G.R. No.

L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of
the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the
petition for review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with
their personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq.
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate
area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed
value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to
'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in
default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for
and in their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as
rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving
them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount
was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and

compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon
they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained
in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes
in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition
for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of
the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for
corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges on the
meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of
which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (compaias colectivas), a tax upon such income equal
to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, properly, or
industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element
is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all
the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots

(24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the
last three purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by
the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually
peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence,
those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax
Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered
general copartnerships" which are possessed of the aforementioned personality have been expressly excluded by
law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the management
of one person even if true, on which we express no opinion tends to increase the similarity between the nature of
their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax on
corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By specific
provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance companies."
However, the term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed
affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its
members or participants change, and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial
whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is not, within the
meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation,
p. 788; emphasis supplied.).
Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other
unincorporated organizations which carries on any business financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal
Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried
on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the
exception only of duly registered general copartnerships within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the
income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic
or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of
five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in
accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized.
(emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal
Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately
after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also,
to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period
of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real
estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing,
or renting property or his own account as principal and holding himself out as a full or part time dealer in
real estate or as an owner of rental property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein.
It is so ordered.

G.R. No. L-35469

March 17, 1932

E. S. LYONS, plaintiff-appellant,
vs.
C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.
Harvey & O'Brien for appellant.
DeWitt, Perkins & Brandy for appellee.
STREET, J.:
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C. W. Rosenstock, as
executor of the estate of H. W. Elser, deceased, consequent upon the taking of an appeal by the executor from the
allowance of the claim sued upon by the committee on claims in said estate. The purpose of the action is to recover four
hundred forty-six and two thirds shares of the stock of J. K. Pickering & Co., Ltd., together with the sum of about
P125,000, representing the dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon
hearing the cause the trial court absolved the defendant executor from the complaint, and the plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where he was engaged
during the years with which we are here concerned in buying, selling, and administering real estate. In several ventures
which he had made in buying and selling property of this kind the plaintiff, E. S. Lyons, had joined with him, the profits
being shared by the two in equal parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or
missionary agent, of the Methodist Episcopal Church, went on leave to the United States and was gone for nearly a year
and a half, returning on September 21, 1920. On the eve of his departure Elser made a written statements showing that
Lyons was, at that time, half owner with Elser of three particular pieces of real property. Concurrently with this act Lyons
execute in favor of Elser a general power of attorney empowering him to manage and dispose of said properties at will
and to represent Lyons fully and amply, to the mutual advantage of both. During the absence of Lyons two of the pieces of
property above referred to were sold by Elser, leaving in his hands a single piece of property located at 616-618 Carried
Street, in the City of Manila, containing about 282 square meters of land, with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000 square meters, near
the City of Manila, and he discerned therein a fine opportunity for the promotion and development of a suburban
improvement. This property, which will be herein referred to as the San Juan Estate, was offered by its owners for
P570,000. To afford a little time for maturing his plans, Elser purchased an option on this property for P5,000, and when
this option was about to expire without his having been able to raise the necessary funds, he paid P15,000 more for an
extension of the option, with the understanding in both cases that, in case the option should be exercised, the amounts
thus paid should be credited as part of the first payment. The amounts paid for this option and its extension were supplied
by Elser entirely from his own funds. In the end he was able from his own means, and with the assistance which he
obtained from others, to acquire said estate. The amount required for the first payment was P150,000, and as Elser had
available only about P120,000, including the P20,000 advanced upon the option, it was necessary to raise the remainder
by obtaining a loan for P50,000. This amount was finally obtained from a Chinese merchant of the city named Uy Siuliong.
This loan was secured through Uy Cho Yee, a son of the lender; and in order to get the money it was necessary for Elser
not only to give a personal note signed by himself and his two associates in the projected enterprise, but also by the
Fidelity & Surety Company. The money thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this
money and what he already had in bank Elser purchased the San Juan Estate on or about June 28, 1920. For the
purpose of the further development of the property a limited partnership had, about this time, been organized by Elser and
three associates, under the name of J. K. Pickering & Company; and when the transfer of the property was effected the
deed was made directly to this company. As Elser was the principal capitalist in the enterprise he received by far the
greater number of the shares issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be induced to come in
with him and supply part of the means necessary to carry the enterprise through. In this connection it appears that on May
20, 1920, Elser wrote Lyons a letter, informing him that he had made an offer for a big subdivision and that, if it should be
acquired and Lyons would come in, the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the first
option expired, Elser cabled Lyons that he had bought the San Juan Estate and thought it advisable for Lyons to resign
(Exhibit M-13), meaning that he should resign his position with the mission board in New York. On the same date he wrote
Lyons a letter explaining some details of the purchase, and added "have advised in my cable that you resign and I hope
you can do so immediately and will come and join me on the lines we have so often spoken about. . . . There is plenty of
business for us all now and I believe we have started something that will keep us going for some time." In one or more
communications prior to this, Elser had sought to impress Lyons with the idea that he should raise all the money he could
for the purpose of giving the necessary assistance in future deals in real estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him averse from joining in
the purchase of the San Juan Estate. In fact upon this visit of Lyons to the United States a grave doubt had arisen as to
whether he would ever return to Manila, and it was only in the summer of 1920 that the board of missions of his church
prevailed upon him to return to Manila and resume his position as managing treasurer and one of its trustees.
Accordingly, on June 21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new
project and adding that from the standpoint of making money, he had passed up a good thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay out of this venture, was
that the board of mission was averse to his engaging in business activities other than those in which the church was
concerned; and some of Lyons' missionary associates had apparently been criticizing his independent commercial
activities. This fact was dwelt upon in the letter above-mentioned. Upon receipt of this letter Elser was of course informed

