De Jesus vs. City of Manila

An innocent purchaser for value of land registered under the Torrens system takes the land free from taxes that were not yet assessed or levied at the time of purchase, because under Section 39 of Act No. 496, only taxes "within two years after the same have become due and payable" subsist as liens against registered land. Taxes that are merely inchoate or "in embryo" — never assessed or levied — cannot be enforced against the land in the hands of such purchaser.

The case involves the interplay between the Land Registration Act (Act No. 496), which created the Torrens system of indefeasible titles in the Philippines, and Act No. 183, which imposed a per centum tax on real estate in the City of Manila. Section 39 of Act No. 496, as amended by Act No. 2011, declared that every applicant receiving a certificate of title and every subsequent purchaser for value in good faith holds registered land free from all incumbrances except those noted on the certificate and certain enumerated exceptions, including taxes within two years after they become due and payable. Section 50 of Act No. 183 authorized the city assessor and collector to list, value, and charge against the owner of lands that had escaped taxation the taxes due for the current year and all prior years for which they had not been assessed.

In 1901, Pastor Lerma, then owner of a piece of land in the City of Manila, declared the property for taxation alleging its area to be 337,938.50 square meters, when in truth and in fact it was 480,695.53 square meters. Because of this inaccurate declaration, 142,767.03 square meters escaped the payment of taxes from 1901 to 1910. In 1907, the plaintiff purchased the land from Lerma; at that time, the land was registered under the Torrens system, and the plaintiff received a certificate of title in accordance with Act No. 496.

In 1910, the taxes that would have been paid upon the 142,767.03 square meters, if properly declared, were assessed against the plaintiff, who was then the owner of the lands. The city proceeded by distraint against the property for the collection of the taxes. To avoid litigation, trouble, and expense, the plaintiff paid taxes, fees, and interest in the sum of P2,096.49 under protest, and thereafter began the action to recover the same. The trial court found in favor of the plaintiff for the sum of P1,649.82 and costs, and the defendant city appealed.

The plaintiff did not claim that the taxes were illegally or erroneously assessed or levied, nor did he question the authority of the city assessor and collector in listing the additional area for taxation. His action was based solely on the proposition that under Section 39 of Act No. 496, his land could not be incumbered with land taxes except those corresponding to the years during which he had held it. The plaintiff paid the taxes for the years 1907 to 1910, and claimed only the right to recover for the taxes paid for the years previous to the date of his purchase.

• Taxes Not "Due and Payable" Until Assessment: The appellant contended that the taxes sought to be recovered were not "due and payable" until 1910, when the area of 142,767.03 square meters was for the first time listed and valued for taxation and taxes assessed against the plaintiff as owner. The city argued that there can be no taxes due and payable unless the assessment and valuation of the property to be taxed is first made, for otherwise the amount of the tax cannot be ascertained.
• No Repugnancy with Section 50 of Act No. 183: The appellant argued that the construction of Section 39 as relieving registered land from unassessed taxes would repeal Section 50 of Act No. 183, which authorizes the city assessor and collector to list, value, and charge against the owner of lands that have escaped taxation the taxes due for the current year and all other years for which they had not been assessed.
• Discrimination Against Unregistered Property: The appellant contended that exempting registered lands that have escaped taxation from back taxes would amount to a discrimination against lands not registered, contrary to the principles of taxation, since the per centum tax under Act No. 183 is assessed directly against the property and not apportioned between individuals.
• Repugnancy with Section 70 of Act No. 496: The appellant argued that the construction of Section 39 makes that section repugnant to Section 70 of the same Act, which provides that after lands are registered they shall be subject to the same burdens and incidents attached by law to unregistered land.

• Torrens Title Free from Unassessed Taxes: The plaintiff argued that under Section 39 of Act No. 496, his land could not be incumbered with the land tax except those corresponding to the years during which he had held it. He claimed only the right to recover for the taxes paid for the years previous to the date of his purchase, those taxes not having been either due or payable and not having ever been assessed or levied prior to the time when he purchased the land.

• Torrens Title and Unassessed Taxes: Whether a purchaser for value and in good faith of land registered under Act No. 496, which has escaped taxation by reason of the failure of the prior owner to declare it for taxation as required by law, takes such land free and clear from the burden of such taxes, they never having been, prior to the purchase, actually levied or assessed against the land by reason of said failure of the prior owner to declare it for taxation.

• Torrens Title and Unassessed Taxes: Yes. An innocent purchaser for value of registered land takes the land free from taxes that were never assessed or levied prior to the purchase. Under Section 39 of Act No. 496, the only taxes to which property held under a Torrens title is subject are those "within two years after the same have become due and payable," and taxes not yet assessed or levied are not "due and payable" within the meaning of the section.

