Republic of the Philippines vs. Philippine Bank of Commerce

Section 51(e) of the National Internal Revenue Code, as amended by Republic Act No. 2343, mandating the collection of surcharges and interest on unpaid taxes is mandatory and admits no exception based on the taxpayer's good faith, because the surcharge and interest are compensatory — not penal — in nature, serving as compensation to the State for the delay in payment and the taxpayer's concomitant use of funds beyond the date prescribed for payment.

The Philippine Bank of Commerce, a domestic banking corporation, filed its corporate income tax return for the taxable year 1950 on February 27, 1951, showing no taxable income on its face. The return reflected the Bank's reliance on BIR General Circular No. V-123 dated September 18, 1951, which permitted property owners to include war losses as deductions from income tax returns for the year 1950. That circular was subsequently revoked by BIR General Circular No. 139 dated August 30, 1952, issued by the Secretary of Finance, which disallowed such deductions outside the year in which the losses were actually sustained. The Bank had claimed war losses in the amount of ₱1,770,160.36, which the Collector of Internal Revenue had initially allowed as a lawful deduction pursuant to the Secretary of Finance's ruling of September 11, 1951, before that ruling was reversed by a subsequent ruling dated September 3, 1952.

The Philippine Bank of Commerce, a domestic banking corporation with its principal office at Plaza Sta. Cruz, Manila, filed its corporate income tax return for the taxable year 1950 on February 27, 1951, showing no taxable income on its face. The return reflected the Bank's reliance on BIR General Circular No. V-123 dated September 18, 1951, which permitted property owners to include war losses as deductions from income tax returns for the year 1950. The Bank had sustained war losses in the amount of ₱1,770,160.36, which the Collector of Internal Revenue had initially allowed as a lawful deduction pursuant to the Secretary of Finance's ruling of September 11, 1951.

That ruling was subsequently reversed by the Secretary of Finance on September 3, 1952, and BIR General Circular No. V-123 was revoked by BIR General Circular No. 139 dated August 30, 1952. Following the revocation, a BIR examiner conducted a verification of the Bank's return and, in a report dated January 20, 1956, recommended the imposition of a deficiency income tax in the sum of ₱116,294.00. Based on that report, the Collector of Internal Revenue issued Income Tax Assessment Notice No. ACR-120114-55/50 on February 14, 1956, requiring the Bank to pay the deficiency tax not later than February 29, 1956.

The Bank contested the assessment through a series of communications with the Bureau of Internal Revenue from February 17, 1956 onward, requesting copies of the examiner's report, the basis of the assessment, and reconsideration of the disallowance of the war-loss deduction. On April 3, 1956, the Bank requested that action on the case be held in abeyance pending its own studies. The Collector of Internal Revenue reiterated the demand for payment on September 18, 1956, and on October 6, 1960, the Commissioner of Internal Revenue denied the Bank's request that the surcharge and interest be disregarded.

On March 21, 1957, the State filed a collection suit in the Court of First Instance of Manila to recover the deficiency tax of ₱116,294.00 plus 5% surcharge, 1% monthly interest, and penalty. On April 8, 1957, the Bank paid the basic tax of ₱116,294.00 under Official Receipt No. 764075 but refused to pay the surcharge and interest. In its answer filed on May 9, 1957, the Bank denied liability for the 5% surcharge and 1% monthly interest, arguing that its war losses had already been allowed as lawful deductions and that the government's mistake in allowing such deductions — left uncorrected for a number of years — should not prejudice the taxpayer by requiring payment of interest and surcharges. The case was submitted for decision on the basis of a stipulation of facts on May 24, 1962. The lower court found that the Bank had acted in good faith during the contest period and limited the 1% monthly interest to the six months following the promulgation of the Supreme Court's decisions in Cu Unjieng Sons, Inc. vs. B.T.A. (September 29, 1956) and Hilado vs. Collector of Internal Revenue (October 31, 1956), which held that war losses were deductible only in the year they were sustained.

