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 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, mientras que la
comunidad puede existir y existe ordinariamente sin ella; y por razon del  fin  u objeto, 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 positivo 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
o 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 Español, Vol. 2, Part
1, 10th  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 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. Commissioner of Internal Revenue, L-19342, May
25, 1972, 45 SCRA 74, where after an extrajudicial settlement the coheirs used the
inheritance or the incomes derived therefrom as a common fund to produce profits for
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.

[ G.R. Nos. L-24020-21, July 29, 1968 ]

FLORENCIO REYES AND ANGEL REYES, PETITIONERS, VS.
COMMISSIONER OF INTERNAL REVENUE AND HON. COURT OF TAX
APPEALS, RESPONDENTS.

DECISION
FERNANDO, J.:

Petitioners in this case were assessed by respondent Commissioner of Internal Revenue

the sum of P46,647.00 as income tax, surcharge and compromise for the years 1951 to
1954, an assessment subsequently reduced to P37, 528. 00.  This assessment sought to be
reconsidered successfully was the subject of an appeal to respondent Court of Tax
Appeals.  Thereafter, another assessment was made against petitioners, this time for back
income taxes plus surcharge and compromise in the total sum of P25,973.75, covering the
years 1955 and 1956.  There being a failure on their part to have such assessments
reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals.  The
two cases  involving as they did identical issues and ultimately traceable to facts similar
[1]

in character were heard jointly with only one decision being rendered.

In that joint decision of respondent Court of Tax Appeals, the tax liability for the years
1951 to 1954 was reduced to P37,128. 00 and for the years 1955 and 1956, to P20,619.00
as income tax due "from the partnership formed" by petitioners.  The reduction was due
[2]

to the elimination of surcharge, the failure to file the income tax return being accepted as
due to petitioners honest belief that no such liability was incurred as well as the
compromise penalties for such failure to file.  A reconsideration of the aforesaid decision
[3]

was sought and denied by respondent Court of Tax Appeals.  Hence this petition for
review.

The facts as found by respondent Court of Tax Appeals, which being supported by
substantial evidence, must be respected  follow: "On October 31, 1950, petitioners, father
[4]

and son, purchased a lot and building, known as the Gibbs Building, situated at
671 Dasmariñas Street, Manila, for P835, C00.00, of which they paid the sum of P375,
000.00, leaving a balance of P460, 000. 00, representing the mortgage obligation of the
vendors with the China Banking Corporation, which mortgage obligations was assumed
by the vendees.  The initial payment of P375,000.00 was shared equally by petitioners At
the time of the purchase, the building was leased to various tenant whose rights under the
lease contracts with the original owners the purchasers, petitioners herein, agreed to
respect.  The administration of the building was entrusted to an administrator who
collected the rents; kept its books and records and rendered statements of accounts to the
owners; negotiated leases; made necessary repairs and disbursed payments, whenever
necessary, after approval by the owners; and performed such other functions necessary
for the conservation and preservation of the building.  Petitioners divided equally the
income derived from the building after deducting the expenses of operation and
maintenance.  The gross income from rentals of the building amounted to about P90, 000.
00 annually." [5]
From the above facts, the respondent Court of Tax Appeals applying the appropriate
provisions of the National Internal Revenue Code, the first of which imposes an income
tax on corporations "organized in, or existing under the laws of the Philippines, no matter
how created or organized but net including duly registered general co-partnerships
(compañias colectivas), * * *, "  a term, which according to the second provision cited,
[6]

includes partnerships "no matter how created or organized, * * *, "  and applying the
[7]

leading case of Evangelista v. Collector of Internal Revenue,  sustained the action of

[8]

respondent Commissioner of Internal Revenue but reduced the tax liability of petitioners,
as previously noted.

Petitioners maintain the view that the Evangelista ruling does not apply; for them, the
situation is dissimilar.  Consequently, they allege that the reliance by respondent Court of
Tax Appeals was unwarranted and the decision should be, set aside.  If their
interpretation of the authoritative doctrine therein se forth commands assent, then clearly
what respondent Court of Tax Appeals did fails to find shelter in the law.  That is the
crux of the matter.  A perusal of the Evangelista decision is therefore unavoidable.

As noted in the opinion of the Court, penned by the present Chief Justice, the issue was
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, *
* *.  After referring to another section of the National Internal Revenue Code, which
[9]

explicitly provides that the term corporation "includes partnerships" and then to Article
1767 of the Civil Code of the Philippines, defining what a Contract of partnership is, the
opinion goes on to state that "the essential elements of 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, * * *. " [10]

In support of the above conclusion, reference was made to the following circumstances,

namely, the common fund being created purposely not something already found in
existence, the' investment of the same not merely in one transaction but in a series of
transactions; the lots thus acquired not being devoted to residential purposes or to other
personal uses of petitioners in that case; such properties having been under the
management of one person with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts and to endorse notes and checks; the above
conditions having existed for more than 10 years since the acquisition of the above
properties; and no testimony having been introduced as to the purpose "in creating the set
up already adverted to, or on the causes for its continued existence.".   The conclusion
[11]

that emerged had all the imprint of inevitability.  Thus: "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."[12]

It may be said that there could be a differentiation made between the circumstances above
detailed 'and those existing in the present case.  It does not suffice though to preclude the
applicability of the Evangelista decision.  Petitioners could harp on these being only one
transaction.  They could stress that an affidavit of one of them found in the Bureau of
Internal Revenue records would indicate that their intention was to house in the building
acquired by them the respective enterprises, coupled with a plan of effecting a division in
10 years.  It is a little surprising then that while the purchase was made on October 31,
1950 and their brief as petitioners filed on October 20, 1965, almost 15 years later, there
was no allegation that such division as between them was in fact made Moreover, the
facts as found and as submitted in the brief made clear that the building in question
continued to be leased by other parties with petitioners dividing "equally the income 4' *
* after deducting the expenses of operation and maintenance * *."  Differences of such
[13]

slight significance do not call for a different ruling.

It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling
cannot be deemed successful.  Respondent Court of Tax Appeals acted correctly.  It
yielded to the command of an authoritative decision; it recognized its binding
character.  There is clearly no merit to the second error assigned by petitioners, who
would deny its applicability to their situation.

The first alleged error committed by respondent Court of Tax Appeals in holding that
petitioners, in acquiring the Gibbs Building, established a partnership subject to income
tax as a corporation under the National Internal Revenue Code is likewise untenable.  In
their discussion in their brief of this alleged error, stress is laid on their being co-owners
and not partners.  Such an allegation was likewise, made in the Evangelista case.

This is the way it was disposed of in the opinion of the present Chief Justice: "This
pretense was correctly rejected by the Court of Tax Appeals."  Then came the
[14]

explanation why: "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 conformity with the usual, requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations.  Again, pursuant to
said' section 84(b), the term 'corporation' includes, among other, 'joint accounts,
(cuentas en paticipacion)’ and 'associations' none of which has personality of its own, 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 copartnerships' 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'."  The opinion went on to summarize the
[15]

matter aptly: "For purposes of the tax on corporations, our National Internal Revenue
Code, include these partnerships - with the exception only of duly registered general co-
partnerships - 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. " [16]

In the light of the above, it cannot be said that the respondent Court of Tax Appeals
decided the matter incorrectly.  There is no warrant for the assertion that it failed to apply
the settled law to uncontroverted facts.  Its decision cannot be successfully
assailed.  Moreover, an observation made in Alhambra Cigar & Cigarette Manufacturing
Co. v. Commissioner of Internal Revenue,  is well-worth recalling.  Thus: "Nor as a
[17]

matter of principle is it advisable for this Court to set aside the conclusion reached by an
agency such as the Court of Tax Appeals which is, by th very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless, as did not happen here, there has been an
abuse or improvident exercise of its authority."

WHEREFORE, the decision of the respondent Court of Tax Appeals ordering

petitioners "to pay the sums of P37,128. 00 as income tax due from the partnership
formed by herein petitioners for the years 1951 to 1954 and P20,619.00 for the years
1955 and 1956 within thirty days from the date this decision becomes final, plus the
corresponding surcharge and interest in case of delinquency, " is affirmed.  With costs
against petitioners.

[ G.R. No. 35840, March 31, 1933 ]

FRANCISCO BASTIDA, PLAINTIFF AND APPELLEE, VS. MENZI & CO.,
INC., J. M. MENZI AND P. C. SCHLOBOHM, DEFENDANTS. MENZI & CO.,
INC., APPELLANT.

DECISION

VICKERS, J.:
This is an appeal by Menzi & Co., Inc., one of the defendants, from a decision of the
Court of First Instance of Manila. The case was tried on the amended complaint dated
May 26, 1928 and defendants' amended answer thereto of September 1, 1928. For the
sake of clearness, we shall incorporate herein the principal allegations of the parties.

FIRST CAUSE OF ACTION

Plaintiff alleged:

That the defendant J. M. Menzi, together with his wife and daughter, owns ninety-nine
per cent (99%) of the capital stock of the defendant Menzi & Co., Inc., that the plaintiff
has been informed and therefore believes that the defendant J. M. Menzi, his wife and
daughter, together with the defendant P. C. Schlobohm and one Juan Seiboth, constitute
the board of directors of the defendant, Menzi & Co., Inc.;

II

That on April 27, 1922, the defendant Menzi & Co., Inc., through its president and
general manager, J. M. Menzi, under the authority of the board of directors, entered into a
contract with the plaintiff to engage in the business of exploiting prepared fertilizers, as
evidenced by the contract marked Exhibit A, attached to the original complaint as a part
thereof, and likewise made a part of the amended complaint, as if it were here copied
verbatim;

III

That in pursuance of said contract, plaintiff and defendant Menzi & Co., Inc., began to
manufacture prepared fertilizers, the former superintending the work of actual
preparation, and the latter, through defendants J. M. Menzi and P. C. Schlobohm,
managing the business and opening an account entitled "FERTILIZERS" on the books of
the defendant Menzi & Co., Inc., where all the accounts of the partnership business were
supposed to be kept; the plaintiff had no participation in the making of these entries,
which were wholly in the defendants' charge, under whose orders every entry was made;

IV

That according to paragraph 7 of the contract Exhibit A, the defendant Menzi & Co., Inc.,
was obliged to render annual balance sheets to the plaintiff upon the 30th day of June of
each year; that the plaintiff had no intervention in the preparation of these yearly
balances, nor was he permitted to have any access to the books of account; and when the
balance sheets were shown him, he, believing in good faith that they contained the true
statement of the partnership business, and relying upon the good faith of the defendants,
Menzi & Co., Inc., J. M. Menzi, and P. C. Schlobohm, accepted and signed them, the last
balance sheet having been rendered in the year 1926;

That by reason of the foregoing facts and especially those set forth in the preceding
paragraph, the plaintiff was kept in ignorance of the defendants' acts relating to the
management of the partnership funds, and the keeping of accounts, until he was informed
and so believes and alleges, that the defendants had conspired to conceal from him the
true status of the business, and to his damage and prejudice made false entries in the
books of account and in the yearly balance sheets, the exact nature and amount of which
it is impossible to ascertain, even after the examination of the books of the business, due
to the defendants' refusal to furnish all the books and data required for the purpose, and
the constant obstacles they have placed in the way of the examination of the books of
account and vouchers;

VI

That when the plaintiff received the information mentioned in the preceding paragraph,
he demanded that the defendants permit him to examine the books and vouchers of the
business, which were in their possession, in order to ascertain the truth of the alleged
false entries in the books and balance sheets submitted for his approval, but the
defendants refused, and did not consent to the examination until after the original
complaint was filed in this case; but up to this time they have refused to furnish all the
books, data, and Vouchers necessary for a complete and accurate examination of all the
partnership's accounts; and

VII

That as a result of the partial examination of the books of account of the business, the
plaintiff has, through his accountants, discovered that the defendants, conspiring and
confederating together, presented to the plaintiff during the period covered by the
partnership contract false and incorrect accounts,

(a) For having included therein undue interest;

(b) For having entered, as a charge to fertilizers, salaries and wages which should have
been paid and were in fact paid by the defendant Menzi & Co., Inc.;

(c) For having collected from the partnership the income tax which should have been paid
for its own account by Menzi & Co., Inc.;
(d) For having-collected, to the damage and prejudice of the plaintiff, commissions on the
purchase of materials for the manufacture of fertilizers;

(e) For having appropriated, to the damage and prejudice of the plaintiff, the profits
obtained from the sale of fertilizers belonging to the partnership and bought with its own
funds; and

(f) For having appropriated to themselves all rebates for freight insurance, taxes, etc.,
upon materials for fertilizer bought abroad, no entries of said rebates having been made
on the books to the credit of the partnership.

Upon the strength of the facts set out in this first cause of action, the plaintiff prays the
court:

1. To prohibit the defendants, each and every one of them, from destroying and
concealing the books and papers of the partnership constituted between the
defendant Menzi & Co., Inc., and the plaintiff;

2. To summon each and every defendant to appear and give a true account of all facts
relating to the partnership between the plaintiff and the defendant Menzi & Co.,
Inc., and of each and every act and transaction connected with the business of said
partnership from the beginning to April 27, 1927, and a true statement of all
merchandise of whatever description, purchased for said partnership, and of all the
expenditures and sales of every kind, together with the true amount thereof,
besides the sums received by the partnership from every source together with their
exact nature, and a true and complete account of the vouchers for all sums paid by
the partnership, and of the salaries paid to its employees;

3. To declare null and void the yearly balances submitted by the defendants to the
plaintiff from 1922 to 1926, both inclusive;

4. To order the defendants to give a true statement of all receipts and disbursements
of the partnership during the period of its existence, besides granting the plaintiff
any other remedy that the court may deem just and equitable.

Exhibit A

"CONTRATO

que se celebra entre los Sres. Menzi y Compañia, de Manila, como Primera Parte, y D.
Francisco Bastida, tambien de Manila, como Segunda Parte, bajo las siguientes

"CONDICIONES
"1.ª El objeto de este contrato es la explotacion del negocio de Abonos o Fertilizantes
Preparados, para diversas aplicaciones agricolas;

"2.ª La duracion de este contrato sera de cinco años, a contar desde la fecha de su firma;

"3.ª La Primera Parte se compromete a facilitar la ayuda financiera necesaria para el

negocio;

"4.ª La Segunda Parte se compromete a poner su entero tiempo y toda su experiencia a la

disposicion del negocio;

"5.ª La Segunda Parte no podra, directa o indirectamente, dedicarse por si sola ni en

sociedad con otras personas, o de manera alguna que no sea con la Primera Parte, al
negocio de Abonos, simples o preparados, o de materia alguna que se aplique
comunmente a la fertilizacion de suelos y plantas, durante la vigencia de este contrato, a
menos que obtenga autorizacion expresa de la Primera Parte para ello;

"6.ª La Primera Parte no podra dedicarse, por si sola ni en sociedad o combinacion con
otras personas o entidades, ni de otro modo que en sociedad con la Segunda Parte, al
negocio de Abonos o Fertilizantes preparados, ya sean ellos importados, ya preparados en
las Islas Filipinas; tampoco podra dedicarse a la venta o negocio de materias o productos
que tengan aplicacion como fertilizantes, o que se usen en la composicion de fertilizantes
o abonos, si ellos son productos de suelo de la manufactura filipinos, pudiendo sin
embargo vender o negociar en materias fertilizantes simples importados de los Estados
Unidos o del Extranjero;

"7.ª La Primera Parte se obliga a ceder y a hacer efectivo a la Segunda Parte el 35 por
ciento (treinta y cinco por ciento) de las utilidades netas del negocio de abonos,
liquidables el 30 de junio de cada ano;

"8.ªa La Primera Parte facilitara a la Segunda, mensualmente, la cantidad de P300

(trescientos pesos), a cuenta de su parte de beneficios;

"9.ª Durante el año 1923 la Primera Parte concedera a la Segunda permiso para que este
se ausente de Filipinas por un periodo de tiempo que no exceda de un ano, sin menoscabo
para los derechos de la Segunda Parte con arreglo a este contrato.

"En testimonio de Io cual firmamos el presente en la Ciudad de Manila, I. F., a veintisiete

de abril de 1922.

  "MENZI & CO., INC.  

"Por
  J. MENZI  
(Fdo.)
      "General  
 Manager
  "Primera Parte 
     
(Fdo.)  F. BASTIDA    
    "Segunda Parte    
     
  "MENZI & CO., INC.  
      "(Fdo.)MAX KAEGI  
"Acting
     
Secretary"

Defendants denied all the allegations of the amended complaint, except the formal
allegations as to the parties, and as a special defense to the first cause of action alleged:

1. That the defendant corporation, Menzi & Co., Inc., has been engaged in the
general merchandise business in the Philippine Islands since its organization in
October, 1921, including the importation and sale of all kinds of goods, wares, and
merchandise, and especially simple fertilizers and fertilizer ingredients, and as a
part of that business, it has been engaged since its organization in the manufacture
and sale of prepared fertilizers for agricultural purposes, and has used for that
purpose trade-marks belonging to it;

2. That on or about November, 1921, the defendant, Menzi & Co., Inc., made and
entered into an employment agreement with the plaintiff, who represented that he
had had much experience in the mixing of fertilizers, to superintend the mixing of
the ingredients in the manufacture of prepared fertilizers in its fertilizer department
and to obtain orders for such prepared fertilizers subject to its approval, for a
compensation of 50 per cent of the net profits which it might derive from the sale
of the fertilizers prepared by him, and that said Francisco Bastida worked under
said agreement until April 27, 1922, and received the compensation agreed upon
for his services; that on the said 27th of April, 1922, the said Menzi & Co., Inc.,
and the said Francisco Bastida made and entered into the written agreement, which
is marked Exhibit A, and made a part of the amended complaint in this case,
whereby they mutually agreed that the employment of the said Francisco Bastida
by the said Menzi & Co., Inc., in the capacity stated, should be for a definite
period of five years from that date and under the other terms and conditions stated
therein, but with the understanding and agreement that the said Francisco Bastida
should receive as compensation for his said services only 35 per cent of the net
profits derived from the sale of the fertilizers prepared by him during the period of
the contract instead of 50 per cent of such profits, as provided in his former
agreement; that the said Francisco Bastida was found to be incompetent to do
anything in relation to its said fertilizer business with the exception of overseeing
the mixing of the ingredients in the manufacture of the same, and on or about the
month of December, 1922, the defendant, Menzi & Co., Inc., in order to make said
 business successful, was obliged to and actually did assume the full management
and direction of said business;

