Juan Luna Subdivision, Inc. vs. Sarmiento

A payee who accepts a check, deposits it with a bank, and whose depository collects from the drawee is deemed to have received payment, releasing the drawer from liability; and a statute remitting "taxes due and payable" covers only delinquent or unpaid taxes, not taxes already collected and applied.

Juan Luna Subdivision, Inc. was a domestic corporation with its principal office in Manila. The City Treasurer of Manila was the official custodian of city tax collections, with the Philippine National Bank as his sole depository. Philippine Trust Company served as the banking institution on which Juan Luna Subdivision maintained its account. The dispute arose in the aftermath of the Japanese occupation, during which banking operations were disrupted and tax records were partially destroyed, and against the backdrop of Commonwealth Act No. 703, enacted November 1, 1945, which remitted certain land taxes and penalties for the occupation years.

Juan Luna Subdivision, Inc., a domestic corporation with its principal office in Manila, maintained an account with the Philippine Trust Company carrying a credit balance of P4,940.17. On December 29, 1941, the corporation issued Check No. 628334 in the amount of P2,210.52, drawn upon the Philippine Trust Company, and delivered it to the City Treasurer of Manila. The check was intended to cover the corporation's land tax for the second semester of 1941, the exact amount of which had not yet been determined. Because the precise liability was unknown, the City Treasurer entered the check in his ledger as a deposit by the taxpayer rather than as a tax payment.

On February 20, 1942, after the exact tax obligation was verified at P341.60, that sum was applied to the second-semester 1941 land tax. The remaining balance of P1,868.92, covered by voucher No. 1487 of the City Treasurer's office, was noted in the ledger as a credit to Juan Luna Subdivision, Inc. The City Treasurer's records did not further disclose what was done with the check, but the books of the Philippine Trust Company showed that it had been deposited by the City Treasurer with the Philippine National Bank—the City Treasurer's sole depository—on December 29, 1941.

The Philippine Trust Company had been closed by order of the Japanese military authorities and was authorized to reopen in March 1942. Upon reopening, it received from the Philippine National Bank a bundle of pre-war checks, including Juan Luna Subdivision's Check No. 628334, which had been held in abeyance pending the bank's resumption of operations. These checks were accepted and the amounts debited against the respective drawers' accounts; with respect to Check No. 628334, the debit was effected on May 1, 1944, when the Philippine National Bank presented it and the drawee bank cashed it.

After liberation, the City refused to refund the plaintiff's deposit or apply it to future taxes, while the Philippine Trust Company was unwilling to reverse its debit entry against Juan Luna Subdivision's account. Caught between the two, the corporation filed suit against both defendants in the alternative, seeking a determination of which one was liable for the check. A separate cause of action between the plaintiff and the City Treasurer concerned the amount to be refunded, the plaintiff claiming the entire P2,210.52 on the ground that the second-semester 1941 taxes had been remitted by Commonwealth Act No. 703, while the City Treasurer contended that the remission applied only to taxes still unpaid.

• Non-Receipt of Proceeds: The City Treasurer argued that his office was not benefited by the check and denied that it was cashed, asserting there was no proof of actual payment. He contended that the lower court's finding that the sum of P2,210.52 was added to the actual cash of the City Treasurer was based on conjecture and surmise without competent proof.
• Book Entries vs. Actual Payment: The City Treasurer maintained that the ledger entries merely showed accounting transactions in book value but did not establish that actual payment had been made by the Philippine National Bank to the City Treasurer, and that there was a difference between the book value and the cash value of the check.
• Burden of Proof: The City Treasurer argued that the burden of proving the check was in fact paid rested on the defendant Philippine Trust Company, not on him.
• Limited Scope of Remission: The City Treasurer contended that Commonwealth Act No. 703 referred only to taxes which were still unpaid at the time of its enactment, not to taxes already collected.

• Check Was Cashed: Juan Luna Subdivision maintained that the check was in fact cashed, as evidenced by the unimpugned entries in the books of the Philippine Trust Company showing that the amount was debited against its account on May 1, 1944.
• Trust Character of Deposit: The plaintiff argued that the check was in the nature of a deposit held in trust by the City Treasurer, and that for this reason its taxes were to be regarded as still "due and payable" within the meaning of Commonwealth Act No. 703, entitling it to refund of the full amount.
• Full Refund Under CA No. 703: The plaintiff claimed the whole amount of the check, contending that taxes for the last semester of 1941 had been remitted by Commonwealth Act No. 703, and that the remission covered taxes paid before the law's enactment.

• Liability on the Check: Whether the City Treasurer of Manila is liable for the amount of the check accepted from Juan Luna Subdivision, Inc., given the City Treasurer's contention that there was no proof the check was actually cashed or that his office received the proceeds.
• Scope of Tax Remission: Whether Commonwealth Act No. 703's remission of "taxes and penalties due and payable" covers taxes already paid or collected before the law's enactment, or is limited to taxes still unpaid.
• Amount of Refund: Whether the refund should be the full P2,210.52 or only the unapplied balance of P1,868.92.

• Liability on the Check: Yes. The City Treasurer is liable, the check having been accepted, deposited with the depository bank, and ultimately cleared by the drawee, thereby discharging the drawer and making the Treasurer a creditor of the Philippine National Bank.
• Scope of Tax Remission: No. Commonwealth Act No. 703 remits only taxes "due and payable"—i.e., taxes owed or still unpaid—not taxes already collected and applied before the law's enactment.
• Amount of Refund: P1,868.92 only. The sum of P341.60 had been applied to the 1941 second-semester tax as early as February 20, 1942, and from that date the tax was legally and actually paid, placing it outside the coverage of the remission.

