Government of the Philippine Islands vs. El Monte de Piedad y Caja de Ahorros de Manila

A tax exemption must be justified by statutory language too plain to be mistaken; an institution claiming exemption from taxation as a savings bank must show that its deposits are loaned or invested for the sole benefit of the depositors and without profit or compensation to the institution. An institution whose profits belong to itself, with depositors entitled only to a fixed 4 per cent interest, is a profit-making institution and does not fall within the statutory exception.

The defendant, El Monte de Piedad y Caja de Ahorros de Manila, was an institution organized in accordance with canon law, created by royal order of the King of Spain on July 8, 1880, under the royal patronate powers then existing in the Crown of Spain. Its statutes and by-laws were subject to the will of the Catholic Archbishop of Manila and could be changed by him at his pleasure. The institution was created for the safe investment of the savings of the poor classes and to assist the needy in time of need by loaning such savings at a low rate of interest. The taxes in question were assessed under Act No. 1189, the Internal Revenue Law, which imposed taxes on banks and banking institutions.

The Government of the Philippine Islands brought an action against El Monte de Piedad y Caja de Ahorros de Manila to recover internal revenue taxes assessed on the monthly deposits and the capital employed by the defendant bank in the business of banking from August 1, 1904, to June 30, 1914, together with statutory penalties for refusing to pay the taxes as required by law. The case was submitted on a stipulation of facts, with some oral and documentary evidence introduced.

The defendant was an institution created by royal order of the King of Spain on July 8, 1880, under the royal patronate powers of the Crown of Spain, for the safe investment of the savings of the poor classes and to assist the needy by loaning such savings at a low rate of interest. Its statutes and by-laws were subject to the will of the Catholic Archbishop of Manila and could be changed by him at his pleasure. The statutes provided for an annual interest of 4 per cent to depositors, which was the limit to which depositors were entitled to participate in the profits or earnings of the institution. During the entire period for which the taxes were assessed, the defendant had a place of business in the city of Manila where credits were opened by the deposit or collection of money or currency subject to be paid by order.

The tax was assessed on the theory that the defendant was a bank within the definition of section 110 of Act No. 1189, subject to a tax of one-eighteenth of one per centum each month upon the average amount of deposits, and a further tax of one-twenty-fourth of one per centum each month upon the capital employed in the business of banking, imposed by section 111. The defendant sought to escape the tax on its deposits by claiming that it was a savings bank exempt under paragraph 4 of section 111, which exempted deposits in provident institutions, savings banks, savings funds, or savings institutions having no capital stock and doing no other business than receiving deposits to be loaned or invested for the sole benefit of the parties making such deposits and without profit or compensation to the association or company. The defendant also argued that there should be no tax on its capital because it had none.

It was undisputed that the defendant was engaged in the banking business, and the amounts of the deposits and the accrued profits, surplus, or capital were admitted. The defendant's accrued profits, surplus, or reserve amounted to P549,912.52, which the defendant claimed would belong to it if the institution were wound up. The trial court held that the defendant was not a savings bank because its deposits were not loaned or invested for the sole benefit of the depositors and without profit or compensation to the institution, and that the accrued profits constituted taxable capital.

• Savings Bank Exemption: The defendant argued that it was a savings bank within the exception contained in paragraph 4 of section 111 of Act No. 1189, and that its deposits should therefore be exempt from the tax on deposits.

• No Capital: The defendant argued that there should be no tax on its capital employed because it had no capital, the P549,912.52 being accrued profits or surplus rather than capital.

• Practical Construction: The defendant argued that the failure of various Collectors of Internal Revenue during the ten years for which the taxes were imposed to levy and assess them constituted a practical construction of the statute by officials charged with its execution, which should be followed by the Court.

• Presumption of Correctness: The defendant complained of the trial court's finding that the assessment of the Collector of Internal Revenue carried with it a presumption of correctness of the taxes and of other matters affecting the defendant's liability.

• Reserve Funds of American Savings Banks: The defendant argued that certain savings banks in the United States had enormous reserve or accrued profits and that it would be a practical impossibility to distribute those profits among depositors.

• Burden of Proof: The Attorney-General argued that, the defendant being engaged in the banking business and presumptively liable to the payment of the taxes imposed on banks, the burden was on the defendant to show clearly that it fell within the exception created by the statute.

• Profit-Making Character: The respondent maintained that the defendant was a profit-making institution, as the profits derived from the investment of deposits belonged to the institution itself, with depositors entitled only to 4 per cent interest.