• Torrens Title and Unassessed Taxes: The Court held that the general purpose of the Land Registration Act was to create an indefeasible title, one free from all charges, liens, and incumbrances except those preserved against it by special mention in the decree of registration or by provision of law. Section 39 embodies that purpose in express law, declaring that every owner of registered land shall hold the same free and clear from any and all liens and incumbrances except those set forth in the decree of registration and those mentioned and excepted in that section. The purpose was to give to the person registering, and to his transferee for value, an absolutely clean title, not one subject to hidden defects, undeveloped or inchoate claims, or any sort of restriction, limitation, or reduction except those named in the certificate of registration or described in Section 39.

The Court identified three requisites before land just registered or transferred for value after registration can be subjected to payment of past taxes: first, they must be taxes; second, they must be due and payable and subsisting as liens; and third, they must be due and payable within two years of the time when the land was originally registered or when the transfer was made to the purchaser of value. Applying these requisites, the Court found that the taxes in question, assessed for the first time in 1910, were not "due and payable" in 1907 when the plaintiff purchased the land, as under the tax laws taxes are not due and payable until they have been levied or assessed as provided by law. Nor were they taxes due and payable within two years prior to the transfer to the plaintiff, since taxes due and payable for the first time in 1910 could not have been due and payable two years prior to 1907.

The Court further reasoned that if the law intended to relieve registered land from taxes that are actual liens and incumbrances, it must also have intended to relieve it from taxes that are not even in existence — "taxes in embryo." The protection of the purchaser is the dominant note of the statute, and if unassessed taxes could be collected against the land, the value of the Torrens title would be reduced and one of the main purposes of the Land Registration Act defeated, for taxes never levied or assessed are wholly unknown and unascertainable and thus far more dangerous to a purchaser than taxes actually assessed and of record.

The Court rejected the appellant's contention that this construction repeals Section 50 of Act No. 183, holding that Section 50 is general while Section 39 puts a limitation on it. After Section 50 has fully operated, Section 39 determines whether the taxes assessed under that section will be collectible out of lands held under registered title. Section 50 deals with the levy and assessment of taxes; Section 39 with the conditions under which certain lands shall be exempt from the payment of taxes. In cases of conflict, "the tax must give way to the title — the general provision to the exception."

The Court also rejected the discrimination argument, holding that the whole purpose of Act No. 496 is to make registered lands different from unregistered lands and to give them advantages very much superior to the latter. There is no discrimination in Section 39 against unregistered property; there is simply a protection of registered titles. The Legislature subordinated the right of the Government to collect taxes in certain cases to the creation of an indefeasible and unimpeachable title, declaring that "it was better that the Government lose a tax occasionally than that registered titles should be uncertain always."

Finally, the Court addressed Section 70 of Act No. 496, holding that the distinction must always be made between lands registered after the taxes sought to be collected were assessed or might have been assessed, and lands transferred to a purchaser for value after the taxes were assessed or might have been assessed. The result of the Court's theory is not to relieve registered lands from taxation but to declare that the Government cannot hide its claims or fail to present them for any considerable length of time and thereby pile them up against the lands in such manner as to destroy or impair the quality of free and fearless transfer. Where sections 39 and 70 appear in conflict, the general provisions of Section 70 must give way to the exceptions of Section 39, as Section 39 forms an exception to the general provisions of the Act.

The Court distinguished between the case where registered lands are owned by the person against whom the taxes are assessed for the period during which they are assessed, and the case where the lands have been transferred by him to an innocent purchaser for value. So long as the registered lands are owned by A, they are subject to the provisions of Section 50 as well as Section 70. But if A transfers the land to B, who buys for value, Section 50 cannot be invoked as to the portion which escaped taxation, because Section 39 declares that an innocent purchaser for value shall take the lands free from all liens and incumbrances except those specifically named in that section. The plaintiff, being the owner since 1907, was liable for all taxes levied or assessed, or which might have been levied or assessed, during his ownership, and he paid the taxes for 1907 to 1910. His claim was only for taxes paid for years previous to his purchase, and those taxes not having been due or payable and not having ever been assessed or levied prior to his purchase, his contention was well founded.