3. That the accounts of the business of the said fertilizer department of Menzi & Co.,
Inc., were duly kept in the regular books of its general business, in the ordinary
course thereof, up to June 30, 1923, and that after that time and during the
remainder of the period of said agreement, for the purpose of convenience in
determining the amount of compensation due to the plaintiff under his agreement,
separate books of account for its said fertilizer business were duly kept in the
name of 'Menzi & Co., Inc., Fertilizer', and used exclusively for that purpose, and
it was mutually agreed between the said Francisco Bastida and the said Menzi &
Co., Inc., that the yearly balances for the determination of the net profits of said
business due to the said plaintiff as compensation for his services under said
agreement would be made as of December 31st, instead of June 30th, of each year,
during the period of said agreement ; that the accounts of the business of its said
fertilizer department, as recorded in its said books, and the vouchers and records
supporting the same, for each year of said business have been duly audited by
Messrs. White, Page & Co., certified public accountants, of Manila, who, shortly
after the close of business at the end of each year up to and including the year
1926, have prepared therefrom a manufacturing and profit and loss account and
balance sheet, showing the status of said business and the share of the net profits
pertaining to the plaintiff as his compensation under said agreement; that after the
said manufacturing and profit and the loss account and balance sheet for each year
of the business of its said fertilizer department up to and including the year 1926,
had been prepared by the said auditors and certified by them, they were shown to
and examined by the plaintiff, and duly accepted, and approved by him, with full
knowledge of their contents, and as evidence of such approval, he signed his name
on each of them, as shown on the copies of said manufacturing and profit and loss
account and balance sheet for each year up to and including the year 1926, which
are attached to the record of this case, and which are hereby referred to and made a
part of this amended answer, and in accordance therewith, the said plaintiff has
actually received the portion of the net profits of its said business for those years
pertaining to him for his services under said agreement; that at no time during the
course of said fertilizer business and the liquidation thereof has the plaintiff been
in any way denied access to the books and records' pertaining thereto, but on the
contrary, said books and records have been subject to his inspection and
examination at any time during business hours, and even since the commencement
of this action, the plaintiff and his accountants, Messrs. Haskins & Sells, of
Manila, have been going over and examining said books and records for months
and the defendant, Menzi & Co., Inc., through its officers, have turned over to said
plaintiff and his accountant the books and records of said business and even
furnished them suitable accommodations in its own office to examine the same;
 4. That prior to the termination of the said agreement, Exhibit A, the defendant,
Menzi & Co., Inc., duly notified the plaintiff that it would not under any
conditions renew his said agreement or continue his said employment with it after
its expiration, and after the termination of said agreement of April 27, 1927, the
said Menzi & Co., Inc., had the certified public accountants, White, Page & Co.,
audit the accounts of the business of its said fertilizer department for the four
months of 1927 covered by plaintiff's agreement and prepare a manufacturing and
profit and loss account and balance sheet of said business snowing the status of
said Business at the termination of said agreement, a copy of which was shown to
and explained to the plaintiff; that at that time there were accounts receivable to be
collected for business covered by said agreement of over P100,000, and there was
guano, ashes, fine tobacco and other fertilizer ingredients on hand of over
P75,000, which had to be disposed of by Menzi & Co., Inc., or valued by the
parties, before the net profits of said business for the period of the agreement could
be determined; that Menzi & Co., Inc., offered to take the face value of said
accounts and the cost value of the other properties for the purpose of determining
the profits of said business for that period, and to pay to the plaintiff at that time
his proportion of such profits on that basis, which the plaintiff refused to accept,
and being disgruntled because the said Menzi & Co., Inc., would not continue him
in its service, the said plaintiff commenced this action, including therein not only
Menzi & Co., Inc., but also its managers J. M. Menzi and P. C. Schlobohm,
wherein he knowingly make various false and malicious allegations against the
defendants; that since that time the said Menzi & Co., Inc., has been collecting the
accounts receivable and disposing of the stocks on hand, and there is still on hand
old stock of approximately P25,000, which it has been unable to dispose of up to
this time; that as soon as possible a final liquidation and accounting of the net
profits of the business covered by said agreement for the last four months thereof
will be made and the share thereof appertaining to the plaintiff will be paid to him;
that the plaintiff has been informed from time to time as to the status of the
disposition of such properties, and he and his auditors have fully examined the
books and records of said business in relation thereto.

SECOND CAUSE OF ACTION

As a second cause of action plaintiff alleged:

I. That the plaintiff hereby reproduces paragraphs I, II, III, IV, and V of the first
cause of action.

II. That the examination made by the plaintiffs auditors of some of the books of the
partnership that were furnished by the defendants disclosed the fact that said
defendants had charged to "purchases" of the business, undue interest, the amount
of which the plaintiff is unable to determine as he has never had at his disposal the
 books and vouchers necessary for that purpose, and especially, owing to the fact
that the partnership constituted between the plaintiff and the defendant Menzi &
Co., Inc., never kept its own cash book, but that its funds were maliciously
included in the private funds of the defendant entity, neither was there a separate
BANK ACCOUNT of the partnership, such account being included in the
defendant's bank account.

III. That from the examination of the partnership books as aforesaid, the plaintiff
estimates that the partnership between himself and the defendant Menzi & Co.,
Inc., has been defrauded by the defendants by way of interest in an amount of
approximately P184,432.51, of which 35 per cent, or P64,551.38, belongs to the
plaintiff exclusively.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants
jointly and severally to pay him the sum of P64,551.38, or any amount which may finally
appear to be due and owing from the defendants to the plaintiff upon this ground, with
legal interest from the filing of the original complaint until payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;

2. That under the contract of employment, Exhibit A, of the amended complaint, the
defendant, Menzi & Co., Inc., only undertook and agreed to facilitate financial aid
in carrying on the said fertilizer business, as it had been doing before the plaintiff
was employed under the said agreement; that the said defendant, Menzi & Co.,
Inc., in the course of the said business of its fertilizer department, opened letters of
credit through the banks of Manila, accepted and paid drafts drawn upon it under
said letters of credit, and obtained loans and advances of moneys for the purchase
of materials to be used in mixing and manufacturing its fertilizers and in paying
the expenses of said business; that such drafts and loans naturally provided for
interest at the banking rate from the dates thereof until paid, as is the case in all
such business enterprises, and that such payments of interest as were actually
made on such drafts, loans and advances during the period of the said employment
agreement constituted legitimate expenses of said business under said agreement.

THIRD CAUSE OF ACTION

As third cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.
 II. That under the terms of the contract Exhibit A, neither the defendants J. M. Menzi
and P. C. Schlobohm, nor the defendant Menzi & Co., Inc., had a right to collect
for itself or themselves any amount whatsoever by way of salary for services
rendered to the partnership between the plaintiff and the defendant, inasmuch as
such services were compensated with the 65% of the net profits of the business
constituting their share.

III. That the plaintiff has, on his own account and with his own money, paid all the
employees he has placed in the service of the partnership, having expended for
their account, during the period of the contract, over P88,000, without ever having
made any claim upon the defendants for this sum because it was included in the
compensation of 35 per cent which he was to receive in accordance with the
contract Exhibit A.

IV. That the defendants J. M. Menzi and P. C. Schlobohm, not satisfied with
collecting undue and excessive salaries for themselves, have made the partnership,
or the fertilizer business, pay the salaries of a number of the employees of the
defendant Menzi & Co., Inc.

V. That under this item of undue salaries the defendants have appropriated P43,920 of
the partnership funds, of which 35 per cent, or P15,372 belongs exclusively to the
plaintiff.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants to pay
jointly and severally to the plaintiff the amount of P15,372, with legal interest from the
date of the filing of the original complaint until the date of payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;

2. That the defendant, Menzi & Co., Inc., through its manager, exclusively managed
and conducted its said fertilizer business, in which the plaintiff was to receive 35
percent of the net profits as compensation for his services, as hereinbefore alleged,
from on or about January 1, 1923, when its other departments had special
experienced Europeans in charge thereof, who received not only salaries but also a
percentage of the net profits of such departments; that its said fertilizer business,
after its manager took charge of it, became very successful, and owing to the large
volume of business transacted, said business required great deal of time and
attention, and actually consumed at least one-half of the time of the manager and
certain employees of Menzi & Co., Inc., in carrying it on; that the said Menzi &
Co., Inc., furnished office space, stationery and other incidentals, for said business,
and had its employees perform the duties of cashiers, accountants, clerks,
 messengers, etc., for the same, and for that reason the said Menzi & Co., Inc.,
charged each year, from and after 1922, as expenses of said business, which
pertained to the fertilizer department, as certain amount as salaries and wages to
cover the proportional part of the overhead expenses of Menzi & Co., Inc.; that the
same method is followed in each of the several departments of the business of
Menzi & Co., Inc., that each and every year from and after 1922, a just proportion
of said overhead expenses were charged to said fertilizer departments and entered
on the books thereof, with the knowledge and consent of the plaintiff, and
included in the auditors' reports, which were examined, accepted and approved by
him, and he is now estopped from saying that such expenses were not legitimate
and just expenses of said business.

FOURTH CAUSE OF ACTION

As fourth cause of action, the plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.

II. That the defendant Menzi & Co., Inc., through the defendants J. M. Menzi and P.
C. Schlobohm, has paid, with the funds of the partnership between the defendant
entity and the plaintiff, the income tax due from said defendant entity for the
fertilizer business, thereby defrauding the partnership in the amount of P10,361.72
of which 35 per cent belongs exclusively to the plaintiff, amounting to P3,626.60.

III. That the plaintiff has, during the period of the contract, paid with his own money
the income tax corresponding to his share which consists in 35 per cent of the
profits of the fertilizer business, expending about P5,000 without ever having
made any claim for reimbursement against the partnership, inasmuch as it has
always been understood among the partners that each of them would pay his own
income tax.

Wherefore, the plaintiff prays the court to order the defendants jointly and severally to
pay the plaintiff the sum of P3,626.60, with legal interest from the date of the filing of the
original complaint until its payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;

2. That under the Income Tax Law Menzi & Co., Inc., was obliged to and did make
return to the Government of the Philippine Islands each year during the period of
the agreement, Exhibit A, of the income of its whole business, including its
 fertilizer department; that the proportional share of such income taxes found to be
due on the business of the fertilizer department was charged as a proper and
legitimate expense of that department, in the same manner as was done in the other
departments of its business; that inasmuch as the agreement with the plaintiff was
an employment agreement, he was requested to make his own return under the
Income Tax Law and to pay his own income taxes, instead of having them paid at
the source, as might be done under the law, so that he would be entitled to the
personal exemptions allowed by the law; that the income taxes paid by the said
Menzi & Co., Inc., pertaining to the business of the fertilizer department and
charged to that business, were duly entered on the books of that department, and
included in the auditors' reports hereinbefore referred to, which reports were
examined, accepted and approved by the plaintiff, with full knowledge of their
contents, and he is now estopped from saying that such taxes are not a legitimate
expense of said business.

FIFTH CAUSE OF ACTION

As fifth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.

II. That the plaintiff has discovered that the defendant Menzi & Co., Inc., had been
receiving, during the period of the contract Exhibit A, from foreign firms selling
fertilizing material, a secret commission equivalent to 5 per cent of the total value
of the purchases of fertilizing material made by the partnership constituted
between the plaintiff and the defendant Menzi & Co., Inc., and that said 5 per cent
commission was not entered by the defendants in the books of the business, to the
credit and benefit of the partnership constituted between the plaintiff and the
defendant, but to the credit of the defendant Menzi & Co., Inc., which
appropriated it to itself.

III. That the exact amount, or even the approximate amount of the fraud thus suffered
by the plaintiff cannot be determined, because the entries referring to these items
do not appear in the partnership books, although the plaintiff believes and alleges
that they do appear in the private books of the defendant Menzi & Co., Inc., which
the latter has refused to furnish, notwithstanding the demands made therefor by the
auditors and the lawyers of the plaintiff.

IV. That taking as basis the amount of the purchases of some fertilizing material made
by the partnership during the first four years of the contract Exhibit A, the plaintiff
estimates that this 5 per cent commission collected by the defendant Menzi & Co.,
 Inc., to the damage and prejudice of the plaintiff, amounts to P127,375.77 of
which 35 per cent belongs exclusively to the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants to pay jointly and
severally to the plaintiff the amount of P44,581.52, or the exact amount owed upon this
ground, after both parties have adduced their evidence upon the point.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;

2. That the defendant, Menzi & Co., Inc., did have during the period of said
agreement, Exhibit A, and has now what is called a "Propaganda Agency
Agreement" with the Deutsches Kalesyndikat, G. M. B., of Berlin, which is a
manufacturer of potash, by virtue of which the said Menzi & Co., Inc., was to
receive, for its propaganda work in advertising and bringing about sales of its
potash a commission of 5 per cent on all orders of potash received by it from the
Philippine Islands; that during the period of said agreement, Exhibit A, orders
were sent to said concern for potash, through C. Andre & Co., of Hamburg, as the
agent of the said Menzi & Co., Inc., upon which the said Menzi & Co., Inc.,
received a 5 per cent commission, amounting in all to P2,222.32 for the
propaganda work which it did for said firm in the Philippine Islands; that said
commissions were not in any sense discounts on the purchase price of said potash,
and have no relation to the fertilizer business of which the plaintiff was to receive
a share of the net profits for his services, and consequently were not credited to
that department;

3. That in going over the books of Menzi & Co., Inc., it has been found that there are
only two items of commissions, which were received from the United Supply Co.,
of San Francisco, in the total sum of $66.51, which, through oversight, were not
credited on the books of the fertilizer department of Menzi & Co., Inc., but due
allowance has now been given to that department for such item.

SIXTH CAUSE OF ACTION

As sixth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V, of the first cause of
action.

II. That the defendant Menzi & Co., Inc., in collusion with and through the
defendants J. M. Menzi and P. C. Schlobohm and their assistants, has tampered
with the books of the business making fictitious transfers in favor of the defendant
 Menzi & Co., Inc., of merchandise belonging to the partnership, purchased with
the latter's money, and deposited in its warehouses, and then sold by Menzi & Co.,
Inc., to third persons, thereby appropriating to itself the profits obtained from such
resale.

III. That it is impossible to ascertain the amount of the fraud suffered by the plaintiff
in this respect as the real amount obtained from such sales can only be ascertained
from an examination of the private books of the defendant entity, which the latter
has refused to permit notwithstanding the demand made for the purpose by the
auditors and the lawyers of the plaintiff, and no basis of computation can be
established, even approximately, to ascertain the extent of the fraud sustained by
the plaintiff in this respect, by merely examining the partnership books.

Wherefore, the plaintiff prays the court to order the defendants J. M. Menzi and P. C.
Schlobohm, to make a sworn statement as to all the profits received from the sale to third
persons of the fertilizers pertaining to the partnership, and the profits they have
appropriated, ordering them jointly and severally to pay 35 per cent of the net amount,
with legal interest from the filing of the original complaint until the payment thereof.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer:

2. That under the express terms of the employment agreement, Exhibit A, the
defendant, Menzi & Co., Inc., had the right to import into the Philippine Islands in
the course of its fertilizer business and sell for its exclusive account and benefit
simple fertilizer ingredients; that the only materials imported by it and sold during
the period of said agreement were simple fertilizer ingredients, which had nothing
whatever to do with the business of mixed fertilizers, of which the plaintiff was to
receive a share of the net profits as a part of his compensation.

SEVENTH CAUSE OF ACTION

As seventh cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.

II. That during the existence of the contract Exhibit A, the defendant Menzi & Co.,
Inc., for the account of the partnership constituted between itself and the plaintiff,
and with the latter's money, purchased from several foreign firms various simple
fertilizing material for the use of the partnership.
III. That in the paid invoices for such purchases there are charged, besides the cost
price of the merchandise, other amounts for freight, insurance, duty, etc., some of
which were not entirely thus spent and were later credited by the selling firms to
the defendant Menzi & Co., Inc.

IV. That said defendant Menzi & Co., Inc., through and in collusion with the
defendants J. M. Menzi and P. C. Schlobohm upon receipt of the credit notes
remitted by the selling firms of fertilizing material, for rebates upon freight,
insurance, duty, etc., charged in the invoice but not all expended, did not enter
them upon the books to the credit of the partnership constituted between the
defendant and the plaintiff, but entered or had them entered to the credit of Menzi
& Co., Inc., thereby defrauding the plaintiff of 35 per cent of the value of such
reductions.

V. That the total amount, or even the approximate amount of this fraud cannot be
ascertained without an examination of the private books of Menzi & Co., Inc.,
which the latter has refused to permit notwithstanding the demand to this effect
made upon them by the auditors and the lawyers of the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants J. M. Menzi and P. C.
Schlobohm, to make a sworn statement as to the total amount of such rebates, and to
sentence the defendants to pay to the plaintiff jointly and severally 35 per cent of the net
amount.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer:

2. That during the period of said employment agreement, Exhibit A, the defendant,
Menzi & Co., Inc., received from its agent, C. Andre & Co., of Hamburg, certain
credits pertaining to the fertilizer business in the profits of which the plaintiff was
interested, by way of refunds of German Export Taxes, in the total sum of
P1,402.54; that all of said credits were duly noted on the books of the fertilizer
department as received, but it has just recently been discovered that through error
an additional sum of P216.22 was credited to said department, which does not
pertain to said business in the profits of which the plaintiff is interested.

EIGHTH CAUSE OF ACTION

As eighth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.
 II. That on or about April 21, 1927, that is, before the expiration of the contract
Exhibit A of the complaint, the defendant Menzi & Co., Inc., acting as manager of
the fertilizer business constituted between said defendant and the plaintiff, entered
into a contract with the Compañia General de Tabacos de Filipinas for the sale to
said entity of three thousand tons of fertilizers of the trade mark "Corona No. 1", at
the rate of P111 per ton, f. o. b. Bais, Oriental Negros, to be delivered, as they
were delivered, according to information received by the plaintiff, during the
months of November and December, 1927, and January, February, March, and
April, 1928.

III. That both the contract mentioned above and the benefits derived therefrom, which
the plaintiff estimates at P90,000, Philippine currency, belongs to the fertilizer
business constituted between the plaintiff and the defendant, of which 35 per cent,
or P31,500, belongs to said plaintiff.

IV. That notwithstanding the expiration of the partnership contract Exhibit A, on April
27, 1927, the defendants have not rendered a true accounting of the profits
obtained by the business during the last four months thereof, as the proposed
balance submitted to the plaintiff was incorrect with regard to the inventory of
merchandise, transportation equipment, and the value of the trade marks, for
which reason such proposed balance did not represent the true status of the
business of the partnership on April 30, 1927.

V. That the proposed balance submitted to the plaintiff with reference to the
partnership operations during the last four months of its existence, was likewise
incorrect, inasmuch as it did not include the profit realized or to be realized from
the contract entered into with the Compañia General de Tabacos de Filipinas,
notwithstanding the fact that this contract was negotiated during the existence of
the partnership, and while the defendant Menzi & Co., Inc., was the manager
thereof.

VI. That the defendant entity now contends that the contract entered into with the
Compañia General de Tabacos de Filipinas belongs to it exclusively, and refuses
to give the plaintiff his share consisting in 35 per cent of the profits produced
thereby.

Wherefore, the plaintiff prays the honorable court to order the defendants to render a true
and detailed account of the business during the last four months of the existence of the
partnership, i. e., from January 1, 1927 to April 27, 1927, and to sentence them likewise
to pay the plaintiff 35 per cent of the net profits.