• Liability on the Check: The drawer had sufficient funds on deposit with the drawee bank to meet the check. The City Treasurer accepted the check and deposited it with the Philippine National Bank, his sole depository. The Philippine National Bank in turn collected the equivalent amount from the Philippine Trust Company, as shown by uncontradicted book entries. Under these circumstances, the City Treasurer became a creditor of the Philippine National Bank, and Juan Luna Subdivision was released from liability on its check. What became of the proceeds after collection was a matter between the City Treasurer and the Philippine National Bank. If the City Treasurer did not collect his credit or otherwise make use of it, he alone bore the consequences. The presumption that things happen according to the ordinary course of business and habits further supported the conclusion that the Philippine National Bank credited the City Treasurer with the amount, and that the Treasurer, in the ordinary care of his concerns, withdrew it. The burden of rebutting this presumption rested on the City Treasurer, not on the plaintiff. The trust character of the deposit did not alter the situation, as the check had been collected and the drawer's account debited.

• Scope of Tax Remission: The language of Section 1 of Commonwealth Act No. 703 was unambiguous. It spoke of "taxes and penalties due and payable," the literal meaning of which is taxes owed or owing. The provision also referred to penalties, which accrue only when taxes are not paid on time, reinforcing the conclusion that the law targeted delinquent obligations. The word "remit" was not confined to desisting from exacting but could also mean restoring what had already been taken; however, the phrase "due and payable" qualified the scope to unpaid liabilities. Literal interpretation did not violate the spirit or intention of the law, nor was it constitutionally infirm as class legislation. The remission of unpaid taxes to the exclusion of already-collected taxes did not constitute unfair discrimination, because each set of taxes formed a class by itself, and all taxpayers within each class were treated alike. The confinement of the condonation to delinquent taxes was justified by practical considerations: taxpayers in arrears would have to satisfy their liability in genuine restored currency, whereas taxes paid during the occupation had been satisfied in Japanese military notes, many at a time when those notes were nearly worthless. Refunding those taxes in restored currency would unduly enrich the payers at public expense, and the administrative burden of processing refunds—given the destruction of tax records and the great number of potential claimants—would be tremendous.

• Amount of Refund: The plaintiff's argument that the check was a deposit held in trust by the City Treasurer, and that the taxes were therefore still "due and payable," was well taken but only to the extent of P1,868.92. The amount of P341.60 had been applied to the second half of the 1941 tax as early as February 20, 1942, and had become part of the general funds of the city treasury. From that date, the tax was legally and actually paid and settled, placing it outside the remission's coverage. Only the unapplied balance of P1,868.92 remained a deposit held in trust and was properly refundable.

• Discharge of Drawer by Collection of Check — When the payee of a check accepts it, deposits it with a bank, and the depository bank collects from the drawee, the drawer is released from liability on the instrument. The payee becomes a creditor of the depository bank; if the payee fails to collect from the depository, the loss falls on the payee alone, not on the drawer. Applied here: Juan Luna Subdivision's check was accepted by the City Treasurer, deposited with PNB, and cleared by Philippine Trust Company, discharging the corporation and rendering the City Treasurer liable.

• Presumption of Ordinary Course of Business — Things are presumed to happen according to the ordinary course of business and habits. The burden of rebutting this presumption rests on the party against whom it operates. Applied here: because PNB was open throughout the occupation and the check was deposited and cleared, it was presumed that PNB credited the City Treasurer and that the Treasurer withdrew the amount; the City Treasurer failed to rebut this presumption.

• Statutory Construction — "Due and Payable" in Tax Remission Statutes — The phrase "taxes and penalties due and payable" in a remission statute refers to taxes owed or owing—i.e., delinquent or unpaid—not taxes already collected and applied. The inclusion of "penalties" (which accrue only upon non-payment) reinforces this reading. Remission of unpaid taxes to the exclusion of paid taxes does not constitute unfair discrimination, as each set of taxes is a class by itself.

• "The drawer of the check had funds on deposit to meet it; the City Treasurer accepted it and deposited it with the Philippine National Bank, and the Philippine National Bank collected the equivalent amount from the drawee Bank. In the light of these circumstances, the City Treasurer became the Philippine National Bank's creditor and the Juan Luna Subdivision, Inc. was released from liability on its checks." — This passage states the ratio decidendi on the check-liability issue: acceptance, deposit, and collection discharge the drawer and shift the risk to the payee.

• "There is no ambiguity in the language of the law. It says 'taxes and penalties due and payable,' the literal meaning of which taxes owned or owing." — This passage defines the controlling interpretation of Commonwealth Act No. 703, limiting the remission to unpaid taxes and excluding already-collected levies.

• "The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike." — This passage articulates the equal-protection rationale sustaining the statute's distinction between paid and unpaid taxes.

• Section 1, Commonwealth Act No. 703 — This provision remitted all land taxes and penalties due and payable for the years 1942, 1943, 1944, and fifty percent of the tax due for 1945, as well as land taxes and penalties due and payable for the second semester of 1941, conditioned on payment of the remaining fifty percent for 1945. The Court interpreted "due and payable" to mean taxes owed or owing, limiting the remission to delinquent or unpaid taxes and excluding the P341.60 already applied to Juan Luna Subdivision's 1941 second-semester tax.

Paras, C.J., Feria, Pablo, Bengzon, Montemayor, Bautista Angelo, and Labrador, JJ., concurred.