• Mandatory Statutory Collection: The State argued that since BIR General Circular No. V-123 had been revoked by BIR General Circular No. 139, and since the Bank had failed to claim its war losses as deductions in the year of actual loss or destruction, those losses could not be deducted in another year. The State relied on the Supreme Court's decisions in Cu Unjieng Sons, Inc. vs. B.T.A. and Hilado vs. Collector of Internal Revenue in support of this position.
• Full Interest Period: The State maintained that the Bank must pay 1% monthly interest for the full 13-month period from March 1, 1956 to April 8, 1957, on the ground that mere good faith in delaying payment of taxes does not exempt the taxpayer from paying surcharges and interest from the date the tax is due.

• Good Faith Exemption from Interest: The Bank contended that it should not be made to pay interest on the assessed tax because it had acted in good faith at least from the time payment was demanded on February 29, 1956 up to its actual payment on April 8, 1957, citing American authorities and the case of Insular Lumber Co. vs. Collector of Internal Revenue.
• Interest Only After Judicial Clarification: The Bank argued that, if at all, it should be charged interest only after the Supreme Court promulgated its decisions in Cu Unjieng Sons, Inc. vs. B.T.A. and Hilado vs. Collector of Internal Revenue, which clarified that war losses were deductible only in the year sustained. Computed at 1% monthly interest for six months following the Cu Unjieng decision, the Bank's liability should be limited to ₱5,814.70.
• Government's Uncorrected Error: The Bank pleaded that the government's mistake in allowing war losses as lawful deductions — left uncorrected for a number of years until the policy was reversed — should not prejudice the taxpayer by requiring payment of interest and other surcharges.

• Statutory Mandatory Collection of Interest: Whether the Bank must pay 1% monthly interest on its deficiency income tax of ₱116,294.00 for a period of 13 months (March 1, 1956 to April 8, 1957) amounting to ₱15,118.22, or only for six months following the Supreme Court's decisions in Cu Unjieng and Hilado, amounting to ₱6,977.64.

• Statutory Mandatory Collection of Interest: Yes. The Bank must pay 1% monthly interest for the full 13-month period from March 1, 1956 to April 8, 1957. Section 51(e) of the National Internal Revenue Code, as amended by Republic Act No. 2343, makes no distinctions or exceptions and is mandatory in case of delinquency; good faith is not a ground for exemption.

• Statutory Mandatory Collection of Interest: Section 51(e) of the National Internal Revenue Code, as amended by Republic Act No. 2343, directs the collection of surcharge and interest at the stated rate upon any sum due and unpaid after the dates prescribed for payment. The provision makes no distinctions and establishes no exceptions — it is mandatory in case of delinquency. The lower court had limited the interest period to six months on the theory that the Bank acted in good faith during the contest period and only became liable after the Supreme Court clarified the law in Cu Unjieng and Hilado. This reasoning was rejected because the statute's mandatory character admits no exception based on the taxpayer's good faith or on the pendency of a bona fide contest. The surcharge and interest are not penal but compensatory in nature — they are compensation to the State for the delay in payment and for the concomitant use of the funds by the taxpayer beyond the date prescribed for payment, as held in Castro vs. Collector (Resolution on Motion for Reconsideration, G.R. No. L-12174, December 28, 1962). Accordingly, the Bank was liable for 1% monthly interest on ₱116,294.00 for the full 13-month period from March 1956 to April 8, 1957, amounting to ₱15,118.22.

• Mandatory nature of tax surcharges and interest — Section 51(e) of the National Internal Revenue Code, as amended, mandating the collection of surcharges and interest on unpaid taxes is mandatory and admits no distinctions, exceptions, or exemptions based on the taxpayer's good faith. The provision applies upon any sum due and unpaid after the dates prescribed for payment. The Court applied this doctrine by reversing the lower court's limitation of the interest period to six months, holding that the Bank's good-faith contest of the assessment did not suspend or excuse the accrual of interest from the date prescribed for payment.