Defendants alleged:
 1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;

2. That the said order for 3,000 tons of mixed fertilizer, received by Menzi & Co.,
Inc., from the Compañia General de Tabacos de Filipinas on April 21, 1927, was
taken by it in the regular course of its fertilizer business, and was to be
manufactured and delivered in December, 1927, and up to April, 1928; that the
employment agreement of the plaintiff expired by its own terms on April 27, 1927,
and he has not been in any way in the service of the defendant, Menzi & Co., Inc.,
since that time, and he cannot possibly have any interest in the fertilizers
manufactured and delivered by the said Menzi & Co., Inc., after the expiration of
his contract for any service rendered to it.

NINTH CAUSE OF ACTION

As ninth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.

II. That during the period of the contract Exhibit A, the partnership constituted
thereby registered in the Bureau of Commerce and Industry the trade marks
"CORONA No. 1", "CORONA No. 2", "ARADO", and "HOZ", the plaintiff and
the defendant having by their efforts succeeded in making them favorably known
in the market.

III. That the plaintiff and the defendant, laboring jointly, have succeeded in making
the fertilizing business a prosperous concern to such an extent that the profits
obtained from the business during the five years it has existed, amount to
approximately P1,000,000, Philippine currency.

IV. That the value of the good-will and the trade marks of a business of this nature
amounts to at least P1,000,000, of which sum 35 per cent belongs to the plaintiff,
or, P350,000.

V. That at the time of the expiration of the contract Exhibit A, the defendant entity,
notwithstanding and in spite of the plaintiff's insistent opposition, has assumed the
charge of liquidating the fertilizing business, without having rendered a monthly
account of the state of the liquidation, as required by law, thereby causing the
plaintiff damages.

VI. That the damages sustained by the plaintiff, as well as the amount of his share in
the remaining property of the business, after its expiration, are wholly unknown to
the plaintiff, and may only be truly and correctly ascertained by compelling the
 defendants J. M. Menzi and P. C. Schlobohm to declare under oath and explain to
the court in detail the sums obtained from the sale of the remaining merchandise,
after the expiration of the partnership contract.

VII. That after the contract Exhibit A had expired, the defendant continued to use for
its own benefit the good-will and trade marks belonging to the partnership, as well
as its transportation equipment and other machinery, thereby indicating its
intention to retain such good-will, trade marks, transportation equipment and
machinery, for the manufacture of fertilizers, by virtue of which the defendant is
bound to pay the plaintiff 35 per cent of the value of said property.

VIII. That the true value of the transportation equipment and machinery employed in the
preparation of the fertilizers amounts to P20,000, 35 per cent of which amounts to
P7,000.

IX. That the plaintiff has repeatedly demanded that the defendant entity render a true
and detailed account of the state of the liquidation of the partnership business, but
said defendant has ignored such demands, so that the plaintiff does not, at this
date, know whether the liquidation of the business has been finished, or what the
status of it is at present.

Wherefore, the plaintiff prays the Honorable Court:

"1. To order the defendants J. M. Menzi and P. C. Schlobohm to render a true and
detailed account of the status of the business in liquidation, that is, from April 28, 1927,
until it is finished, ordering all the defendants to pay the plaintiff jointly and severally 35
per cent of the net amount.

"2. To order the defendants to pay the plaintiff jointly and severally the amount of
P350,000, which is 35 per cent of the value of the goodwill and the trade marks of the
fertilizer business;

"3. To order the defendants to pay the plaintiff jointly and severally the amount of
P7,000, which is 35 per cent of the value of the transportation equipment and machinery
of the business; and

"4. To order the defendants to pay the costs of this trial, and further, to grant any other
remedy that this Honorable Court may deem just and equitable."

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4,
of the special defense to the first cause of action in this amended answer;
 2. That the goodwill, if any, of the said fertilizer business of the defendant, Menzi &
Co., Inc., pertains exclusively to it, and the plaintiff can have no interest therein of
any nature under his said employment agreement; that the trade-marks mentioned
by the plaintiff in his amended complaint, as a part of such goodwill, belonged to
and have been used by the said Menzi & Co., Inc., in its fertilizer business from
and since its organization, and the plaintiff can have no rights to or interest therein
under his said employment agreement; that the transportation equipment pertains
to the fertilizer department of Menzi & Co., Inc., and whenever it has been used by
the said Menzi & Co., Inc., in its own business, due and reasonable compensation
for its use has been allowed to said business; that the machinery pertaining to the
said fertilizer business was destroyed by fire in October, 1926, and the value
thereof in the sum of P20,000 was collected from the Insurance Company, and the
plaintiff has been given credit for 35 per cent of that amount; that the present
machinery used by Menzi & Co., Inc., was constructed by it, and the costs thereof
was not charged to the fertilizer department, and the plaintiff has no right to have
it taken into consideration in arriving at the net profits due to him under his said
employment agreement.

The dispositive part of the decision of the trial court is as follows:

"Wherefore, let judgment be entered:

"(a) Holding that the contract entered into by the parties, evidenced by Exhibit A, is a
contract of general regular commercial partnership, wherein Menzi & Co., Inc., was the
capitalist, and the plaintiff, the industrial partner;

"(b) Holding that the plaintiff, by the mere fact of having signed and approved the
balance sheets, Exhibits C to C-8, is not estopped from questioning the statements of
accounts therein contained;

"(c) Ordering Menzi & Co., Inc., upon the second ground of action, to pay the plaintiff
the sum of P60,385.67 with legal interest from the date of the filing of the original
complaint until paid;

"(d) Dismissing the third cause of action;

"(e) Ordering Menzi & Co., Inc., upon the fourth cause of action, to pay the plaintiff the
sum of P3,821.41, with legal interest from the date of the filing of the original complaint
until paid;

"(f) Dismissing the fifth cause of action;

"(g) Dismissing the sixth cause of action;

"(h) Dismissing the seventh cause of action;

"(i) Ordering the defendant Menzi & Co., Inc., upon the eighth cause of action, to pay the
plaintiff the sum of P6,578.38 with legal interest from January 1, 1929, the date of the
liquidation of the fertilizer business, until paid;

"(j) Ordering Menzi & Co., Inc., upon the ninth cause of action to pay the plaintiff the
sum of P196,709.20 with legal interest from the date of the filing of the original
complaint until paid;

"(k) Ordering the said defendant corporation, in view of the plaintiff's share of the profits
of the business accruing from January 1, 1927 to December 31, 1928, to pay the plaintiff
35 per cent of the net balance shown in Exhibits 51 and 51-A, after deducting the item of
P2,410 for income tax, and any other sum charged for interest under the entry 'Purchases';

"(l) Ordering the defendant corporation, in connection with the final liquidation set out in
Exhibits 52 and 52-A, to pay the plaintiff the sum of P17,463.54 with legal interest from
January 1, 1929, until fully paid;

"(m) Dismissing the case with reference to the other defendants, J. M. Menzi and P. C.
Schlobohm; and

"(n) Menzi & Co., Inc., shall pay the costs of the trial."

The appellant makes the following assignments of error:

"I. The trial court erred in finding and holding that the contract Exhibit A constitutes a
regular collective commercial copartnership between the defendant corporation, Menzi &
Co., Inc., and the plaintiff, Francisco Bastida, and not a contract of employment.

"II. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc., had
wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income
taxes partners' balances, foreign drafts, local drafts, and on other credit balances in the
sum of P172,530.49, and that 35 per cent thereof, or the sum of P60,385.67, with legal
interest thereon from the date of filing his complaint, corresponds to the plaintiff.

"III. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc.,
had wrongfully charged to the fertilizer business in question the sum of P10,918.33 as
income taxes for the years 1923, 1924, 1925 and 1926, and that the plaintiff is entitled to
35 per cent thereof, or the sum of P3,821.41, with legal interest thereon from the date of
filing his complaint, and in disallowing the item of P2,410 charged as income tax in the
liquidation in Exhibits 51 and 51-A for the period from January 1 to April 27, 1927.
"IV. The trial court erred in refusing to find and hold under the evidence in this case that
the contract, Exhibit A was during the whole period thereof considered by the parties and
performed by them as a contract of employment in relation to the fertilizer business of the
defendant, and that the accounts of said business were kept by the defendant, Menzi &
Co., Inc., on that theory with the knowledge and consent of the plaintiff, and that at the
end of each year for five years a balance sheet and profit and loss statement of said
business were prepared from the books of account of said business on the same theory
and submitted to the plaintiff, and that each year said balance sheet and profit and loss
statement were examined, approved and signed by said plaintiff and he was paid the
amount due him under said contract in accordance therewith with full knowledge of the
manner in which said business was conducted and the charges for interest and income
taxes made against the same and that by reason of such facts, the plaintiff is now
estopped from raising any question as to the nature of said contract or the propriety of
such charges.

"V. The trial court erred in finding and holding that the plaintiff, Francisco Bastida, is
entitled to 35 per cent of the net profits in the sum of P18,795.38 received by the
defendant, Menzi & Co., Inc., from its contract with the Compañia General de Tabacos
de Filipinas, or the sum of P6,578.38, with legal interest thereon from January 1, 1929,
the date upon which the liquidation of said business was terminated.

"VI. The trial court erred in finding and holding that the value of the good-will of the
fertilizer business in question was P562,312, and that the plaintiff, Francisco Bastida, was
entitled to 35 per cent of such valuation, or the sum of P196,709.20, with legal interest
thereon from the date of filing his complaint.

"VII. The trial court erred in rendering judgment in favor of the plaintiff and against the
defendant, Menzi & Co., Inc., (a) on the second cause of action, for the sum of
P60,385.67, with legal interest thereon from the date of filing the complaint; (b) on the
fourth cause of action, for the sum of P3,821.41, with legal interest thereon from the date
of filing the complaint; (c) on the eighth cause of action, for the sum of P6,578.38, with
legal interest thereon from January 1, 1929; and (d) on the ninth cause of action, for the
sum of P196,709.20, with legal interest thereon from the date of filing the original
complaint; and (e) for the costs of the action, and in not approving the final liquidation of
said business, Exhibits 51 and 51-A and 52 and 52-A, as true and correct, and entering
judgment against said defendant only for the amounts admitted therein as due the plaintiff
with legal interest, with the costs against the plaintiff.

"VIII. The trial court erred in overruling the defendants' motion for a new trial."

It appears from the evidence that the defendant corporation was organized in 1921 for the
purpose of importing and selling general merchandise, including fertilizers and fertilizer
ingredients. It acquired through John Bordman and the Menzi-Bordman Co. the good-
will, trade-marks, business, and other assets of the old German firm of Behn, Meyer &
Co., Ltd., including its fertilizer business with its stocks and trade-marks. Behn, Meyer &
Co., Ltd., had owned and carried on this fertilizer business from 1910 until that firm was
taken over by the Alien Property Custodian in 1917. Among the trade-marks thus
acquired by the appellant were those known as the "ARADO", "HOZ", and "CORONA".
They were registered in the Bureau of Commerce and Industry in the name of Menzi &
Co. The trade-marks "ARADO" and "HOZ" had been used by Behn, Meyer & Co., Ltd.,
in the sale of its mixed fertilizers, and the trade-mark "CORONA" had been used in its
other business. The "HOZ" trade-mark was used by John Bordman and the Menzi-
Bordman Co. in the continuation of the fertilizer business that had belonged to Behn,
Meyer & Co., Ltd.

The business of Menzi & Co., Inc., was divided into several different departments, each
of which was in charge of a manager, who received a fixed salary and a percentage of the
profits. The corporation had to borrow money or obtain credits from time to time and to
pay interest thereon. The amount paid for interest was charged against the department
concerned, and the interest charges were taken into account in determining the net profits
of each department. The practice of the corporation was to debit or credit each
department with interest at the bank rate on its daily balance. The fertilizer business of
Menzi & Co., Inc., was carried on in accordance with this practice under the "Sundries
Department" until July, 1923, and after that as a separate department.

In November, 1921, the plaintiff, who had had some experience in mixing and selling
fertilizer, went to see Toehl, the manager of the sundries department of Menzi & Co.,
Inc., and told him that he had a written contract with the Philippine Sugar Centrals
Agency for 1,250 tons of mixed fertilizers, and that he could obtain other contracts,
including one from the Calamba Sugar Estates for 450 tons, but that he did not have the
money to buy the ingredients to fill the order and carry on the business. He offered to
assign to Menzi & Co., Inc., his contract with the Philippine Sugar Centrals Agency and
to supervise the mixing of the fertilizer and to obtain other orders for fifty per cent of the
net profits that Menzi & Co., Inc., might derive therefrom. J. M. Menzi, the general
manager of Menzi & Co., accepted plaintiffs offer. Plaintiff assigned to Menzi & Co.,
Inc., his contract with the Sugar Centrals Agency, and the defendant corporation
proceeded to fill the order. Plaintiff supervised the mixing of the fertilizer.

On January 10, 1922 the defendant corporation at plaintiff's request gave him the
following letter, Exhibit B:

"MANILA, 10 de
   
enero de 1922
"Sr. FRANCISCO BASTIDA    
"Manila     
"MUY SR. NUESTRO: Interin formalizamos el contrato que, en principio, tenemos
convenido para la explotacion del negocio de abono y fertilizantes, por la presente
venimos en confirmar su derecho de 50 por ciento de las utilidades que se deriven del
contrato obtenido por Vd. de la Philippine Sugar Centrals (por 1250 tonel.) y del contrato
con la Calamba Sugar Estates, asi como de cuantos contratos se cierren con compradores
de abonos preparados antes de la formalizaci6n definitiva de nuestro contrato mutuo, lo
que hacemos para garantia y seguridad de Vd.

"MENZI &
   
CO.
"Por
W. TOEHL"
(Fdo.)

Menzi & Co., Inc., continued to carry on its fertilizer business under this arrangement
with the plaintiff. It ordered ingredients from the United States and other countries, and
the interest on the drafts for the purchase of these materials was charged to the business
as a part of the cost of the materials. The mixed fertilizers were sold by Menzi & Co.,
Inc., between January 19 and April 1, 1922 under its "CORONA" brand. Menzi & Co.,
Inc., had only one bank account for its whole business. The fertilizer business had no
separate capital. A fertilizer account was opened in the general ledger, and interest at the
rate charged by the Bank of the Philippine Islands was debited or credited to that account
on the daily balances of the fertilizer business. This was in accordance with appellant's
established practice, to which the plaintiff assented.

On or about April 24, 1922 the net profits of the business carried on under the oral
agreement were determined by Menzi & Co., Inc., after deducting interest charges,
proportional part of warehouse rent and salaries and wages, and the other expenses of
said business, and the plaintiff was paid some twenty thousand pesos in full satisfaction
of his share of the profits.

Pursuant to the aforementioned verbal agreement, confirmed by the letter, Exhibit B, the
defendant corporation on April 27, 1922 entered into a written contract with the plaintiff,
marked Exhibit A, which is the basis of the present action.

The fertilizer business was carried on by Menzi & Co., Inc., after the execution of Exhibit
A in practically the same manner as it was prior thereto. The intervention of the plaintiff
was limited to supervising the mixing of the fertilizers in Menzi & Co.'s, Inc., bodegas.

The trade-marks used in the sale of the fertilizer were registered in the Bureau of
Commerce & Industry in the name of Menzi & Co., Inc., and the fees were paid by that
company. They were not charged to the fertilizer business, in which the plaintiff was
interested. Only the fees for registering the formulas in the Bureau of Science were
charged to the fertilizer business, and the total amount thereof was credited to this
business in the final liquidation on April 27, 1927.
On May 3, 1924 the plaintiff made a contract with Menzi & Co., Inc., to furnish it all the
stems and scraps of tobacco that it might need for its fertilizer business either in the
Philippine Islands or for export to other countries. This contract is referred to in the
record as the "Vastago Contract". Menzi & Co., Inc., advanced the plaintiff large sums of
money for buying and installing machinery, paying the salaries of his employees, and
other expenses in performing his contract. White, Page & Co., certified public
accountants, audited the books of Menzi & Co., Inc., every month, and at the end of each
year they prepared a balance sheet and a profit and loss statement of the fertilizer
business. These statements were delivered to the plaintiff for examination, and after he
had had an opportunity of verifying them he approved them without objection and
returned them to Menzi & Co., Inc.

Plaintiff collected from Menzi & Co., Inc., as his share or 35 per cent of the net profits of
the fertilizer business the following amounts:

  1922...................................................................... P1,874.73 
  1923...................................................................... 30,212.62 
  1924...................................................................... 101,081.56 
  1925...................................................................... 35,665.03 
  1926...................................................................... 27,649.98 
    _________ 
P196,483.9
  Total.............................................................  
2

To this amount must be added plaintiff's share of the net profits from January 1 to April
27, 1927, amounting to P34,766.87, making a total of P231,250.79.

Prior to the expiration of the contract, Exhibit A, the manager of Menzi & Co., Inc.,
notified the plaintiff that the contract for his services would not be renewed.

When plaintiff's contract expired on April 27, 1927, the fertilizer department of Menzi &
Co., Inc., had on hand materials and ingredients and two Ford trucks of the book value of
approximately P75,000, and accounts receivable amounting to P103,000. There were
claims outstanding and bills to pay. Before the net profits could be finally determined, it
was necessary to dispose of the materials and equipment, collect the outstanding
accounts, and pay the debts of the business. The accountants for Menzi & Co., Inc.,
prepared a balance sheet and a profit and loss statement for the period from January 1 to
April 27, 1927 as a basis of settlement, but the plaintiff refused to accept it, and filed the
present action.

Menzi & Co., Inc., then proceeded to liquidate the fertilizer business in question. In
October, 1927 it proposed to the plaintiff that the old and damaged stocks on hand having
a book value of P40,000, which the defendant corporation had been unable to dispose of,
be sold at public or private sale, or divided between the parties. The plaintiff refused to
agree to this. The defendant corporation then applied to the trial court for an order for the
sale of the remaining property at public auction, but apparently the court did not act on
the petition.

The old stocks were taken over by Menzi & Co., Inc., and the final liquidation of the
fertilizer business was completed in December, 1928, and a final balance sheet and a
profit and loss statement were submitted to the plaintiff during the trial. During the
liquidation the books of Menzi & Co., Inc., for the whole period of the contract in
question were reaudited by White, Page & Co., certain errors of bookkeeping were
discovered by them. After making the corrections they found the balance due the plaintiff
to be P21,633.20.

Plaintiff employed a certified public accountant, Vernon Thompson, to examine the

books and vouchers of Menzi & Co. Thompson assumed the plaintiff and Menzi & Co.,
Inc., to be partners, and that Menzi & Co., Inc., was obliged to furnish free of charge all
the capital the partnership should need. He naturally reached very different conclusions
from those of the auditors of Menzi & Co., Inc.