• Torrens Title and Unassessed Taxes — Under Section 39 of Act No. 496, an innocent purchaser for value of registered land takes the land free from all liens and incumbrances except those noted on the certificate and those specifically enumerated in the section. For past taxes to burden registered land in the hands of such purchaser, three requisites must concur: (1) they must be taxes; (2) they must be due and payable and subsisting as liens; and (3) they must be due and payable within two years of the time when the land was originally registered or when the transfer was made to the purchaser of value. Taxes never assessed or levied — "taxes in embryo" — are not liens or incumbrances and cannot burden the Torrens title.
• Statutory Construction — Exception Prevails Over General Provision — Where a statute contains an exception, the exception is as much a part of the Act as the general provisions to which it presents the exception. When the occasion for the application of the exception arises, there is no repugnancy between the general provisions and the exception. Section 39 of Act No. 496 forms an exception to the general provisions of the Act, particularly Section 70, and in cases of conflict, the general provisions must give way to the exception.
• Distinction Between Original Owner and Innocent Purchaser for Value — So long as registered lands are owned by the person who made the false declaration, Section 50 of Act No. 183 can be invoked to oblige him to pay the taxes on the excess area. But if he transfers the land to an innocent purchaser for value, Section 50 cannot be invoked as to the portion which escaped taxation, because Section 39 of Act No. 496 declares that such purchaser takes the land free from all liens and incumbrances except those specifically named in that section.

• "Every applicant receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all incumbrances except those noted on said certificate, and any of the following incumbrances which may be subsisting, namely: . . . Second. Taxes within two years after the same have become due and payable." — This is the controlling statutory provision, Section 39 of Act No. 496, which defines the extent to which registered land may be burdened by taxes.
• "The purpose was to give to the person registering, and to his transferee for value, an absolutely clean title, not one subject to hidden defects, to undeveloped or inchoate claims, to any sort of restriction, limitation or reduction except those named in the certificate of registration or described in section 39." — This passage articulates the dominant purpose of the Land Registration Act and the interpretive principle applied throughout the decision.
• "It is the protection of the purchaser which is the dominant note of the statute; and, if such taxes as those here in question may be collected, then the value of that title has been reduced, its efficacy impaired, and one of the main purposes of Land Registration Act defeated; for taxes which have never been levied or assessed are far more dangerous to a purchaser than taxes actually assessed and of record, because they are wholly unknown and unascertainable." — This states the policy rationale for holding that unassessed taxes cannot burden a Torrens title in the hands of an innocent purchaser for value.
• "In such case the tax must give way to the title — the general provision to the exception." — This is the Court's resolution of the apparent conflict between Section 50 of Act No. 183 and Section 39 of Act No. 496, establishing the priority of the Torrens title exception over the general tax collection provision.

• City of Manila vs. Lack, 19 Phil. Rep., 324 — Cited as controlling precedent for the proposition that the general purpose of the Land Registration Act was to create an indefeasible title free from all charges, liens, and incumbrances except those preserved against it by special mention in the decree of registration or by provision of law.
• Adam vs. Tonella, 70 Miss., 701; 22 L. R. A., 349 — Cited by the appellant for the definition of assessment as the listing and valuation of property liable to taxation.
• Galusha vs. Wendt, 114 Iowa, 604 — Cited by the appellant for the proposition that without an assessment there is no debt from the taxpayer and no obligation on his part which can be enforced in an action.
• Worthington vs. Withman, 70 Iowa, 192 — Cited by the appellant for the proposition that assessment is the basis of the levy, and without it there cannot properly be a levy.

• Section 39, Act No. 496 (Land Registration Act), as amended by Act No. 2011 — The central provision of the case, declaring that every applicant receiving a certificate of title and every subsequent purchaser of registered land for value in good faith holds the land free of all incumbrances except those noted on the certificate and the enumerated exceptions, including taxes within two years after the same have become due and payable. The Court applied this section to hold that unassessed taxes cannot burden registered land in the hands of an innocent purchaser for value.
• Section 50, Act No. 183 — Authorizes the city assessor and collector to list, value, and charge against the owner of lands which have theretofore escaped taxation the taxes due for the current year and for all other years for which they had not been assessed. The Court held that this general provision must give way to the exception in Section 39 of Act No. 496 when the land has passed to an innocent purchaser for value.
• Section 70, Act No. 496 — Provides that after lands are registered they shall be subject to the same burdens and incidents attached by law to unregistered land, and that nothing in the Act shall relieve registered land from liability to any lien established by law. The Court held that Section 39 forms an exception to this general provision, and in cases of apparent conflict, the general provisions of Section 70 must give way to the exceptions of Section 39.

Arellano, C.J., Torres, and Araullo, JJ., concurred.

• Carson and Trent, JJ., dissenting — The decision records that Carson and Trent, JJ., dissented, but the text does not provide the grounds or reasoning of their dissent.