• Compensatory, not penal, nature of tax surcharges and interest — Surcharges and interest on delinquent taxes are compensatory, not penal, in nature. They serve as compensation to the State for the delay in payment and for the taxpayer's concomitant use of funds beyond the date prescribed for payment. The Court relied on this characterization to justify the mandatory application of Section 51(e) regardless of the taxpayer's good faith, distinguishing the provision from a penal measure that might admit mitigating circumstances.

• "The above legal provision makes no distinctions nor does it establish exceptions. It directs the collection of the surcharge and interest at the stated rate upon any sum or sums due and unpaid after the dates prescribed in subsections (b), (c), and (d) of the Act for the payment of the amounts due. The provision therefore is mandatory in case of delinquency." — This passage states the ratio decidendi: the mandatory and exceptionless character of Section 51(e), which forecloses any good-faith defense against the accrual of interest and surcharges.

• "This is justified because the intention of the law is precisely to discourage delay in the payment of taxes due to the State and, in this sense, the surcharge and interest charged are not penal but compensatory in nature — they are compensation to the State for the delay in payment, or for the concomitant use of the funds by the taxpayer beyond the date he is supposed to have paid them to the State." — This passage defines the compensatory character of tax surcharges and interest, a formulation frequently cited in subsequent tax jurisprudence to distinguish compensatory from penal impositions.

• Cu Unjieng Sons, Inc. vs. B.T.A., G.R. No. L-6292, Sept. 29, 1956 — Controlling precedent on the deductibility of war losses. The Court held that war losses were deductible only in the year in which they were sustained. The lower court relied on this decision to mark the point from which the Bank's good-faith contest ended and interest began to accrue; the Supreme Court affirmed the legal principle but rejected its use to limit the interest period.

• Hilado vs. Collector of Internal Revenue, G.R. No. L-9408, Oct. 31, 1956 — Controlling precedent cited alongside Cu Unjieng, holding that war losses were deductible only in the year sustained. The lower court used both decisions to determine the start of the six-month interest period; the Supreme Court upheld the rulings but held they did not affect the mandatory accrual of interest from the original due date.

• Insular Lumber Co. vs. Collector of Internal Revenue, G.R. No. L-7190, April 28, 1956 — Cited by the Bank in support of its good-faith argument. The lower court relied on this case to justify suspending interest during the contest period; the Supreme Court effectively distinguished or disregarded it in light of the mandatory language of Section 51(e).

• Castro vs. Collector, G.R. No. L-12174, Dec. 28, 1962 (Resolution on Motion for Reconsideration) — Followed. The Court cited this case for the proposition that surcharges and interest are compensatory, not penal, in nature, serving as compensation to the State for the delay in payment.

• Section 51(e), National Internal Revenue Code, as amended by Republic Act No. 2343 — Governs additions to the tax in case of non-payment. Subsection (e)(1) imposes 1% monthly interest on unpaid amounts shown on the return from the date prescribed for payment until paid. Subsection (e)(2) imposes 1% monthly interest on deficiency taxes not paid within 30 days from notice and demand. Subsection (e)(3) imposes a 5% surcharge on any amount of tax not paid in full within 30 days after notice and demand. The Court held that this provision is mandatory, makes no distinctions or exceptions, and applies regardless of the taxpayer's good faith.

• BIR General Circular No. V-123, dated September 18, 1951 — Permitted property owners to include war losses as deductions from income tax returns for the year 1950. The Bank relied on this circular in filing its return showing no taxable income.

• BIR General Circular No. 139, dated August 30, 1952 — Revoked BIR General Circular No. V-123, disallowing war-loss deductions outside the year in which the losses were sustained. The revocation formed the basis for the deficiency assessment against the Bank.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, and Villamor, JJ., concurred.