We come now to a consideration of appellant's assignments of error. After considering

the evidence and the arguments of counsel, we are unanimously of the opinion that under
the facts of this case the relationship established between Menzi & Co. and the plaintiff
by the contract, Exhibit A, was not that of partners, but that of employer and employee,
whereby the plaintiff was to receive 35 per cent of the net profits of the fertilizer business
of Menzi & Co., Inc., in compensation for his services of supervising the mixing of the
fertilizers. Neither the provisions of the contract nor the conduct of the parties prior or
subsequent to its execution justified the finding that it was a contract of copartnership.
Exhibit A, as appears from the statement of facts, was in effect a continuation of the
verbal agreement between the parties, whereby the plaintiff worked for the defendant
corporation for one-half of the net profits derived by the corporation from certain
fertilizer contracts. Plaintiff was paid his share of the profits from those transactions after
Menzi & Co., Inc., had deducted the same items of expense which he now protests.
Plaintiff never made any objection to defendant's manner of keeping the accounts or to
the charges. The business was continued in the same manner under the written
agreement, Exhibit A, and for four years the plaintiff never made any objection. On the
contrary he approved and signed every year the balance sheet and the profit and loss
statement. It was only when plaintiff's contract was about to expire and the defendant
corporation had notified him that it would not renew it that the plaintiff began to make
objections.

The trial court relied on article 116 of the Code of Commerce, which provides that
articles of association by which two or more persons obligate themselves to place in a
common fund any property, industry, or any of these things, in order to obtain profit,
shall be commercial, no matter what its class may be, provided it has been established in
accordance with the provisions of this Code; but in the case at bar there was no common
fund, that is, a fund belonging to the parties as joint owners or partners. The business
belonged to Menzi & Co., Inc. The plaintiff was working for Menzi & Co., Inc. Instead
of receiving a fixed salary or a fixed salary and a small percentage of the net profits, he
was to receive 35 per cent of the net profits as compensation for his services. Menzi &
Co., Inc., was to advance him P300 a month on account of his participation in the profits.
It will be noted that no provision was made for reimbursing Menzi & Co., Inc., in case
there should be no net profits at the end of the year. It is now well settled that the old rule
that sharing profits as profits made one a partner is overthrown. (Mechem, second
edition, p. 89.)

It is nowhere stated in Exhibit A that the parties were establishing a partnership or

intended to become partners. Great stress is laid by the trial judge and plaintiff's attorneys
on the fact that in the sixth paragraph of Exhibit A the phrase "en sociedad con" is used in
providing that defendant corporation shall not engage in the business of prepared
fertilizers except in association with the plaintiff (en sociedad con). The fact is that en
sociedad con as there used merely means en reunion con or in association with, and does
not carry the meaning of "in partnership with".

The trial judge found that the defendant corporation had not always regarded the contract
in question as an employment agreement, because in its answer to the original complaint
it stated that before the expiration of Exhibit A it notified the plaintiff that it would not
continue associated with him in said business. The trial judge concluded that the phrase
"associated with", used by the defendant corporation, indicated that it regarded the
contract, Exhibit A, as an agreement of copartnership.

In the first place, the complaint and answer having been superseded by the amended
complaint and the answer thereto, and the answer to the original complaint not having
been presented in evidence as an exhibit, the trial court was not authorized to take it into
account. "Where amended pleadings have been filed, allegations in the original pleadings
are held admissible, but in such case the original pleadings can have no effect, unless
formally offered in evidence." (Jones on Evidence, sec. 273; Lucido vs. Calupitan, 27
Phil, 148.)

In the second place, although the word "associated" may be related etymologically to the
Spanish word "socio", meaning partner, it does not in its common acceptation imply any
partnership relation.

The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation
obligated itself to pay to the plaintiff 35 per cent of the net profits of the fertilizer
business, to advance to him P300 a month on account of his share of the profits, and to
grant him permission during 1923 to absent himself from the Philippines for not more
than one year are utterly incompatible with the claim that it was the intention of the
parties to form a copartnership. Various other reasons for holding that the parties were
not partners are advanced in appellant's brief. We do not deem it necessary to discuss
them here. We merely wish to add that in the Vastago contract, Exhibit A, the plaintiff
clearly recognized Menzi & Co., Inc., as the owners of the fertilizer business in question.

As to the various items of expense rejected by the trial judge, they were in our opinion
proper charges and erroneously disallowed, and' this would be true even if the parties had
been partners. Although Menzi & Co., Inc., agreed to furnish the necessary financial aid
for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital
or to defray at its own expense the cost of securing the necessary credit. Some of the
contentions of the plaintiff and his expert witness Thompson are so obviously without
merit as not to merit serious consideration. For instance, they objected to the interest
charges on draft for materials purchased abroad. Their contention is that the corporation
should have furnished the money to purchase these materials for cash,' overlooking the
fact that the interest was added to the cost price, and that the plaintiff was not prejudiced
by the practice complained of. It was also urged, and this seems to us the height of
absurdity, that the defendant corporation should have furnished free of charge such
financial assistance as would have made it unnecessary to discount customers' notes,
thereby enabling the business to reap the interest. In other words, the defendant
corporation should have enabled the fertilizer department to do business on a credit
instead of a cash basis.

The charges now complained of, as we have already stated, are the same as those made
under the verbal agreement, upon the termination of which the parties made a settlement;
the charges in question were acquiesced in by the plaintiff for years, and it is now too late
for him to contest them. The decision of this court in the case of Kriedt vs. E. C.
McCullough & Co. (37 Phil., 474), is in point. A portion of the syllabus of that case reads
as follows:

"1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS ACTS OF

PARTIES.—Acts done by the parties to a contract in the course of its performance are
admissible in evidence upon the question of its meaning, as being their own
contemporaneous interpretation of its terms.

"2. ID.; ID.; ACTION OF PARTIES UNDER PRIOR CONTRACT.—In an action upon
a contract containing a provision of doubtful application it appeared that under a similar
prior contract the parties had, upon the termination of said contract, adjusted their rights
and made a settlement in which the doubtful clause had been given effect in conformity
with the interpretation placed thereon by one of the parties. Held: That this action of the
parties under the prior contract could properly be considered upon the question of the
interpretation of the same clause in the later contract.
"3. ID. ; ID.; ACQUIESCENCE.—Where one of the parties to a contract acquiesces in
the interpretation placed by the other upon a provision of doubtful application, the party
so acquiescing is bound by such interpretation.

"4. ID. ; ID.; ILLUSTRATION. —One of the parties to a contract, being aware at the
time of the execution thereof that the other placed a certain interpretation upon a
provision of doubtful application, nevertheless proceeded, without raising any question
upon the point, to perform the services which he was bound to render under the contract.
Upon the termination of the contract by mutual consent a question was raised as to the
proper interpretation of the doubtful provision. Held: That the party raising such question
had acquiesced in the interpretation placed upon the contract by the other party and was
bound thereby."

The trial court held that the plaintiff was entitled to P6,578.38 or 35 per cent of the net
profits derived by Menzi & Co., Inc., from its contract for fertilizers with the Tabacalera.
This finding in our opinion is not justified by the evidence. This contract was obtained by
Menzi & Co., Inc., shortly before plaintiff's contract with the defendant corporation
expired. Plaintiff tried to get the Tabacalera contract for himself. When this contract was
filled, plaintiff had ceased to work for Menzi & Co., Inc., and he has no right to
participate in the profits derived therefrom.

Appellant's sixth assignment of error is that the trial court erred in finding the value of the
good-will of the fertilizer business in question to be P562,312, and that the plaintiff was
entitled to 35 per cent thereof or P196,709.20. In reaching this conclusion the trial court
unfortunately relied on the opinion of the accountant, Vernon Thompson, who assumed,
erroneously as we have seen, that the plaintiff and Menzi & Co., Inc., were partners; but
even if they had been partners there would have been no good-will to dispose of. The
defendant corporation had a fertilizer business before it entered into any agreement with
the plaintiff; plaintiff's agreement was for a fixed period, five years, and during that time
the business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s
warehouses and after the expiration of plaintiff's contract Menzi & Co., Inc., continued its
fertilizer business, as it had a perfect right to do. There was really nothing to which any
good-will could attach. Plaintiff maintains, however, that the trade-marks used in the
fertilizer business during the time that he was connected with it acquired great value, and
that they have been appropriated by the appellant to its own use. That seems to be the
only basis of the alleged good-will, to which a fabulous valuation was given. As we have
seen, the trade-marks were not new. They had been used by Behn, Meyer & Co. in its
business for other goods and one of them for fertilizer. They belonged to Menzi & Co.,
Inc., and were registered in its name; only the expense of registering the formulas in the
Bureau of Science was charged to the business in which the plaintiff was interested.
These trade-marks remained the exclusive property of Menzi & Co., and the plaintiff had
no interest therein on the expiration of his contract.
The balance due the plaintiff, as appears from Exhibit 52, is P21,633.20. We are satisfied
by the evidence that said balance is correct.

For the foregoing reasons, the decision appealed from is modified and the defendant
corporation is sentenced to pay the plaintiff twenty-one thousand, six hundred and thirty-
three pesos and twenty centavos (P21,633.20), with legal interest thereon from the date of
the filing of the complaint or June 17, 1927, without a special finding as to costs.

SECOND DIVISION
[ G.R. No. 126881, October 03, 2000 ]
HEIRS OF TAN ENG KEE, PETITIONERS, VS. COURT OF APPEALS AND
BENGUET LUMBER COMPANY, REPRESENTED BY ITS PRESIDENT
TAN ENG LAY, RESPONDENTS.

DECISION

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the
Decision[1] dated March 13, 1996 of the former Fifth Division[2] of the Court of Appeals
in CA-G.R. CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the
complaint dismissed.
The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the
common-law spouse of the decedent, joined by their children Teresita, Nena, Clarita,
Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF TAN
ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19,
1990. The complaint,[3] docketed as Civil Case No. 1983-R in the Regional Trial Court of
Baguio City was for accounting, liquidation and winding up of the alleged partnership
formed after World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991,
the petitioners filed an amended complaint[4] impleading private respondent herein
BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended
complaint was admitted by the trial court in its Order dated May 3, 1991.[5]

The amended complaint principally alleged that after the second World War, Tan Eng
Kee and Tan Eng Lay, pooling their resources and industry together, entered into a
partnership engaged in the business of selling lumber and hardware and construction
supplies. They named their enterprise "Benguet Lumber" which they jointly managed
until Tan Eng Kee's death. Petitioners herein averred that the business prospered due to
the hard work and thrift of the alleged partners. However, they claimed that in 1981, Tan
Eng Lay and his children caused the conversion of the partnership "Benguet Lumber"
into a corporation called "Benguet Lumber Company." The incorporation was
purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in
the profits of the business. Petitioners prayed for accounting of the partnership assets, and
the dissolution, winding up and liquidation thereof, and the equal division of the net
assets of Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment[6] on April
12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint adventure which is akin to a particular

partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers
and/or partners in a business venture and/or particular partnership called Benguet Lumber
and as such should share in the profits and/or losses of the business venture or particular
partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to
Benguet Lumber Co. Inc. and as such the heirs or legal representatives of the deceased
Tan Eng Kee have a legal right to share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or
as partner in a particular partnership have descended to the plaintiffs who are his legal
heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of
Benguet Lumber Company Inc. to render an accounting of all the assets of Benguet
Lumber Company, Inc. so the plaintiffs know their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of

Benguet Lumber Company, Inc. until such time that said corporation is finally liquidated
are directed to submit the name of any person they want to be appointed as receiver
failing in which this Court will appoint the Branch Clerk of Court or another one who is
qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in
filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996,
rendered the assailed decision reversing the judgment of the trial court. Petitioners'
motion for reconsideration[7] was denied by the Court of Appeals in a Resolution[8] dated
October 11, 1996.

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan
Eng Lay and Wilborn Tan for the use of allegedly falsified documents in a judicial
proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by the defendants
before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere
employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of
Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against Gloria, Julia,
Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged
falsification of commercial documents by a private individual. On March 20, 1999, the
Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered
judgment[9] dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

I

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE

WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS
BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B)
THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE
WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT
AS TO PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE
DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE

SELF-SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT
BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE
WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE

FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF
BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST
BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED
BEFORE THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY
WERE ALL LIVING AT THE BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE
COMMANDING THE EMPLOYEES OF BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE
SUPERVISING THE EMPLOYEES THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES
DETERMINING THE PRICES OF STOCKS TO BE SOLD TO THE
PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES
MAKING ORDERS TO THE SUPPLIERS (PAGE 18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE

WAS NO PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE LATE TAN
ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH THEIR
WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN
THE ESTABLISHMENT KNOWN IN BAUGIO CITY AS BENGUET LUMBER WAS
STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE

WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS
BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF
BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE
EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP
SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC INSTRUMENT
ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of
Appeals will not be disturbed on appeal if such are supported by the evidence. [10] Our
jurisdiction, it must be emphasized, does not include review of factual issues. Thus:
Filing of petition with Supreme Court.-A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The petition shall raise only
questions of law which must be distinctly set forth.[11] [italics supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to
analyze the evidentiary basis on which the lower court rendered judgment. Review of
factual issues is therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is
manifestly mistaken, absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case,
and such findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of

facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly
considered, will justify a different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on
which they are based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of
evidence but such findings are contradicted by the evidence on record. [12]
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs
mentioned only the existence of a partnership, the Court in turn went beyond that by
justifying the existence of a joint adventure.

When mention is made of a joint adventure, it would presuppose parity of standing

between the parties, equal proprietary interest and the exercise by the parties equally of
the conduct of the business, thus:

xxx    xxx    xxx    xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet
Lumber before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6)
this is because during the war, the entire stocks of the pre-war Benguet Lumber were
confiscated if not burned by the Japanese. After the war, because of the absence of capital
to start a lumber and hardware business, Lay and Kee pooled the proceeds of their
individual businesses earned from buying and selling military supplies, so that the
common fund would be enough to form a partnership, both in the lumber and hardware
business. That Lay and Kee actually established the Benguet Lumber in Baguio City, was
even testified to by witnesses. Because of the pooling of resources, the post-war Benguet
Lumber was eventually established. That the father of the plaintiffs and Lay were
partners, is obvious from the fact that: (1) they conducted the affairs of the business
during Kee's lifetime, jointly, (2) they were the ones giving orders to the employees, (3)
they were the ones preparing orders from the suppliers, (4) their families stayed together
at the Benguet Lumber compound, and (5) all their children were employed in the
business in different capacities.

xxx    xxx    xxx    xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was
no firm account, no firm letterheads submitted as evidence, no certificate of partnership,
no agreement as to profits and losses, and no time fixed for the duration of the
partnership. There was even no attempt to submit an accounting corresponding to the
period after the war until Kee's death in 1984. It had no business book, no written account
nor any memorandum for that matter and no license mentioning the existence of a
partnership [citation omitted].

Also, the exhibits support the establishment of only a proprietorship. The certification
dated March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the only registered
owner of the Benguet Lumber and Hardware. His application for registration, effective
1954, in fact mentioned that his business started in 1945 until 1985 (thereafter, the
incorporation). The deceased, Kee, on the other hand, was merely an employee of the
Benguet Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3".
In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was
similarly listed only as an employee; precisely, he was on the payroll listing. In the
Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.

xxx    xxx    xxx    xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted
in any form, but when an immovable is constituted, the execution of a public instrument
becomes necessary. This is equally true if the capitalization exceeds P3,000.00, in which
case a public instrument is also necessary, and which is to be recorded with the Securities
and Exchange Commission. In this case at bar, we can easily assume that the business
establishment, which from the language of the appellees, prospered (pars. 5 & 9,
Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real
properties and to the fact that it is now a compound. The execution of a public
instrument, on the other hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and
the members of his family. There is no proof either that the capital assets of the
partnership, assuming them to be in existence, were maliciously assigned or transferred
by Lay, supposedly to the corporation and since then have been treated as a part of the
latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in
the bunk house in Trinidad, but within the compound of the lumber establishment, as
testified to by Tandoc; 2) that both Lay and Kee were seated on a table and were
"commanding people" as testified to by the son, Elpidio Tan; 3) that both were
supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was
supposedly being told by Kee that the proceeds of the 80 pieces of the G.I. sheets were
added to the business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either

oral or written. However, if it involves real property or where the capital is P3,000.00 or
more, the execution of a contract is necessary; 2) the capacity of the parties to execute the
contract; 3) money property or industry contribution; 4) community of funds and interest,
mentioning equality of the partners or one having a proportionate share in the benefits;
and 5) intention to divide the profits, being the true test of the partnership. The intention
to join in the business venture for the purpose of obtaining profits thereafter to be
divided, must be established. We cannot see these elements from the testimonial evidence
of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had
adjudged that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint
adventure. In this connection, we have held that whether a partnership exists is a factual
matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain
inquiries relative to the correctness of the assessment of the evidence by the court a quo.
[13]
 Inasmuch as the Court of Appeals and the trial court had reached conflicting
conclusions, perforce we must examine the record to determine if the reversal was
justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in
Benguet Lumber. A contract of partnership is defined by law as one where:
xxx 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.

