Government of the Philippine Islands v. Bank of the Philippine Islands
REITERATIONFacts
The Antecedents: Federico Luchsinger sold his Hacienda Progreso for P275,000, payable in five annual installments. He appointed the Bank of the Philippine Islands (BPI) as his attorney-in-fact with powers to collect credits and pay taxes. Luchsinger then resided in Paris, France, and no longer owned property in the Philippines. BPI collected the installment payments from October 1919 to June 1924. The sale resulted in a net profit of P139,000, averaging P27,800 annually from 1920 to 1925. Procedural History: BPI, acting as attorney-in-fact, filed income tax returns for Luchsinger on February 28, 1921, March 10, 1922, March 23, 1923, February 27, 1924, and February 26, 1925. These returns omitted the net income derived from the installment payments of the Hacienda Progreso sale. The Collector of Internal Revenue demanded payment of the P5,077.87 income tax due, plus surcharge and interest, from BPI, but BPI failed and refused to pay. The Government filed a complaint, which the Court of First Instance of Manila sustained a demurrer to. The Government appealed, contending the demurrer was erroneous. The Petition: The Government prayed for the reversal of the lower court's order, the overruling of the demurrer, and the remand of the case for further proceedings, seeking judgment ordering BPI to pay the assessed taxes, surcharge, and interest.
Issue(s)
Whether the facts alleged in the complaint constitute a sufficient cause of action against the defendant bank. Whether the complaint must allege that the defendant bank was aware of the income subject to tax.
Ruling
The Supreme Court reversed the order of the Court of First Instance, overruled the demurrer, and remanded the case for further proceedings. The Court held that the complaint sufficiently states a cause of action against the defendant bank.
Ratio Decidendi
On whether the facts alleged in the complaint constitute a sufficient cause of action against the defendant bank: The Court held that the complaint sufficiently states a cause of action. Section 9(b) and (c) of Act No. 2833 imposes a duty upon agents to make a complete return of their principal's income and profits and to pay the proper tax. The complaint alleged that the defendant bank, as attorney-in-fact, collected payments for the sale of the Hacienda Progreso and filed income tax returns for its principal, Federico Luchsinger, but omitted to mention the net income derived from these collections. This omission, assuming it was the defendant's legal duty to report it, constitutes a prima facie breach of duty. The Court reasoned that if the defendant had any excuse or reason for such omission, it should have been alleged in its answer, not in a demurrer to the complaint. The complaint, as it stands, alleges facts sufficient to constitute a cause of action. On whether the complaint must allege that the defendant bank was aware of the income subject to tax: The Court held that the complaint need not expressly allege that the defendant bank knew of the income. Being an agent specifically authorized to collect credits and pay taxes for its principal, the law presumes that the defendant bank, in the absence of evidence to the contrary, knew or would know in due time all the taxable income of its principal. This presumption, coupled with the allegation of omission in the tax returns, establishes a sufficient cause of action. The Court further noted that the obligation breached arose from the law, not from a contract, and therefore, it is sufficient to allege the breach of such obligation. If the defendant bank acted through excusable ignorance or had any other legally sufficient reason for not reporting the income, it could set up such defense in its answer.
Main Doctrine
A complaint alleging that an attorney-in-fact, authorized to collect credits and pay taxes for its principal, failed to include taxable income in the filed tax returns, thereby causing the government to suffer loss, sufficiently states a cause of action, as the law presumes the agent's knowledge of the principal's taxable income in the absence of contrary evidence, and any excuse for omission must be alleged in the answer.