• Savings Bank Exemption: Whether the defendant institution fell within the exception contained in paragraph 4 of section 111 of Act No. 1189 as a savings bank whose deposits are loaned or invested for the sole benefit of the depositors and without profit or compensation to the institution.

• Taxability of Accrued Profits as Capital: Whether the P549,912.52 in accrued profits, surplus, or reserve constituted "capital employed" by the defendant in the business of banking, subject to the tax imposed by paragraph 2 of section 111 of Act No. 1189.

• Practical Construction: Whether the failure of Collectors of Internal Revenue to assess the taxes during the ten-year period constituted a practical construction of the statute binding on the government.

• Presumption of Liability: Whether the assessment of the Collector of Internal Revenue carried with it a presumption of correctness of the taxes and of other matters affecting the defendant's liability.

• Savings Bank Exemption: No. The defendant was a profit-making institution, and its deposits were not loaned or invested for the sole benefit of the depositors and without profit or compensation to the institution, as required by paragraph 4 of section 111 of Act No. 1189.

• Taxability of Accrued Profits as Capital: Yes. The P549,912.52 was money which the defendant institution used in its banking business and constituted "capital employed" within the meaning of the Internal Revenue Law.

• Practical Construction: No. The statute was perfectly clear as to what constituted a savings bank and needed no construction; moreover, the conditions under which tax laws were administered during the early years of American civil government in the Philippines relieved the government from the burden of a presumption arising from practical construction.

• Presumption of Liability: The complaint was without merit, as the universal rule is that he who claims an exemption from taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be mistaken.

• Savings Bank Exemption: The Court found no successful attack could be made on the trial court's finding that the defendant was not a savings bank. It was undisputed that the defendant was a profit-making institution, although it may not have been designed as such, and that the profits derived from the investment of the deposits went to and belonged to the institution itself. The only participation of the depositors in the results of the business was the right to a return of the deposits with interest at 4 per cent. In this respect, the defendant was not different from any other banking institution. Whatever profit was made belonged, as in the case of an ordinary bank, to the bank itself, and the depositor had no interest or participation in that profit. It was conceded that if the defendant institution were wound up, the surplus of P549,912.52 would belong to the defendant institution. Being a profit-making institution, the defendant did not fall within the exception of the statute.

• Taxability of Accrued Profits as Capital: The Court acknowledged that the question whether the P549,912.52 was capital presented some difficulties. The word "capital" was used and understood by the Legislature in a nontechnical sense, not as "capital stock" or any other stated or fixed sum, but rather as the amount of money which the bank uses in its business. The proviso immediately following the phrase imposing the tax spoke of what was not capital, providing that money borrowed and received from time to time in the usual course of business from any person not a partner of or interested in the bank should not be considered as capital employed. This proviso indicated that the Legislature, in speaking of capital, did not refer to a fixed sum paid by incorporators or stockholders, and that the capital upon which the tax was imposed was broad enough to cover whatever money, from whatever source except deposits, the bank used in the usual course of business. The third proviso, dealing with branch banks of foreign corporations, further indicated that "capital" had a wider signification, meaning the amount of money which one uses in his business. The Court was satisfied that the P549,912.52 was money which the defendant used in its banking business, although it may have been held for the time being for the payment of depositors in times of extraordinary withdrawals or to meet unusual demands upon its loan department. The mere fact that it was for the time being inactive was not conclusive in the determination of its nature.

• Practical Construction: The Court rejected the argument that the failure of Collectors of Internal Revenue to assess the taxes constituted a practical construction of the statute. The statute itself was perfectly clear as to what was and what was not a savings bank, and needed no construction. The constitution of the bank, its by-laws, its method of doing business, and the destination of its profits determined whether it fell within the definition of the exception. The difficulty was not an ambiguity in the statute but a question of fact as to whether the institution possessed the elements required. Moreover, even giving the contention full weight, the Court hesitated to apply it, as the conditions under which tax laws were administered during the first years of American civil government, immediately following the change of sovereignty, were such as to relieve the government from the burden of a presumption which, under ordinary conditions, arises from the practical construction of a statute by officials charged with its execution. There was never a direct or press ruling on the question by any official; the mere fact that no tax was levied or assessed was the main reliance.