Two or more persons may also form a partnership for the exercise of a profession. [14]
Thus, in order to constitute a partnership, it must be established that (1) two or more
persons bound themselves to contribute money, property, or industry to a common fund,
and (2) they intend to divide the profits among themselves.[15] The agreement need not be
formally reduced into writing, since statute allows the oral constitution of a partnership,
save in two instances: (1) when immovable property or real rights are contributed, [16] and
(2) when the partnership has a capital of three thousand pesos or more. [17] In both cases, a
public instrument is required.[18] An inventory to be signed by the parties and attached to
the public instrument is also indispensable to the validity of the partnership whenever
immovable property is contributed to the partnership.[19]

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint
adventure, which it said is akin to a particular partnership.[20] A particular partnership is
distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and can be individually liable
therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful termination may continue for a number of
years; a partnership generally relates to a continuing business of various transactions of a
certain kind.[21]
A joint adventure "presupposes generally a parity of standing between the joint co-
ventures or partners, in which each party has an equal proprietary interest in the capital or
property contributed, and where each party exercises equal rights in the conduct of the
business."[22] Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing
Corporation, et. al.,[23] we expressed the view that a joint adventure may be likened to a
particular partnership, thus:
The legal concept of a joint adventure is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for some
temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable
from the partnership, since their elements are similar-community of interest in the
business, sharing of profits and losses, and a mutual right of control. (Blackner v.
McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939];
Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main
distinction cited by most opinions in common law jurisdiction is that the partnership
contemplates a general business with some degree of continuity, while the joint adventure
is formed for the execution of a single transaction, and is thus of a temporary nature.
(Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595,
71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a
joint adventure is a form of partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint adventure with others. (At p. 12, Tuazon v.
Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the
articles of partnership but there is none. The alleged partnership, though, was never
formally organized. In addition, petitioners point out that the New Civil Code was not yet
in effect when the partnership was allegedly formed sometime in 1945, although the
contrary may well be argued that nothing prevented the parties from complying with the
provisions of the New Civil Code when it took effect on August 30, 1950. But all that is
in the past. The net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A review of the record
persuades us that the Court of Appeals correctly reversed the decision of the trial court.
The evidence presented by petitioners falls short of the quantum of proof required to
establish a partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan
Eng Lay, could have expounded on the precise nature of the business relationship
between them. In the absence of evidence, we cannot accept as an established fact that
Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of
establishing a partnership. The testimonies to that effect of petitioners' witnesses is
directly controverted by Tan Eng Lay. It should be noted that it is not with the number of
witnesses wherein preponderance lies;[24] the quality of their testimonies is to be
considered. None of petitioners' witnesses could suitably account for the beginnings of
Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was
related to Matilde Abubo.[25] He stated that when he met Tan Eng Kee after the liberation,
the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly
owned by both brothers.[26] Tan Eng Lay, however, denied knowledge of this meeting or
of the conversation between Peralta and his brother.[27] Tan Eng Lay consistently testified
that he had his business and his brother had his, that it was only later on that his said
brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-
possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a
partnership.[28]

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was
allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a
partnership is that the partners share in the profits and losses.[29] Each has the right to
demand an accounting as long as the partnership exists.[30] We have allowed a scenario
wherein "[i]f excellent relations exist among the partners at the start of the business and
all the partners are more interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible."[31] But in the situation
in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is
presumed to take ordinary care of his concerns.[32] As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second
place, she did not furnish any help or intervention in the management of the theatre. In
the third place, it does not appear that she has even demanded from defendant any
accounting of the expenses and earnings of the business. Were she really a partner, her
first concern should have been to find out how the business was progressing, whether the
expenses were legitimate, whether the earnings were correct, etc. She was absolutely
silent with respect to any of the acts that a partner should have done; all that she did was
to receive her share of P3,000.00 a month, which cannot be interpreted in any manner
than a payment for the use of the premises which she had leased from the owners.
Clearly, plaintiff had always acted in accordance with the original letter of defendant of
June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real
contract between them.[33] [italics supplied]
A demand for periodic accounting is evidence of a partnership.[34] During his lifetime,
Tan Eng Kee appeared never to have made any such demand for accounting from his
brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of
payrolls purporting to show that Tan Eng Kee was an ordinary employee of Benguet
Lumber, as it was then called. The authenticity of these documents was questioned by
petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his
wife and children. As aforesaid, the criminal cases were dismissed for insufficiency of
evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received sums as wages
of an employee. In connection therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:

(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 which
the returns are derived;

(4) The receipt by a person of a share of the profits of a business is 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 installment or otherwise;

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

    (b)   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.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only
an employee, not a partner. Even if the payrolls as evidence were discarded, petitioners
would still be back to square one, so to speak, since they did not present and offer
evidence that would show that Tan Eng Kee received amounts of money allegedly
representing his share in the profits of the enterprise. Petitioners failed to show how much
their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet Lumber
Company for any particular period. Hence, they failed to prove that Tan Eng Kee and
Tan Eng Lay intended to divide the profits of the business between themselves, which is
one of the essential features of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a
partnership from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were
commanding the employees; that both were supervising the employees; that both were
the ones who determined the price at which the stocks were to be sold; and that both
placed orders to the suppliers of the Benguet Lumber Company. They also point out that
the families of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber
Company compound, a privilege not extended to its ordinary employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers
and privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in
Benguet Lumber for the following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to
his subordinates. So long, therefore, that an employee's position is higher in rank, it is not
unusual that he orders around those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the
owner, can order materials from suppliers for and in behalf of Benguet Lumber.
Furthermore, even a partner does not necessarily have to perform this particular task. It
is, thus, not an indication that Tan Eng Kee was a partner.

(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and
this privilege was not accorded to other employees, the undisputed fact remains that Tan
Eng Kee is the brother of Tan Eng Lay. Naturally, close personal relations existed
between them. Whatever privileges Tan Eng Lay gave his brother, and which were not
given the other employees, only proves the kindness and generosity of Tan Eng Lay
towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarrelling with Tan Eng Lay in
connection with the pricing of stocks, this does not adequately prove the existence of a
partnership relation between them. Even highly confidential employees and the owners of
a company sometimes argue with respect to certain matters which, in no way indicates
that they are partners as to each other.[35]
In the instant case, we find private respondent's arguments to be well-taken. Where
circumstances taken singly may be inadequate to prove the intent to form a partnership,
nevertheless, the collective effect of these circumstances may be such as to support a
finding of the existence of the parties' intent.[36] Yet, in the case at bench, even the
aforesaid circumstances when taken together are not persuasive indicia of a partnership.
They only tend to show that Tan Eng Kee was involved in the operations of Benguet
Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a
member of the family, he occupied a niche above the rank-and-file employees. He would
have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the
Benguet Lumber Company compound. He would have moral, if not actual, superiority
over his fellow employees, thereby entitling him to exercise powers of supervision. It
may even be that among his duties is to place orders with suppliers. Again, the
circumstances proffered by petitioners do not provide a logical nexus to the conclusion
desired; these are not inconsistent with the powers and duties of a manager, even in a
business organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or

liquidation to speak of. Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of
Appeals is hereby AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION
[ G.R. No. 127405, September 20, 2001 ]
MARJORIE TOCAO AND WILLIAM T. BELO, PETITIONERS, VS. COURT
OF APPEALS AND NENITA A. ANAY, RESPONDENTS.
 RESOLUTION

YNARES-SANTIAGO, J.:

The inherent powers of a Court to amend and control its processes and orders so
as to make them conformable to law and justice includes the right to reverse itself,
especially when in its honest opinion it has committed an error or mistake in judgment,
and that to adhere to its decision will cause injustice to a party litigant. [1]

On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion
for Reconsideration of our Decision dated October 4, 2000. They maintain that there
was no partnership bettween petitioner Belo, on the one hand, and respondent Nenita
A. Anay, on the other hand; and that the latter being merely an employee of petitioner
Tocao.

After a careful review of the evidence presented, we are convinced that, indeed,
petitioner Belo acted merely as guarantor of Geminesse Enterprise. This was
categorically affirmed by respondent's own witness, Elizabeth Bantilan, during her cross-
examination. Furthermore, Bantilan testified that it was Peter Lo who was the
company's financier. Thus:
Q You mentioned a while ago the name William Belo. Now, what is the role of William
Belo with Geminesse Enterprise?
A William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.

Q What do you mean by guarantor?

A He guarantees the stocks that she owes somebody who is Peter Lo and he acts as
guarantor for us. We can borrow money from him.

Q You mentioned a certain Peter Lo. Who is this Peter Lo?

A Peter Lo is based in Singapore.

Q What is the role of Peter Lo in the Geminesse Enterprise?

A He is the one fixing our orders that open the L/C.

Q You mean Peter Lo is the financier?

A Yes, he is the financier.

Q And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I
correct?
A Yes, sir.[2]
 The foregoing was neither refuted nor contradicted by respondent's evidence. It
should be recalled that the business relationship created between petitioner Tocao and
respondent Anay was an informal partnership, which was not even recorded with the
Securities and Exchange Commission. As such, it was understandable that Belo, who was
after all petitioner Tocao's good friend and confidante, would occasionally participate in
the affairs of the business, although never in a formal or official capacity.[3] Again,
respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence in
Geminesse Enterprise's meetings was merely as guarantor of the company and to help
petitioner Tocao.[4]

Furthermore, no evidence was presented to show that petitioner Belo participated in

the profits of the business enterprise. Respondent herself professed lack of knowledge
that petitioner Belo received any share in the net income of the partnership. [5] On the
other hand, petitioner Tocao declared that petitioner Belo was not entitled to any share
in the profits of Geminesse Enterprise.[6] With no participation in the profits, petitioner
Belo cannot be deemed a partner since the essence of a partnership is that the partners
share in the profits and losses.[7]

Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise,

respondent had no cause of action against him and her complaint against him should
accordingly be dismissed.

As regards the award of damages, petitioners argue that respondent should be deemed
in bad faith for failing to account for stocks of Geminesse Enterprise amounting to
P208,250.00 and that, accordingly, her claim for damages should be barred to that
extent. We do not agree. Given the circumstances surrounding private respondent's
sudden ouster from the partnership by petitioner Tocao, her act of withholding
whatever stocks were in her possession and control was justified, if only to serve as
security for her claims against the partnership. However, while we do not agree that the
same renders private respondent in bad faith and should bar her claim for damages, we
find that the said sum of P208,250.00 should be deducted from whatever amount is
finally adjudged in her favor on the basis of the formal account of the partnership affairs
to be submitted to the Regional Trial Court.

WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners

is PARTIALLY GRANTED. The Regional Trial Court of Makati is hereby ordered
to DISMISS the complaint, docketed as Civil Case No. 88-509, as against petitioner
William T. Belo only. The sum of P208,250.00 shall be deducted from whatever amount
petitioner Marjorie Tocao shall be held liable to pay respondent after the formal
accounting of the partnership affairs.

SO ORDERED.

[ G.R. No. L-12541, August 28, 1959 ]

ROSARIO U. YULO, ASSISTED BY HER HUSBAND JOSE C. YULO,
PLAINTIFFS AND APPELLANTS, VS. YANG CHIAO SENG, DEFENDANT
AND APPELLEE.

DECISION

LABRADOR, J.:

Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A.
Tan, presiding, dismissing plaintiff's complaint as well as defendant's counterclaim. The
appeal is prosecuted by plaintiff.

The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to
the plaintiff Mrs. Rosario U. Yulo, proposing the formation of a partnership between
them to run and operate a theatre on the premises occupied by former Cine Oro afc Plaza
Sta. Cruz, Manila. The principal conditions of the offer are (1) that Yang Chiao Seng
guarantees Mrs. Yulo a monthly participation of P3,000, payable quarterly in advance
within the first 15 days of each quarter, (2) that the partnership shall be for a period of
two years and six months, starting from July 1, 1945 to December 31, 1947, with the
condition that if the land is expropriated or rendered impracticable for the business, or if
the owner constructs a permanent building thereon, or Mrs. Yulo's right of lease is
terminated by the owner, then the partnership shall be terminated even if the period for
which the partnership was agreed to be established has not yet expired; (3) that Mrs. Yulo
is authorized personally to conduct such business in the lobby of the building as is
ordinarily carried on in lobbies of theatres in operation, provided the said business may
not obstruct the free ingress and egrees of patrons of the theatre; (4) that after December
31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but that
if the partnership agreement is terminated before the lapse of one and a half years period
under any of the causes mentioned in paragraph (2), then Yang Chiao Seng shall have the
right to remove and take away all improvements that the partnership may place in the
premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a
partnership agreement establishing the "Yang & Company, Limited," which was to exist
from July 1, 1945 to December 31, 1947. It states that it will conduct and carry on the
business of operating a theatre for the exhibition of motion and talking pictures. The
capital is fixed at P100,000, P80,000 of which is to be furnished by Yang Chiao Seng and
P20,000, by Mrs. Yulo. All gains and profits are to be distributed among the partners in
the same proportion as their capital contribution, and the liability of Mrs. Yulo, in case of
loss, shall be limited to her capital contribution (Exh. "B'").

In June, 1946, they executed a supplementary agreement, extending the partnership for a
period of three years beginning January 1, 1948 to December 31, 1950. The benefits are
to be divided between them at the rate of 50-50 and after December 31, 1950, the
showhouse building shall belong exclusively to the second party, Mrs. Yulo.

The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from
Emilia Carrion Santa Marina and Maria Carrion Santa Marina. In the contract of lease it
was stipulated that the lease shall continue for an indefinite period of time, but that after
one year the lease may be cancelled by either party by written notice to the other party at
least 90 days before the date of cancellation. The last contract was executed between the
owners and Mrs. Yulo on April 5, 1948. But on April 12, 1949, the the attorney for the
owners notified Mrs. Yulo of the owner's desire to cancel the contract of lease on July 31,
1949. In view of the above notice, Mrs. Yulo and her husband brought a civil action in
the Court of First Instance of Manila on July 3, 1949 to declare the lease of the premises
one for an indefinite period. On August 17, 1949, the owners on their part brought an
action in the Municipal Court of Manila against Mrs. Yulo and her husband and Yang
Chiao Seng to eject them from the premises. On February 9, 1950, the Municipal Court
of Manila rendered judgment ordering the ejectment of Mrs. Yulo and Mr. Yang. The
judgment was appealed. In the Court, of First Instance, the two cases were afterwards
heard jointly, and judgment was rendered dismissing the complaint of Mrs. Yulo and her
husband, and declaring the contract of lease of the premises terminated as of July 31,
1949, and fixing the reasonable monthly rentals of said premises at P100. Both parties
appealed from said decision and the Court of Appeals, on April 30, 1955, affirmed the
judgment.

On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the
profits of the business. Yang answered the letter saying that upon the advice of his
counsel he had to suspend the payment (of the rentals) because of the pendency of the
ejectment suit by the owners of the land against Mrs. Yulo. In this letter Yang alleges that
inasmuch as he is a sublessee and inasmuch as Mrs. Yulo has not paid to the lessors the
rentals from August, 1949, he was retaining the rentals to make good to the landowners
the rentals due from Mrs. Yulo in arrears (Exh. "E").
In view of the refusal of Yang to pay to her the amount agreed upon, Mrs. Yulo instituted
this action on May 26, 1954, alleging the existence of a partnership between them, and
that defendant Yang Chiao Seng has refused to pay her share from December, 1949 to
December, ,1950; that after December 81, 1950 the partnership between Mrs. Yulo and
Yang terminated, as a result of which, plaintiff became the absolute owner of the building
occupied by the Cine Astor; that the reasonable rental that the defendant should pay
therefor from January, 1951 is P5,000; that the defendant has acted maliciously and
refuses to pay the participation of the plaintiff in the profits of the business amounting to
P35,000 from November, 1949 to October, 1950, and that as a result of such bad faith
and malice on the part of the defendant, Mrs. Yulo has suffered damages in the amount of
P160,000 and exemplary damages to the extent of P5,000. The prayer includes a demand
for the payment of the above sums plus the sum of P10,000 for attorney's fees.

In answer to the complaint, defendant alleges that the real agreement between the
plaintiff and the defendant was one of lease and not of partnership; that the partnership
was adopted as a subterfuge to get around the prohibition contained in the contract of
lease between the owners and the plaintiff against the sublease of the said property. As to
the other claims, he denies the same and alleges that the fair rental value of the land is
only P1,100. By way of counterclaim he alleges that by reason of an attachment issued
against the properties of the defendant the latter has suffered damages amounting to
P100,000.

The first hearing was had on April 19, 1955, at which time only the plaintiff appeared.
The court heard evidence of the plaintiff in the absence of the defendant and thereafter
rendered judgment ordering the defendant to pay to the plaintiff P41,000 for her
participation in the business up to December, 1950; P5,000 as monthly rental for the use
and occupation of the building from January 1, 1951 until defendant vacates the same,
and P300 for the use and occupation of the lobby from July 1, 1945 until defendant
vacates the property. This decision, however, was set aside on a motion for
reconsideration. In said motion it is claimed that defendant failed to appear at the hearing
because of his honest belief that a joint petition for postponement filed by both parties, in
view of a possible amicable settlement, would be granted; that in view of the decision of
the Court of Appeals in two previous cases between the owners of the land and the
plaintiff Rosario Yulo, the plaintiff has no right to claim the alleged participation in the
profits of the business, etc. The court, finding the above motion well-founded, set aside
its decision and a new trial was held. After trial the court rendered the decision making
the following findings: that it is not true that a partnership was created between the
plaintiff and the defendant because defendant has not actually contributed the sum
mentioned in the Articles of Partnership, or any other amount; that the real agreement
between the plaintiff and the defendant is not one of partnership but one of lease for the
reason that under the agreement the plaintiff did not share either in the profits or in the
losses of the business as required by Article 1769 of the Civil Code; and that the fact that
plaintiff was granted a "guaranteed participation" in the profits also belies the supposed
existence of a partnership between them. It, therefore, denied plaintiff's claim for
damages or supposed participation in the profits.

As to her claim for damages for the refusal of the defendant to allow the use of the
supposed lobby of the theatre, the court after ocular inspection found that the said lobby
was a very narrow space leading to the balcony of the theatre which could not be used for
business purposes under existing ordinances of the City of Manila because it would
constitute a hazard and danger to the patrons of the theatre. The court, therefore,
dismissed the complaint; so did it dismiss the defendant's counter-claim, on the ground
that defendant failed to present sufficient evidence to sustain the same. It is against this
decision that the appeal has been prosecuted by plaintiff to this Court.

The first assignment of error imputed to the trial court is its order setting aside its former
decision and allowing a new trial. This assignment of error is without merit. As the
parties had agreed to postpone the trial because of a probable amicable settlement, the
plaintiff could not take advantage of defendant's absence at the time fixed for the hearing.
The lower court, therefore, did not err in setting aside its former judgment. The final
result of the hearing shown by the decision indicates that the setting aside of the previous
decision was in the interest of justice.

In the second assignment of error plaintiff-appellant claims that the lower court erred in
not striking out the evidence offered by defendant-appellee to prove that the relation
between him and the plaintiff is one of sublease and not of partnership. The action of the
lower court in admitting evidence is justified by the express allegation in the defendant's
answer that the agreement set forth in the complaint was one of lease and not of
partnership, and that the partnership formed was adopted in view of a prohibition
contained in plaintiff's lease against a sublease of the property.

The most important issue raised in the appeal is that contained in the fourth assignment of
error, to the effect that the lower court erred in holding that the written contracts, Exhs.
"A", "B", and "C, between plaintiff and defendant, are one of lease and not one 6f
partnership. We have gone over the evidence and we fully agree with the conclusion of
the trial court that the agreement was a sublease, not a partnership. The following are the
requisites of partnership: (1) two or more persons who bind themselves to contribute
money, property, or industry to a common fund; (2) intention on the part of the partners
to divide the profits among themselves. (Art. 1767, Civil Code.)

In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second
place, she did not furnish any help or intervention in the management of the theatre. In
the third place, it does not appear that she has ever demanded from defendant any
accounting of the expenses and earnings of the business. Were she really a partner, her
first concern should have been to find out how the business was progressing, whether the
expenses were legitimate, whether the earnings were correct, etc. She was absolutely
silent with respect to any of the acts that a partner should have done; all that she did was
to receive her share of P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the owners. Clearly,
plaintiff had always acted in accordance with the original letter of defendant of June
17,1945 (Exh. "A"), which shows that both parties considered this offer as the real
contract between them.

Plaintiff claims the sum of P41,000 as representing her share or participation in the
business from December, 1949. But the original letter of the defendant, Exh. "A",
expressly states that the agreement between the plaintiff and the defendant was to end
upon the termination of the right of the plaintiff to the lease. Plaintiff's right having
terminated in July, 1949 as found by the Court of Appeals, the partnership agreement or
the agreement for her to receive a participation of P3,000 automatically ceased as of said
date.

We find no error in the judgment of the court below and we affirm it in toto, with costs
against plaintiff-appellant.

[ G.R. No. L-9996, October 15, 1957 ]

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA AND FRANCISCA
EVANGELISTA, PETITIONERS, VS. THE COLLECTOR OF INTERNAL
REVENUE AND THE COURT OP TAX APPEALS, RESPONDENTS.