• Presumption of Liability: The Court held that even if the complaint regarding the presumption of correctness were well founded, it would have little bearing on the result, considering the universal rule that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be mistaken. The defendant being a bank engaged in the banking business, it immediately fell within the imposing clause of the statute. To escape that imposition, the defendant must produce an Act of the Legislature showing an intention to exempt it by words too plain to be mistaken. It mattered little whether the assessment carried with it a presumption of liability or whether the admission of the defendant that it was engaged in banking business carried with it the presumption that it was liable to pay the taxes imposed on all persons engaged in that business.

• Reserve Funds of American Savings Banks: The Court regarded the argument based on American savings banks with reserve funds as without merit. The essential point was that, in those cases, the ownership of the depositors of the reserve funds or accrued profits was admitted, and their right to share in the distribution thereof was undisputed. Here, the ownership of the fund was claimed by the defendant and the right of the depositors to participate therein was denied.

• Strict Construction of Tax Exemptions — He who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be mistaken. The Court applied this rule to hold that the defendant, being admittedly engaged in the banking business, fell within the imposing clause of the statute and bore the burden of proving its exemption.

• Savings Bank Exemption Requisites — Under paragraph 4 of section 111 of Act No. 1189, an institution qualifies for the exemption only if it has no capital stock and does no other business than receiving deposits to be loaned or invested for the sole benefit of the parties making such deposits and without profit or compensation to the association or company. The Court applied this test to find that the defendant, whose profits belonged to itself and whose depositors were entitled only to 4 per cent interest, was a profit-making institution outside the exemption.

• Meaning of "Capital Employed" — The word "capital" in the Internal Revenue Law was used in a nontechnical sense, meaning the amount of money which the bank uses in its business, not "capital stock" or any other stated or fixed sum. The Court applied this definition to hold that the defendant's accrued profits or surplus of P549,912.52, being money used in its banking business, constituted taxable capital.

• Practical Construction of Statutes — The failure of officials charged with the execution of a statute to levy or assess a tax does not constitute a practical construction binding on the government where the statute is clear and unambiguous and needs no construction. The Court further noted that the conditions of the early years of American civil government in the Philippines, when officials were confronted with a new system of laws and unfamiliar institutions, relieved the government from the burden of a presumption arising from practical construction.

• "The particular reason urged why there should be no tax on the capital employed by the defendant is that it has none." — This excerpt frames the defendant's argument regarding the tax on capital, which the Court ultimately rejected by defining "capital employed" broadly.

• "It is undisputed in this case that the defendant is a profit making institution, although it may not have been designed as such, and that the profits derived from the investment or the deposits go and belong to the institution itself." — This passage states the core factual finding that disqualified the defendant from the savings bank exemption, as its deposits were not loaned or invested for the sole benefit of the depositors.

• "The statute itself is perfectly clear as to what is and what is not a savings bank; and, accordingly, needs no construction to determine whether a given institution is or is not a savings bank." — This excerpt articulates the Court's rejection of the practical construction argument, holding that the statute's clarity obviated any need for interpretation.

• "It is, rather, the amount of money which the bank uses in its business; and this seems to be the sense in which the word is used in the Internal Revenue Law imposing a tax on the capital employed by a banking institution." — This passage defines the nontechnical meaning of "capital" under the Internal Revenue Law, which formed the basis for holding the defendant's accrued profits taxable.

N/A — The decision does not cite any prior case law.

• Section 110, Act No. 1189 (Internal Revenue Law) — Defined "bank" for purposes of the internal revenue tax. The Court applied this definition to hold that the defendant, which had a place of business where credits were opened by the deposit or collection of money or currency subject to be paid by order, was a bank within the meaning of the law.

• Section 111, paragraph 2, Act No. 1189 (Internal Revenue Law) — Imposed a tax of one-twenty-fourth of one per centum each month upon the capital employed by any bank engaged in the business of banking. The Court applied this provision to hold that the defendant's accrued profits of P549,912.52 constituted taxable capital.

• Section 111, paragraph 4, Act No. 1189 (Internal Revenue Law) — Exempted from the tax on deposits those deposits in provident institutions, savings banks, savings funds, or savings institutions having no capital stock and doing no other business than receiving deposits to be loaned or invested for the sole benefit of the parties making such deposits and without profit or compensation to the association or company. The Court applied this exemption strictly and held that the defendant, being a profit-making institution, did not qualify.

Torres, Carson, and Araullo, JJ., concurred. Trent, J., concurred in the result. Johnson, J., reserved his vote.

N/A — No dissenting opinion is provided in the case text.