DECISION

CONCEPCION, J.:

This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca

Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part of
which reads:

"For all the foregoing, we hold that the petitioners are liable for the income tax, real
estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in the total amount of 
P6,878.34, which is hereby affirmed and the petition for review filed by petitioners is
hereby dismissed with costs against petitioners." 
It apears from the stipulation submitted by the parties:

"1. That the petitioners borrowed from their father the sum of P59,140.00 which amount
together with their personal monies  was used by them for the purpose of buying real
properties,

"2. That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area
of 3,718.40 sq, m. including: improvements thereon for the sum of P100,000.00; this
property has an assessed value of P57,517.00  as of  1948;

"3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with
an aggregate area of 3,718.40 sq. m. including improvements thereon for P18,000.00; this
property has an  assessed  value of P8,255.00 as  of  1948;

"4, That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948;

"5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m.
including improvements thereon for P237.234.14. This property has an assessed value of
P59,140.00 as of 1948;

"6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive
rents; to issue receipts therefor; in default of such payment, to bring' suits against the
defaulting tenant; to sign all letters, contracts, etc., for and in their behalf, and to endorse
and deposit all notes and checks for them;

 
"7. That after having bought the above-mentioned real properties, the petitioners had the
same rented or leased to various tenants;

"8. That from the month of March, 1945 up to and including December, 1945, the total
amount collected as rents on their real properties was P9,599.00 while the- expenses
amounted to P3.650.00 thereby leaving them a net rental income of P5,948.33;

"9. That in 1940, they realized a gross rental income in the sum of P24,786.30, out of
which amount was deducted the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;

"10. That in 1948 they realized a gross rental income of P17,453.00 out of the which
amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net
rental income of P12,615.35." 

It further appears that on September 24, 1954, respondent Collector of Internal Revenue
demanded the payment, of income tax on corporations, real estate dealer's fixed  tax  and 
corporation  residence  tax  for  the  years 1945-1949, computed, according to the 
assessments made by said officer, as follows:

                                                                                                                                                 
Income Taxes
1945 ....................................................... P614.84 
1946 ...................................................... 1,144.71 
1947 ........................................................ 910.34 
1948 ....................................................... 1,912.30 
1949 ..................................................... _1,575.90 
  Total including surcharge and compromise ....P6,157.09
    
  Real Estate Dealer's Fixed Tax  
1946 …………………………………………………………. 
P37.50
1947 ………….……………………………………………… 150.00 
1948 ………….……………………………………………… 150.00 
1949 …..………….………………………………………… _150.00 
  Total including penalty………………..P527.50
    
  Residence Taxes of Corporation  
 1945 ………………………………………………………… P38.75 
1946 ……………………….……………………………….. 38.75 
1947 ……………………….……………………………….. 38.75 
1948 ……………………….……………………………….. 38.75 
1949 ……………………….……………………………….. _38.75 
  Total including surchage...........................P193.75
  Total Taxes Due ........................................6,878.34

Said letter of demand and the corresponding assessments were delivered to petitioners on
December 8, 1954, whereupon they instituted the present case in the Court of Tax
Appeals, with a prayer that "the decision of the respondent contained in. his letter of
demand dated September 24, 1954" be reversed, and that they be absolved from the
payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals rendered the above-mentioned
decision for the respondent, and, a petition for reconsideration and new trial having been
subsequently denied, the case is now before Us for review at the instance of the
petitioners.

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 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 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 (compañias colectivas), 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 participacion), associations
or insurance companies, but does not include duly registered general copartnerships
(compañias 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 dividing1 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 P18,000.000.    This was soon followed, on April 23,
1944, by the 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  transactions   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 Evangelista, 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 Evangelista 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.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality independent
of that of its members, did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was correctly rejected by the
Court of Tax Appeals.

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(6) 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 conformity with the usual
requirements of the law on partnerships, in order that one couid be deemed constituted
for purposes of the tax on corporations. Again, pursuant to said section 84(6), the term
"corporation" includes, among other, "joint accounts, (cuentas en participation)" and
"associations", none of which his 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 copartnerships"—which are possessed of the
aforementioned personality—have been expressly excluded by law (sections 24 and 84
[6]) from the connotation of the term "corporation." It may not be amiss to add that
petitioners' allegation to the effect that their liability in connection with the leasing of the
lots above referred to, under the management of one person—even if true, on which we
express no opinion—tends to increase the similarity between the nature of their venture
and that of corporations, and is, therefore, an additional argument in favor of the
imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed
differently from "partnerships". By specific provision of said laws, such "corporations"
include "associations, joint-stock companies and insurance companies." However, the
term "association" is not used in the aforementioned laws

“* * * in any narrow or technical sense. It includes any organization, created for the
transaction of designated affairs, or the attainment of some object, which, like a
corporation, continues notwithstanding that its members or participants change, and the
affairs of which, like corporate affairs, are conducted by a single individual, a committee,
a board, or some other group, acting in a representative capacity. It is immaterial whether
such organization is created by an agreement, a declaration of trust, a statute, or
otherwise. It includes a voluntary association, a joint-stock corporation or company, a
'business* trusts a 'Massachusetts' trust, a 'common law' trust, and 'investment' trust
(whether of the fixed or the management type), an interinsurance exchange operating
through an attorney in fact, a partnership association, and any other type of organization
(by whatever name known) which is not, within the meaning oi' the Code, a, trust or an
estate, or a partnership." (7A Merten's Law of Federal Income Taxation, p. 788; italics
ours.)

Similarly, the American Law.

“* * * provides its own concept of a partnership. Under the term 'partnership' it

includes not only a partnership as known at 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;
italics 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;   italics 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.

As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:

"Entities liable to residence tax.—Every corporation, no matter how created or

organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five pesos and an annual additional tax
which, in no case, shall exceed one thousand pesos, in accordance with the following
schedule:    *    *    *.

"The term 'corporation' as used in this Act includes joint-stock company, partnership,

joint account (cuentas en participacion), association or insurance company, no matter
how created or organized." (italics ours.)

Considering that the pertinent part of this provision is analogous to that of sections 24
and 84 (b) of our National Internal Revenue Code (Commonwealth Act No. 466), and
that the latter was approved on June 15, 1939, the day immediately after the approval of
said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation” and "partnership" are used in both statutes with substantially the same
meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties
above mentioned for a period of over twelve years, and that the yearly gross rentals of
said properties from 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject
to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real
estate dealers," inasmuch as, pursuant to section 194(s) thereof:

" 'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding
himself out as a full or part-time dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of three thousand pesos or
more a year.    *    *    *." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with
costs against the petitioners herein.    It is so ordered.

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

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.

DECISION

BARREDO, J.:

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 afore-named minors
(See p. 3, BIR rec.).

"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. 34-31, 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:  
                                                        
"Year Investment Account Land Account Building Account
1949   P87,860   P 17,590.00
1950 P 24,657.65 128,566.72 96,076.26
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 shown.  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 add 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 

"Net income as per 

investigation................................................... P 40,209.89 

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 Exh. 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 vs. 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 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 inheritances 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? 

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 proceeds
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 cases of their respective shares of the profits of their
common business as reported by 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 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 tantamount 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 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 notnecessarily '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 conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted
for purposes of the tax on corporations.  Again, pursuant to said section 84(b), the term
'corporation' includes, among other, 'joint accounts, (cuentasenparticipation)' 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.' * * * 

"* * *  * * * 

"Similarly, the American Law

'* * * provides itsownconcept of a partnership.  Under the term 'partnership' it

includes notonly a partnership as known at 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;
Italics supplied.)

'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; italics ours.)

"For purposes of the tax on corporations, ourNational Internal Revenue Code,

includesthesepartnerships — with the exception only of duly registered general co-
partnerships — 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 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 allege:

'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 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 excess income taxes in the
case of herein petitioners has already lapsed, 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 affirmed, with costs against petitioners.

THIRD DIVISION
[ G.R. No. 172690, March 03, 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 Certiorari[1] under Rule 45 of the

Rules of Civil Procedure, assailing the Court of Appeals (CA) Decision [2] dated June 29,
2005, which reversed and set aside the decision[3] 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
Complaint[4] 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 P50,000.00 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 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 P50,000.00 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:

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 Resolution [6] 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 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]

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 Appeals[14] 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:

(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 P50,000.00, 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 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.

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.

[ G.R. No. L-24193, June 28, 1968 ]

MAURICIO AGAD, PLAINTIFF-APPELLANT VS. SEVERINO MABATO &
MABATO & AGAD COMPANY, DEFENDANTS-APPELLEES.

DECISION

CONCEPCION, C.J.:

In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court
of First Instance of Davao, we are called upon to determine the applicability of Article
1773 of our Civil Code to the contract of partnership on which the complaint herein is
based.

Alleging that he and defendant Severino Mabato are - pursuant to a public instrument

dated August 29, 1952, copy of which is attached to the complaint as Annex "A" -
partners in a fishpond business, to the capital of which Agad contributed P1,000, with the
right to receive 50% of the profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts of the operations of the
partnership; and that, despite repeated demands, Mabato had failed and refused to render
accounts for the years 1957 to 1963, Agad prayed in his complaint
against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be
rendered sentencing Mabato to pay him (Agad) the sum of P14,000, as his share in the
profits of the partnership for the period from 1957 to 1963, in addition to P1,000 as
attorney's fees, and ordering the dissolution of the partnership, as well as the winding up
of its affairs by a receiver to be appointed therefor.

In his answer, Mabato admitted the formal allegations of the complaint and denied the
existence of said partnership, upon the ground that the contract therefor had not been
perfected, despite the execution of Annex "A", because Agad had allegedly failed to give
his P1,000 contribution to the partnership capital.  Mabato prayed, therefore, that the
complaint be dismissed; that Annex "A" be declared void ab initio; and that Agad be
sentenced to pay actual, moral and exemplary damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint
states no cause of action and that the lower court had no jurisdiction over the subject
matter of the case, because it involves principally the determination of rights over public
lands.  After due hearing, the court issued the order appealed from, granting the motion to
dismiss the complaint for failure to state a cause of action.  This conclusion was
predicated upon the theory that the contract of partnership, Annex "A", is null and void,
pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond referred in
said instrument had not been attached thereto.  A reconsideration of this order having
been denied, Agad brought the matter to us for review by record on appeal.

Articles 1771 and 1773 of said Code provide:

"Art. 1771. A partnership may be constituted in any form, except where

immovable property or real rights are contributed thereto, in which case a public
instrument shall be necessary.
"Art. 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if inventory of said property is not made, signed by the parties, and
attached to the Public instrument."

The issue before us hinges on whether or not "immovable property or real rights" have
been contributed to the partnership under consideration.  Mabato alleged and the lower
court held that the answer should be in the affirmative, because "it is really inconceivable
how a partnership engaged in the fishpond business could exist without said fishpond
property (being) contributed to the partnership." It should be noted, however, that, as
stated in Annex "A" the partnership was established "to operate a fishpond", not to"
engage in a fishpond business".  Moreover, none of the partners contributed either a
fishpond or a real right to any fishpond.  Their contributions were limited to the sum of
P1,000 each.  Indeed, Paragraph 4 of the Annex "A" provides:

"That the capital of the said partnership is Two Thousand (P2,000.00) Pesos
Philippine Currency, of which One Thousand (P1,000.00) pesos has been contributed
by Severino Mabato and One Thousand (P1,000.00) Pesos has been contributed by
Mauricio Agad.
x        x          x          x          x          x          x          x          "

The operation of the fishpond mentioned in Annex "A" was the purpose of the

partnership.  Neither said fishpond nor a real right thereto was contributed to the
partnership or became part of the capital thereof, even if a fishpond or a real right thereto
could become part of its assets.

WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that,
the order appealed from should be, as it is hereby set aside and the case remanded to the
lower court for further proceedings, with the costs of this instance against defendant-
appellee, Severino Mabato.

IT IS SO ORDERED.

THIRD DIVISION
[ G.R. No. 134559, December 09, 1999 ]
ANTONIA TORRES, ASSISTED BY HER HUSBAND, ANGELO TORRES;
AND EMETERIA BARING, PETITIONERS, VS. COURT OF APPEALS AND
MANUEL TORRES, RESPONDENTS.

DECISION

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. 
That the terms of a contract turn out to be financially disadvantageous to them will not
relieve them of their obligations therein.  The lack of an inventory of real property will
not ipso facto release the contracting partners from their respective obligations to each
other  arising from acts executed in accordance with their agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998
Decision[1] Second Division of the Court of Appeals[2] (CA) in CA-GR CV No. 42378 and its
June 25, 1998 Resolution denying reconsideration.  The assailed Decision affirmed the
ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which
disposed as follows:
"WHEREFORE, for all the foregoing considerations, the Court, finding for the
defendant and against the plaintiffs, orders the dismissal of the plaintiff's complaint. 
The counterclaims of the defendant are likewise ordered dismissed.  No pronouncement
as to costs."[3]

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint
venture agreement" with Respondent Manuel Torres for the development of a parcel of
land into a subdivision.  Pursuant to the contract, they executed a Deed of Sale covering
the said parcel of land in favor of respondent, who then had it registered in his name. 
By mortgaging the property, respondent obtained from Equitable Bank a loan of
P40,000 which, under the Joint Venture Agreement, was to be used for the
development of the subdivision.[4] All three of them also agreed to share the proceeds
from the sale of the subdivided lots.

The project did not push through, and the land was subsequently foreclosed by the
bank.

According to petitioners, the project failed because of "respondent's lack of funds or

means and skills." They add that respondent used the loan not for the development of
the subdivision, but in furtherance of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the
Agreement.  With the said amount, he was able to effect the survey and the subdivision
of the lots. He secured the Lapu Lapu City Council's approval of the subdivision project
which he advertised in a local newspaper.  He also caused the construction of roads,
curbs and gutters.  Likewise, he entered into a contract with an engineering firm for the
building of sixty low-cost housing units and actually even set up a model house on one
of the subdivision lots.  He did all of these for a total expense of P85,000.

Respondent claimed that the subdivision project failed, however, because petitioners
and their relatives had separately caused the annotations of adverse claims on the title
to the land, which eventually scared away prospective buyers.  Despite his requests,
petitioners refused to cause the clearing of the claims, thereby forcing him to give up on
the project.[5]

Subsequently, petitioners filed a criminal case for estafa against respondent and his
wife, who were however acquitted.  Thereafter, they filed the present civil case which,
upon respondent's motion, was later dismissed by the trial court in an Order dated
September 6, 1982.  On appeal, however, the appellate court remanded the case for
further proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier
stated,  was affirmed by the CA.

Hence, this Petition.[6]

 Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent
had formed a partnership for the development of the subdivision.  Thus, they must bear
the loss suffered by the partnership in the same proportion as their share in the profits
stipulated in the contract.  Disagreeing with the trial court's pronouncement that losses
as well as profits in a joint venture should be distributed equally, [7] the CA invoked
Article 1797 of the Civil Code which provides:
"Article 1797 - The losses and profits shall be distributed in conformity with the
agreement.  If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion."
The CA elucidated further:
"In the absence of stipulation, the share of each partner in the profits and losses
shall be in proportion to what he may have contributed, but the industrial partner shall
not be liable for the losses.  As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances.  If besides his services he
has contributed capital, he shall also receive a share in the profits in proportion to his
capital."
The Issue

Petitioners impute to the Court of Appeals the following error:

"x x x [The] Court of Appeals erred in concluding that the transaction x x x
between the petitioners and respondent was that of a joint venture/partnership,
ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines."[8]
The Court's Ruling

The Petition is bereft of merit.

Main Issue:
Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the
Joint Venture Agreement and the earlier Deed of Sale, both of which were the bases of
the appellate court's finding of a partnership, were void.

In the same breath, however, they assert that under those very same contracts,
respondent is liable for his failure to implement the project. Because the agreement
entitled them to receive 60 percent of the proceeds from the sale of the subdivision
lots, they pray that respondent pay them damages equivalent to 60 percent of the value
of the property.[9]

The pertinent portions of the Joint Venture Agreement read as follows:

"KNOW ALL MEN BY THESE PRESENTS:

"This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of
March, 1969, by and between MR. MANUEL R. TORRES, x x x the FIRST PARTY, likewise,
MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x the SECOND PARTY:

W I T N E S S E T H:

"That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property
located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184
with a total area of 17,009 square meters, to be sub-divided by the FIRST PARTY;

"Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:  TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the execution of this contract
for the property entrusted by the SECOND PARTY, for sub-division projects and
development purposes;

"NOW THEREFORE, for and in consideration of the above covenants and promises
herein contained the respective parties hereto do hereby stipulate and agree as follows:

"ONE:  That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5,
1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY
CTVS. (P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY
CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY
did not actually receive the payment.

"SECOND:  That the SECOND PARTY, had received from the FIRST PARTY, the necessary
amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their
personal obligations and this particular amount will serve as an advance payment from
the FIRST PARTY for the property mentioned to be sub-divided  and to be deducted from
the sales.

"THIRD:  That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and
the principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, until the sub-division project is terminated and ready for sale to any
interested parties, and the amount of TWENTY THOUSAND (P20,000.00) pesos,
Philippine currency, will be deducted accordingly.

"FOURTH:  That all general expense[s] and all cost[s] involved in the sub-division project
should be paid by the FIRST PARTY, exclusively and all the expenses will not be deducted
from the sales after the development of the sub-division project.

"FIFTH:  That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM
60% for the SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and
additional profits or whatever income deriving from the sales will be divided equally
according to the x x x percentage [agreed upon] by both parties.

"SIXTH:  That the intended sub-division project of the property involved will start the
work and all improvements upon the adjacent lots will be negotiated in both parties[']
favor and all sales shall [be] decided by both parties.

"SEVENTH:  That the SECOND PARTIES, should be given an option to get back the
property mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST
PARTY, including all necessary improvements spent by the FIRST PARTY, and the FIRST
PARTY will be given a grace period to turnover the property mentioned above.

"That this AGREEMENT shall be binding and obligatory to the parties who executed
same freely and voluntarily for the uses and purposes therein stated." [10]
A reading of the terms embodied in the Agreement indubitably shows the
existence of a partnership pursuant to Article 1767 of the Civil Code, which provides:
"ART. 1767.  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."
Under the above-quoted Agreement, petitioners would contribute property to
the partnership in the form of land which was to be developed into a subdivision; while
respondent would give, in addition to his industry, the amount needed for general
expenses and other costs.  Furthermore, the income from the said project would be
divided according to the stipulated percentage.  Clearly, the contract manifested the
intention of the parties to form a partnership.[11]
It should be stressed that the parties implemented the contract. Thus,  petitioners
transferred the title to the land to facilitate its use in the name of the respondent.  On
the other hand, respondent caused the subject land to be mortgaged, the proceeds of
which were used for the survey and the subdivision of the land.  As noted earlier, he
developed the roads, the curbs and the gutters of the subdivision and entered into a
contract to construct low-cost housing units on the property.

Respondent's actions clearly belie petitioners' contention that he made no contribution

to the partnership.  Under Article 1767 of the Civil Code, a partner may contribute not
only money or property, but also industry.

Petitioners Bound by
Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has
been expressly stipulated, but also to all necessary consequences thereof, as follows:
"ART. 1315.  Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law."
It is undisputed that petitioners are educated and are thus presumed to have
understood the terms of the contract they voluntarily signed. If it was not in consonance
with their expectations, they should have objected to it and insisted on the provisions
they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their
acts, and the fact that the contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their obligations.  They cannot now
disavow the relationship formed from such agreement due to their supposed
misunderstanding of its terms.

Alleged Nullity of the

Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the
Civil Code, which provides:
 "ART. 1773.  A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument."
They contend that since the parties did not make, sign or attach to the public
instrument an inventory of the real property contributed, the partnership is void.

We clarify.  First, Article 1773 was intended primarily to protect third persons. Thus, the
eminent Arturo M. Tolentino states that under the aforecited provision which is a
complement of Article 1771,[12] "the execution of a public instrument would be useless if
there is no inventory of the property contributed, because without its designation and
description, they cannot be subject to inscription in the Registry of Property, and their
contribution cannot prejudice third persons.  This will result in fraud to those who
contract with the partnership in the belief [in] the efficacy of the guaranty in which the
immovables may consist. Thus, the contract is declared void by the law when no such
inventory is made."  The case at bar does not involve third parties who may be
prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim
that respondent should pay them 60 percent of the value of the property. [13] They
cannot in one breath deny the contract and in another recognize it, depending on what
momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard
to a contract and courts will not tolerate, much less approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering
the Joint Venture Agreement an ordinary contract from which the parties' rights and
obligations to each other may be inferred and enforced.

Partnership Agreement Not the Result

of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article
1422[14] of the Civil Code, because it is the direct result of an earlier illegal contract,
which was for the sale of the land without valid consideration.

This argument is puerile.  The Joint Venture Agreement clearly states that the
consideration for the sale was the expectation of profits from the subdivision project. Its
first stipulation states that petitioners did not actually receive payment for the parcel of
land sold to respondent.  Consideration, more properly denominated as cause, can take
different forms, such as the prestation or promise of a thing or service by another. [15]

In this case, the cause of the contract of sale consisted not in the stated peso value of
the land, but in the expectation of profits from the subdivision project, for which the
land was intended to be used.  As explained by the trial court, "the land was in effect
given to the partnership as [petitioner's] participation therein.  x x x There was therefore
a consideration for the sale, the [petitioners] acting in  the expectation that, should the
venture come into fruition, they [would] get sixty percent  of the net profits."

Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision
project, petitioners maintain that he should be made to pay damages equivalent to 60
percent of the value of the property, which was their share in the profits under the Joint
Venture Agreement.

We are not persuaded.  True, the Court of Appeals held that petitioners' acts were not
the cause of the failure of the project.[16] But it also ruled that neither was respondent
responsible therefor.[17] In imputing the blame solely to him, petitioners failed to give
any reason why we should disregard the factual findings of the appellate court relieving
him of fault.  Verily, factual issues cannot be resolved in a petition for review under Rule
45, as in this case.  Petitioners have not alleged, not to say shown, that their Petition
constitutes one of the exceptions to this doctrine. [18] Accordingly, we find no reversible
error in the CA's ruling that petitioners are not entitled to damages.

WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED.

Costs against petitioners.

SO ORDERED.

THIRD DIVISION
[ G.R. NOS. 166299-300, December 13, 2005 ]
AURELIO K. LITONJUA, JR., PETITIONER, VS. EDUARDO K. LITONJUA,
SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX,
INC., DDM GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY,
INC., EDDIE K. LITONJUA SHIPPING CO., INC., LITONJUA SECURITIES,
INC. (FORMERLY E. K. LITONJUA SEC), LUNETA THEATER, INC., E & L
REALTY, (FORMERLY E & L INT'L SHIPPING CORP.), FNP CO., INC.,
HOME ENTERPRISES, INC., BEAUMONT DEV. REALTY CO., INC.,
GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., "L" DEV.
CORP, LCM THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING
CO. INC., MACOIL INC., ODEON REALTY CORP., SARATOGA REALTY,
INC., ACT THEATER INC. (FORMERLY GENERAL THEATRICAL &
FILM EXCHANGE, INC.), AVENUE REALTY, INC., AVENUE THEATER,
INC. AND LVF PHILIPPINES, INC., (FORMERLY VF PHILIPPINES),
RESPONDENTS.

DECISION

GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K.
Litonjua, Jr. seeks to nullify and set aside the Decision of the Court of Appeals (CA)
dated March 31, 2004[1] in consolidated cases C.A. G.R. Sp. No. 76987 and C.A. G.R. SP.
No 78774 and its Resolution dated December 07, 2004,[2] denying petitioner's motion for
reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua,
Sr. (Eduardo) are brothers. The legal dispute between them started when, on December 4,
2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio filed a suit against his
brother Eduardo and herein respondent Robert T. Yang (Yang) and several corporations
for specific performance and accounting. In his complaint,[3] docketed as Civil Case No.
69235 and eventually raffled to Branch 68 of the court,[4] Aurelio alleged that, since June
1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon
Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical
Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue
Realty, Inc., owner of lands and buildings, among other corporations. Yang is described
in the complaint as petitioner's and Eduardo's partner in their Odeon Theater investment.
[5]
 The same complaint also contained the following material averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint
venture/partnership for the continuation of their family business and common family
funds ....

3.01.1 This joint venture/[partnership] agreement was contained in a

memorandum addressed by Eduardo to his siblings, parents and other relatives. Copy of
this memorandum is attached hereto and made an integral part as Annex "A" and the
portion referring to [Aurelio] submarked as Annex "A-1".

3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of
[Aurelio's] retaining his share in the remaining family businesses (mostly, movie theaters,
shipping and land development) and contributing his industry to the continued operation
of these businesses, [Aurelio] will be given P1 Million or 10% equity in all these
businesses and those to be subsequently acquired by them whichever is greater. . . .

4.01 ... from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and
Eduardo had accumulated in their joint venture/partnership various assets including but
not limited to the corporate defendants and [their] respective assets.

4.02 In addition . . . the joint venture/partnership ... had also acquired [various other
assets], but Eduardo caused to be registered in the names of other parties....

xxx                                        xxx                                                xxx

4.04 The substantial assets of most of the corporate defendants consist of real
properties .... A list of some of these real properties is attached hereto and made an
integral part as Annex "B".

xxx                                        xxx                                                xxx

5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that
[Aurelio] requested for an accounting and liquidation of his share in the joint
venture/partnership [but these demands for complete accounting and liquidation were not
heeded].

xxx                                        xxx                                                xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the
corporate defendants as well as Bobby [Yang], are transferring . . . various real properties
of the corporations belonging to the joint venture/partnership to other parties in fraud of
[Aurelio]. In consequence, [Aurelio] is therefore causing at this time the annotation on
the titles of these real properties' a notice of lis pendens .... (Emphasis in the original;
underscoring and words in bracket added.)
For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have
been meant for him by his brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:

You have now your own life to live after having been married. ....

I am trying my best to mold you the way I work so you can follow the pattern .... You
will be the only one left with the company, among us brothers and I will ask you to stay
as I want you to run this office every time I am away. I want you to run it the way I am
trying to run it because I will be all alone and I will depend entirely to you (sic). My sons
will not be ready to help me yet until about maybe 15/20 years from now. Whatever is
left in the corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two will gamble
the whole thing of what I have and what you are entitled to. .... It will be you and me
alone on this. If ever I pass away, I want you to take care of all of this. You keep my
share for my two sons are ready take over but give them the chance to run the company
which I have built.

xxx                                    xxx                                        xxx

Because you will need a place to stay, I will arrange to give you first ONE HUNDRED
THOUSANDS PESOS: (P100, 000.00) in cash or asset, like Lt. Artiaga so you can live
better there. The rest I will give you in form of stocks which you can keep. This stock I
assure you is good and saleable. I will also gladly give you the share of Wack-Wack
...and Valley Golf ... because you have been good. The rest will be in stocks from all the
corporations which I repeat, ten percent (10%) equity. [6]
On December 20, 2002, Eduardo and the corporate respondents, as defendants a
quo, filed a joint ANSWER With Compulsory Counterclaim denying under oath the
material allegations of the complaint, more particularly that portion thereof depicting
petitioner and Eduardo as having entered into a contract of partnership. As affirmative
defenses, Eduardo, et al., apart from raising a jurisdictional matter, alleged that the
complaint states no cause of action, since no cause of action may be derived from the
actionable document, i.e., Annex "A-1", being void under the terms of Article 1767 in
relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever
undertaking Eduardo agreed to do, if any, under Annex "A-1", are unenforceable under
the provisions of the Statute of Frauds.[7]

For his part, Yang - who was served with summons long after the other defendants
submitted their answer – moved to dismiss on the ground, inter alia, that, as to him,
petitioner has no cause of action and the complaint does not state any.[8] Petitioner
opposed this motion to dismiss.

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.

[9]
 To this motion, petitioner interposed an Opposition with ex-Parte Motion to Set the
Case for Pre-trial.[10]
Acting on the separate motions immediately adverted to above, the trial court, in an
Omnibus Order dated March 5, 2003, denied the affirmative defenses and, except for
Yang, set the case for pre-trial on April 10, 2003.[11]

In another Omnibus Order of April 2, 2003, the same court denied the motion of
Eduardo, et al., for reconsideration[12] and Yang's motion to dismiss. The following then
transpired insofar as Yang is concerned:

1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the

right to seek reconsideration of the April 2, 2003 Omnibus Order and to
pursue his failed motion to dismiss[13] to its full resolution.

2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of

April 2, 2003, but his motion was denied in an Order of July 4, 2003.[14]

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorari under Rule 65 of the Rules of Court, docketed as CA-G.R. SP
No. 78774,[15] to nullify the separate orders of the trial court, the first
denying his motion to dismiss the basic complaint and, the second, denying
his motion for reconsideration.

Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of
discretion and injudicious haste attended the issuance of the trial court's aforementioned
Omnibus Orders dated March 5, and April 2, 2003, sought relief from the CA via similar
recourse. Their petition for certiorari was docketed as CA G.R. SP No. 76987.

Per its resolution dated October 2, 2003,[16] the CA's 14th Division ordered the
consolidation of CA G.R. SP No. 78774 with CA G.R. SP No. 76987.

Following the submission by the parties of their respective Memoranda of Authorities,

the appellate court came out with the herein assailed Decision dated March 31,
2004, finding for Eduardo and Yang, as lead petitioners therein, disposing as follows:
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of
certiorari in these consolidated cases annulling, reversing and setting aside the assailed
orders of the court a quo dated March 5, 2003, April 2, 2003 and July 4, 2003 and the
complaint filed by private respondent [now petitioner Aurelio] against all the petitioners
[now herein respondents Eduardo, et al.] with the court a quo is hereby dismissed.

SO ORDERED.[17] (Emphasis in the original; words in bracket added.)

Explaining its case disposition, the appellate court stated, inter alia, that the alleged
partnership, as evidenced by the actionable documents, Annex "A" and "A-1" attached
to the complaint, and upon which petitioner solely predicates his right/s allegedly
violated by Eduardo, Yang and the corporate defendants a quo is "void or legally
inexistent".

In time, petitioner moved for reconsideration but his motion was denied by the CA in its
equally assailed Resolution of December 7, 2004.[18] .

Hence, petitioner's present recourse, on the contention that the CA erred:

A. When it ruled that there was no partnership created by the actionable

document because this was not a public instrument and immovable
properties were contributed to the partnership.

B. When it ruled that the actionable document did not create a demandable
right in favor of petitioner.

C. When it ruled that the complaint stated no cause of action against

[respondent] Robert Yang; and

D. When it ruled that petitioner has changed his theory on appeal when all that
Petitioner had done was to support his pleaded cause of action by another
legal perspective/argument.

The petition lacks merit.

Petitioner's demand, as defined in the petitory portion of his complaint in the trial court,
is for delivery or payment to him, as Eduardo's and Yang's partner, of his
partnership/joint venture share, after an accounting has been duly conducted of what he
deems to be partnership/joint venture property.[19]

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 between them.[20] A contract of partnership
is defined by the Civil Code as one where two or more persons bound themselves to
contribute money, property, or industry to a common fund with the intention of dividing
the profits among themselves.[21] A joint venture, on the other hand, is hardly
distinguishable from, and may be likened to, a partnership since their elements are
similar, i.e., community of interests in the business and sharing of profits and losses.
Being a form of partnership, a joint venture is generally governed by the law on
partnership.[22]

The underlying issue that necessarily comes to mind in this proceedings is whether or not
petitioner and respondent Eduardo are partners in the theatre, shipping and realty
business, as one claims but which the other denies. And the issue bearing on the first
assigned error relates to the question of what legal provision is applicable under the
premises, petitioner seeking, as it were, to enforce the actionable document - Annex "A-
1" - which he depicts in his complaint to be the contract of partnership/joint venture
between himself and Eduardo. Clearly, then, a look at the legal provisions determinative
of the existence, or defining the formal requisites, of a partnership is indicated. Foremost
of these are the following provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall be
necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more,
in money or property, shall appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.

Failure to comply with the requirement of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed

thereto, if an inventory of said property is not made, signed by the parties, and attached to
the public instrument.
Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned
and undated. As an unsigned document, there can be no quibbling that Annex "A-1" does
not meet the public instrumentation requirements exacted under Article 1771 of the Civil
Code. Moreover, being unsigned and doubtless referring to a partnership involving more
than P3,000.00 in money or property, Annex "A-1" cannot be presented for notarization,
let alone registered with the Securities and Exchange Commission (SEC), as called for
under the Article 1772 of the Code. And inasmuch as the inventory requirement under the
succeeding Article 1773 goes into the matter of validity when immovable property is
contributed to the partnership, the next logical point of inquiry turns on the nature of
petitioner's contribution, if any, to the supposed partnership.

The CA, addressing the foregoing query, correctly stated that petitioner's contribution
consisted of immovables and real rights. Wrote that court:
A further examination of the allegations in the complaint would show that [petitioner's]
contribution to the so-called "partnership/joint venture" was his supposed share in the
family business that is consisting of movie theaters, shipping and land development under
paragraph 3.02 of the complaint. In other words, his contribution as a partner in the
alleged partnership/joint venture consisted of immovable properties and real rights. ....[23]
Significantly enough, petitioner matter-of-factly concurred with the appellate court's
observation that, prescinding from what he himself alleged in his basic complaint, his
contribution to the partnership consisted of his share in the Litonjua family businesses
which owned variable immovable properties. Petitioner's assertion in his motion for
reconsideration[24] of the CA's decision, that "what was to be contributed to the business
[of the partnership] was [petitioner's] industry and his share in the family [theatre and
land development] business" leaves no room for speculation as to what petitioner
contributed to the perceived partnership.

Lest it be overlooked, the contract-validating inventory requirement under Article 1773

of the Civil Code applies as long real property or real rights are initially brought into the
partnership. In short, it is really of no moment which of the partners, or, in this case, who
between petitioner and his brother Eduardo, contributed immovables. In context, the
more important consideration is that real property was contributed, in which case an
inventory of the contributed property duly signed by the parties should be attached to the
public instrument, else there is legally no partnership to speak of.

Petitioner, in an obvious bid to evade the application of Article 1773, argues that the
immovables in question were not contributed, but were acquired after the formation of
the supposed partnership. Needless to stress, the Court cannot accord cogency to this
specious argument. For, as earlier stated, petitioner himself admitted contributing his
share in the supposed shipping, movie theatres and realty development family businesses
which already owned immovables even before Annex "A-1" was allegedly executed.

Considering thus the value and nature of petitioner's alleged contribution to the purported
partnership, the Court, even if so disposed, cannot plausibly extend Annex "A-1" the
legal effects that petitioner so desires and pleads to be given. Annex "A-1", in fine,
cannot support the existence of the partnership sued upon and sought to be enforced. The
legal and factual milieu of the case calls for this disposition. A partnership may be
constituted in any form, save when immovable property or real rights are contributed
thereto or when the partnership has a capital of at least P3,000.00, in which case a public
instrument shall be necessary.[25] And if only to stress what has repeatedly been
articulated, an inventory to be signed by the parties and attached to the public instrument
is also indispensable to the validity of the partnership whenever immovable property is
contributed to it.

Given the foregoing perspective, what the appellate court wrote in its assailed
Decision[26] about the probative value and legal effect of Annex "A-1" commends itself
for concurrence:
Considering that the allegations in the complaint showed that [petitioner] contributed
immovable properties to the alleged partnership, the "Memorandum" (Annex "A" of the
complaint) which purports to establish the said "partnership/joint venture" is NOT a
public instrument and there was NO inventory of the immovable property duly signed by
the parties. As such, the said "Memorandum" ... is null and void for purposes of
establishing the existence of a valid contract of partnership. Indeed, because of the failure
to comply with the essential formalities of a valid contract, the purported
"partnership/joint venture" is legally inexistent and it produces no effect whatsoever.
Necessarily, a void or legally inexistent contract cannot be the source of any contractual
or legal right. Accordingly, the allegations in the complaint, including the actionable
document attached thereto, clearly demonstrates that [petitioner] has NO valid contractual
or legal right which could be violated by the [individual respondents] herein. As a
consequence, [petitioner's] complaint does NOT state a valid cause of action because
NOT all the essential elements of a cause of action are present. (Underscoring and words
in bracket added.)
Likewise well-taken are the following complementary excerpts from the CA's equally
assailed Resolution of December 7, 2004[27] denying petitioner's motion for
reconsideration:
Further, We conclude that despite glaring defects in the allegations in the complaint as
well as the actionable document attached thereto (Rollo, p. 191), the [trial] court did not
appreciate and apply the legal provisions which were brought to its attention by herein
[respondents] in the their pleadings. In our evaluation of [petitioner's] complaint, the
latter alleged inter alia to have contributed immovable properties to the alleged
partnership but the actionable document is not a public document and there was no
inventory of immovable properties signed by the parties. Both the allegations in the
complaint and the actionable documents considered, it is crystal clear that [petitioner] has
no valid or legal right which could be violated by [respondents]. (Words in bracket
added.)
Under the second assigned error, it is petitioner's posture that Annex "A-1", assuming its
inefficacy or nullity as a partnership document, nevertheless created demandable rights in
his favor. As petitioner succinctly puts it in this petition:
43. Contrariwise, this actionable document, especially its above-quoted provisions,
established an actionable contract even though it may not be a partnership. This
actionable contract is what is known as an innominate contract (Civil Code, Article
1307).

44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract
does create rights and obligations of the parties and which rights and obligations may be
enforceable and demandable. Just because the relationship created by the agreement
cannot be specifically labeled or pigeonholed into a category of nominate contract does
not mean it is void or unenforceable.
Petitioner has thus thrusted the notion of an innominate contract on this Court - and
earlier on the CA after he experienced a reversal of fortune thereat - as an afterthought.
The appellate court, however, cannot really be faulted for not yielding to petitioner's
dubious stratagem of altering his theory of joint venture/partnership to an innominate
contract. For, at bottom, the appellate court's certiorari jurisdiction was circumscribed by
what was alleged to have been the order/s issued by the trial court in grave abuse of
discretion. As respondent Yang pointedly observed,[28] since the parties' basic position
had been well-defined, that of petitioner being that the actionable document established a
partnership/joint venture, it is on those positions that the appellate court exercised its
certiorari jurisdiction. Petitioner's act of changing his original theory is an impermissible
practice and constitutes, as the CA aptly declared, an admission of the untenability of
such theory in the first place.
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now
contended that the actionable instrument may be considered an innominate contract. xxx
Verily, this now changes [petitioner's] theory of the case which is not only prohibited by
the Rules but also is an implied admission that the very theory he himself ... has adopted,
filed and prosecuted before the respondent court is erroneous.

Be that as it may . .... We hold that this new theory contravenes [petitioner's] theory of the
actionable document being a partnership document. If anything, it is so obvious we do
have to test the sufficiency of the cause of action on the basis of partnership law xxx.
[29]
 (Emphasis in the original; Words in bracket added).
But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected
innominate contract, petitioner's complaint would still be dismissible as against Eduardo
and, more so, against Yang. It cannot be over-emphasized that petitioner points to
Eduardo as the author of Annex "A-1". Withal, even on this consideration alone,
petitioner's claim against Yang is doomed from the very start.

As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded

as vesting petitioner with a right to demand from respondent Eduardo the observance of a
determinate conduct, reads:
xxx You will be the only one left with the company, among us brothers and I will ask you
to stay as I want you to run this office everytime I am away. I want you to run it the way I
am trying to run it because I will be alone and I will depend entirely to you, My sons will
not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in
the corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or
ten percent (10%) equity, whichever is greater. (Underscoring added)
It is at once apparent that what respondent Eduardo imposed upon himself under the
above passage, if he indeed wrote Annex "A-1", is a promise which is not to be
performed within one year from "contract" execution on June 22, 1973. Accordingly, the
agreement embodied in Annex "A-1" is covered by the Statute of Frauds and ergo
unenforceable for non-compliance therewith.[30] By force of the statute of frauds, an
agreement that by its terms is not to be performed within a year from the making thereof
shall be unenforceable by action, unless the same, or some note or memorandum thereof,
be in writing and subscribed by the party charged. Corollarily, no action can be proved
unless the requirement exacted by the statute of frauds is complied with. [31]

Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10%

equity of the family businesses supposedly promised by Eduardo to give in the near
future. Any suggestion that the stated amount or the equity component of the promise
was intended to go to a common fund would be to read something not written in Annex
"A-1". Thus, even this angle alone argues against the very idea of a partnership, the
creation of which requires two or more contracting minds mutually agreeing to contribute
money, property or industry to a common fund with the intention of dividing the profits
between or among themselves.[32]

In sum then, the Court rules, as did the CA, that petitioner's complaint for specific
performance anchored on an actionable document of partnership which is legally
inexistent or void or, at best, unenforceable does not state a cause of action as against
respondent Eduardo and the corporate defendants. And if no of action can successfully be
maintained against respondent Eduardo because no valid partnership existed between him
and petitioner, the Court cannot see its way clear on how the same action could plausibly
prosper against Yang. Surely, Yang could not have become a partner in, or could not
have had any form of business relationship with, an inexistent partnership.

As may be noted, petitioner has not, in his complaint, provide the logical nexus that
would tie Yang to him as his partner. In fact, attendant circumstances would indicate the
contrary. Consider:

1. Petitioner asserted in his complaint that his so-called joint

venture/partnership with Eduardo was "for the continuation of their family
business and common family funds which were theretofore being mainly
managed by Eduardo." [33] But Yang denies kinship with the Litonjua
family and petitioner has not disputed the disclaimer.

2. In some detail, petitioner mentioned what he had contributed to the joint

venture/partnership with Eduardo and what his share in the businesses will
be. No allegation is made whatsoever about what Yang contributed, if any,
let alone his proportional share in the profits. But such allegation cannot,
however, be made because, as aptly observed by the CA, the actionable
document did not contain such provision, let alone mention the name of
Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even
mention his name.

3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are
business partners in the [respondent] corporations," while "Bobby is his and
Eduardo's partner in their Odeon Theater investment" (par. 2.03). This
means that the partnership between petitioner and Eduardo came first; Yang
became their partner in their Odeon Theater investment thereafter. Several
paragraphs later, however, petitioner would contradict himself by alleging
that his "investment and that of Eduardo and Yang in the Odeon theater
business has expanded through a reinvestment of profit income and direct
investments in several corporation including but not limited to [six]
corporate respondents" This simply means that the "Odeon Theatre
business" came before the corporate respondents. Significantly enough,
 petitioner refers to the corporate respondents as "progeny" of the Odeon
Theatre business.[34]

Needless to stress, petitioner has not sufficiently established in his complaint the
legal vinculum whence he sourced his right to drag Yang into the fray. The Court of
Appeals, in its assailed decision, captured and formulated the legal situation in the
following wise:
[Respondent] Yang, ... is impleaded because, as alleged in the complaint, he is a "partner"
of [Eduardo] and the [petitioner] in the Odeon Theater Investment which expanded
through reinvestments of profits and direct investments in several corporations, thus:

xxx                                        xxx                                        xxx

Clearly, [petitioner's] claim against ... Yang arose from his alleged partnership with
petitioner and the ...respondent. However, there was NO allegation in the complaint
which directly alleged how the supposed contractual relation was created between
[petitioner] and ...Yang. More importantly, however, the foregoing ruling of this Court
that the purported partnership between [Eduardo] is void and legally inexistent directly
affects said claim against ...Yang. Since [petitioner] is trying to establish his claim
against ... Yang by linking him to the legally inexistent partnership . . . such attempt had
become futile because there was NOTHING that would contractually connect [petitioner]
and ... Yang. To establish a valid cause of action, the complaint should have a statement
of fact upon which to connect [respondent] Yang to the alleged partnership between
[petitioner] and respondent [Eduardo], including their alleged investment in the Odeon
Theater. A statement of facts on those matters is pivotal to the complaint as they would
constitute the ultimate facts necessary to establish the elements of a cause of action
against ... Yang. [35]
Pressing its point, the CA later stated in its resolution denying petitioner's motion for
reconsideration the following:
xxx Whatever the complaint calls it, it is the actionable document attached to the
complaint that is controlling. Suffice it to state, We have not ignored the actionable
document ... As a matter of fact, We emphasized in our decision ... that insofar as [Yang]
is concerned, he is not even mentioned in the said actionable document. We are therefore
puzzled how a person not mentioned in a document purporting to establish a partnership
could be considered a partner.[36] (Words in bracket ours).
The last issue raised by petitioner, referring to whether or not he changed his theory of
the case, as peremptorily determined by the CA, has been discussed at length earlier and
need not detain us long. Suffice it to say that after the CA has ruled that the alleged
partnership is inexistent, petitioner took a different tack. Thus, from a joint
venture/partnership theory which he adopted and consistently pursued in his complaint,
petitioner embraced the innominate contract theory. Illustrative of this shift is petitioner's
statement in par. #8 of his motion for reconsideration of the CA's decision combined with
what he said in par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership, joint venture, or
whatever, is a legal matter. What is determinative for purposes of sufficiency of the
complainant's allegations, is whether the actionable document bears out an actionable
contract ... be it a partnership, a joint venture or whatever or some innominate contract  –
It may be noted that one kind of innominate contract is what is known as du ut facias (I
give that you may do).[37]

43. Contrariwise, this actionable document, especially its above-quoted provisions,

established an actionable contract even though it may not be a partnership. This
actionable contract is what is known as an innominate contract (Civil Code, Article
1307).[38]
Springing surprises on the opposing party is offensive to the sporting idea of fair play,
justice and due process; hence, the proscription against a party shifting from one theory at
the trial court to a new and different theory in the appellate court.[39] On the same
rationale, an issue which was neither averred in the complaint cannot be raised for the
first time on appeal.[40] It is not difficult, therefore, to agree with the CA when it made
short shrift of petitioner's innominate contract theory on the basis of the foregoing basic
reasons.

Petitioner's protestation that his act of introducing the concept of innominate contract was
not a case of changing theories but of supporting his pleaded cause of action – that of the
existence of a partnership - by another legal perspective/argument, strikes the Court as a
strained attempt to rationalize an untenable position. Paragraph 12 of his motion for
reconsideration of the CA's decision virtually relegates partnership as a fall-back theory.
Two paragraphs later, in the same notion, petitioner faults the appellate court for reading,
with myopic eyes, the actionable document solely as establishing a partnership/joint
venture. Verily, the cited paragraphs are a study of a party hedging on whether or not to
pursue the original cause of action or altogether abandoning the same, thus:
12. Incidentally, assuming that the actionable document created a partnership between
[respondent] Eduardo, Sr. and [petitioner], no immovables were contributed to this
partnership. xxx

14. All told, the Decision takes off from a false premise that the actionable document
attached to the complaint does not establish a contractual relationship between
[petitioner] and ... Eduardo, Sr. and Roberto T Yang simply because his document does
not create a partnership or a joint venture. This is ... a myopic reading of the actionable
document.
Per the Court's own count, petitioner used in his complaint the mixed words "joint
venture/partnership" nineteen (19) times and the term "partner" four (4) times. He made
reference to the "law of joint venture/partnership [being applicable] to the business
relationship ... between [him], Eduardo and Bobby [Yang]" and to his "rights in all
specific properties of their joint venture/partnership". Given this consideration,
petitioner's right of action against respondents Eduardo and Yang doubtless pivots on the
existence of the partnership between the three of them, as purportedly evidenced by the
undated and unsigned Annex "A-1". A void Annex "A-1", as an actionable document of
partnership, would strip petitioner of a cause of action under the premises. A complaint
for delivery and accounting of partnership property based on such void or legally non-
existent actionable document is dismissible for failure to state of action. So, in gist, said
the Court of Appeals. The Court agrees.

WHEREFORE, the instant petition is DENIED and the impugned Decision and

Resolution of the Court of Appeals AFFIRMED.

Cost against the petitioner.

SO ORDERED.

[ G.R. No. L-25532, February 28, 1969 ]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. WILLIAM
J. SUTTER AND THE COURT OF TAX APPEALS, RESPONDENTS.

DECISION

REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.", was formed on 30
September 1947 by herein respondent William J. Suter, as the general partner, and Julia
Spirig and Gustav Carlson, as the limited partners.  The partners contributed,
respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership.  On 1 October
1947, the limited partnership was registered with the Securities and Exchange
Commission.  The firm engaged, among other activities, in the importation, marketing,
distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories.  It had an office and held itself out as a
limited partnership, handling and carrying merchandise, using invoices, bills and
letterheads bearing its trade-name, maintaining its own books of accounts and bank
accounts, and had a quota allocation with the Central Bank.

In 1948, however, general partner Suter and limited partner Spirig got married and,
thereafter, on 18 December 1948, limited partner Carlson sold his share in the partnership
to Suter and his wife.  The sale was duly recorded with the Securities and Exchange
Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without
objection by the herein petitioner, Commissioner of Internal Revenue, until in 1959 when
the latter, in an assessment, consolidated the income of the firm and the individual
incomes of the partners-spouses Suter and Spirig, resulting in a determination of a
deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and
P4,567.00 for 1955.

Respondent Suter protested the assessment, and requested its cancellation and
withdrawal, as not in accordance with law, but his request was denied.  Unable to secure
a reconsideration, he appealed to the Court of Tax Appeals, which court, after trial,
rendered a decision, on 11 November 1965, reversing that of the Commissioner of
Internal Revenue.

The present case is a petition for review, filed by the Commissioner of Internal Revenue,
of the tax court's aforesaid decision.  It raises these issues:

(a)  Whether or not the corporate personality of the William J. Suter "Morcoin" Co.,
Ltd. should be disregarded for income tax purposes, considering that respondent
William J. Suter and his wife, Julia Spirig Suter, actually formed a single taxable
unit; and

(b)  Whether or not the partnership was dissolved after the marriage of the partners,

respondent William J. Suter and Julia Spirig Suter, and the subsequent sale to
them by the remaining partner, Gustav Carlson, of his participation of P2,000.00
in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of
Suter and Spirig and their subsequent acquisition of the interests of remaining partner
Carlson in the partnership dissolved the limited partnership, and if they did not, the
fiction of juridical' personality of the partnership should be disregarded for income tax
purposes because the spouses have exclusive ownership and control of the business;
consequently, the income tax return of respondent Suter for the years in question should
have included his and his wife's individual incomes and that of the limited partnership, in
accordance with Section 45 (d) of the National Internal Revenue Code, which provides as
follows:

"(d)  Husband and wife.  - In the case of married persons, whether citizens,

residents or non-residents, only one consolidated return for the taxable year shall be
filed by either spouse to cover the income of both spouses, - - - - -.”

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax appeals
held, that his marriage with limited partner Spirig and their acquisition of Carlson's
interests in the partnership in 1948 is not a ground for dissolution of the partnership,
either in the Code of Commerce or in the New Civil Code, and that since its juridical
personality had not been affected and since, as a limited partnership, as
contradistinguished from a duly registered general partnership, it is taxable on its income
similarly with corporations, Suter was not bound to include in his individual return the
income of the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been
dissolved by operation of law because of the marriage of the only general partner,
William J. Suter, to the originally limited partner, Julia Spirig, one year after the
partnership was organized is rested by the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence on Commercial Laws of the Philippines,
Vol. 1, 4th Ed., page 58, that reads as follows:

"' A husband and a wife may not enter into a contract of general copartnership,
because under the Civil Code, which applies in the absence of express provision in the
Code of Commerce, persons prohibited from making donations to each other are
prohibited from entering into universal partnerships.  (2 Echaverri, 196) It follows that
the marriage of partners necessarily brings about the dissolution of a pre-existing
partnership.  (1 Guy de Montella 58)’"

The petitioner-appellant has evidently failed to observe the fact that William J. Suter
"Morcoin" Co., Ltd. was not a universal partnership, but a particular one.  As appears
from Articles 1674 and 1675 of the Spanish Civil Code of 1889 (which was the law in
force when the subject firm was organized in 1947), a universal partnership requires
either that the object of the association be all the present property of the partners, as
contributed by them to the common fund, or else "all that the partners may acquire by
their industry or work during the existence of the partnership".  William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the
partners were fixed sums of money, P20,000.00 by William Suter and P18,000.00 by
Julia Spirig, and neither one of them was an industrial partner.  It follows that William J.
Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by
Article 1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Castan, in his Derecho
Civil, 7th Edition, 1952, Volume. 4, page 546, footnote 1, says with regard to the
prohibition contained in the aforesaid Article 1677:

"Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad

universal, Pero 8 podran constituir sociedad particular?  Aunque el punto ha sido muy
debetido, nos inclinamos a la tesis permisiva de los contratos de sociedad particular
entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y hay que ester a
la norma general segun la que toda persona es capaz pare contratar mientras no sea
declarado incapaz por la ley.  La jurisprudencia de la Direccion de los Registros fue
favorable a esta misma tesis en su resolucion de 3 de febrero de 1936, mas parece
cambiar de rumbo en la de 9 de marzo de 1943."

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage
not being one of the causes provided for that purpose either by the Spanish Civil Code or
the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous.  The capital contributions of partners William J.
Suter and Julia Spirig were separately owned and contributed by them before their
marriage; and after they were joined in wedlock, such contributions remained their
respective separate property under the Spanish Civil Code (Article 1396):

"The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; - - - -- - - -.”

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did
not become common property of both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American
and English law that does not recognize such separate juridical personality), the
bypassing of the existence of the limited partnership as a taxpayer can only be done by
ignoring or disregarding clear statutory mandates and basic principles of our law.  The
limited partnership's separate individuality makes it impossible to equate its income with
that of the component members.  True, section 24 of the Internal Revenue Code merges
registered general co partnerships (compañias colectivas) with the personality of the
individual partners for income tax purposes.  But this rule is exceptional in its disregard
of a cardinal tenet of our partnership laws, and can not be extended by mere implication
to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the
Visayas, L-13554, Resolution of 30 October 1964, and Koppel (Phil.), Inc., vs. Yatco, 77
Phil. 504) as authority for disregarding the fiction of legal personality of the corporations
involved therein are not applicable to the present case.  In the cited cases, the
corporations were already subject to tax when the fiction of their corporate personality
was pierced; in the present case, to do so would exempt, the limited partnership from
income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities.  The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of their
corporate personalities for tax purposes.  This is not true in the present case.  Here, the
limited partnership is not a mere business conduit of the partner-spouses; it was
organized for legitimate business purposes; it conducted its own dealings with its
customers prior to appellee's marriage, and had been filing its own income tax returns as
such independent entity.  The change in its membership, brought about by the marriage of
the partners and their subsequent acquisition of all interest therein, is no ground for
withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it
to pay income tax.  As far as the records show, the partners did not enter into matrimony
and thereafter buy the interests of the remaining partner with the premeditated scheme or
design to use the partnership as a business conduit to dodge the tax laws.  Regularity, not
otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that
income to be included in the individual tax return of respondent Suter is to overstretch the
letter and intent of the law.  In fact, it would even conflict with what it specifically
provides in its Section 24: for the appellant Commissioner's stand results in equal
treatment, taxwise, of a general copartnership (compañia colectiva) and a limited
partnership, when the code plainly differentiates the two.  Thus, the code taxes the latter
on its income, but not the former, because it is in the case of compañias colectivas that
the members, and not the firm, are taxable in their individual capacities for any dividend
or share of the profit derived from the duly registered general partnership (Section 26, N.
I. R. C.; Arañas, Anno. & juris. on the N.I.R.C., As Amended, Vol. 1, pages 88-89).

But it is argued that the income of the limited partnership is actually or constructively the
income of the spouses and forms part of the conjugal partnership of gains.  This is not
wholly correct.  As pointed out in Agapito vs. Molo, 50 Phil. 779, and People's Bank vs.
Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become
conjugal only when no longer needed to defray the expenses for the administration and
preservation of the paraphernal capital of the wife.  Then again, the appellant's argument
erroneously confines itself to the question of the legal personality of the limited
partnerships which is not essential to the income taxability of the partnership since the
law taxes the income of even joint accounts that have no personality of their own.
[1]
 Appellant is, likewise, mistaken in that it assumes that the conjugal partnership of gains
is a taxable unit, which it is not.  What is taxable is the "income of both spouses" [section
45 (d)] in their individual capacities.  Though the amount of income (income of the
conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for
a given taxable year, their consequences would be different, as their contributions in the
business partnership are not the same.

The difference in tax rates between the income of the limited partnership being
consolidated with, and when split from the income of the spouses, is not a justification
for requiring consolidation; the revenue code, as it presently stands, does not authorize it,
and even bars it by requiring the limited partnership to pay tax on its own income.

For the foregoing reasons, the decision under review is hereby affirmed.  No costs.