that it would be out of the question to expect assistance from Lyons in carrying out the San Juan project. No further efforts
to this end were therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his book showed that he was
indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to Lyons from profits and earnings derived
from other properties; and when the J. K. Pickering & Company was organized and stock issued, Elser indorsed to Lyons
200 of the shares allocated to himself, as he then believed that Lyons would be one of his associates in the deal. It will be
noted that the par value of these 200 shares was more than P8,000 in excess of the amount which Elser in fact owed to
Lyons; and when the latter returned to the Philippine Islands, he accepted these shares and sold them for his own benefit.
It seems to be supposed in the appellant's brief that the transfer of these shares to Lyons by Elser supplies some sort of
basis for the present action, or at least strengthens the considerations involved in a feature of the case to be presently
explained. This view is manifestly untenable, since the ratification of the transaction by Lyons and the appropriation by
him of the shares which were issued to him leaves no ground whatever for treating the transaction as a source of further
equitable rights in Lyons. We should perhaps add that after Lyons' return to the Philippine Islands he acted for a time as
one of the members of the board of directors of the J. K. Pickering & Company, his qualification for this office being
derived precisely from the ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that, when Elser obtained
the loan of P50,000 to complete the amount needed for the first payment on the San Juan Estate, the lender, Uy Siuliong,
insisted that he should procure the signature of the Fidelity & Surety Co. on the note to be given for said loan. But before
signing the note with Elser and his associates, the Fidelity & Surety Co. insisted upon having security for the liability thus
assumed by it. To meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in the
property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June 30, 1920, at which time
Elser expected that Lyons would come in on the purchase of the San Juan Estate. But when he learned from the letter
from Lyons of July 21, 1920, that the latter had determined not to come into this deal, Elser began to cast around for
means to relieve the Carriedo property of the encumbrance which he had placed upon it. For this purpose, on September
9, 1920, he addressed a letter to the Fidelity & Surety Co., asking it to permit him to substitute a property owned by
himself at 644 M. H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering & Company, in lieu of the Carriedo
property, as security. The Fidelity & Surety Co. agreed to the proposition; and on September 15, 1920, Elser executed in
favor of the Fidelity & Surety Co. a new mortgage on the M. H. del Pillar property and delivered the same, with 1,000
shares of J. K. Pickering & Company, to said company. The latter thereupon in turn executed a cancellation of the
mortgage on the Carriedo property and delivered it to Elser. But notwithstanding the fact that these documents were
executed and delivered, the new mortgage and the release of the old were never registered; and on September 25, 1920,
thereafter, Elser returned the cancellation of the mortgage on the Carriedo property and took back from the Fidelity &
Surety Co. the new mortgage on the M. H. del Pilar property, together with the 1,000 shares of the J. K. Pickering &
Company which he had delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had arrived in Manila on
September 21, 1920, and shortly thereafter, in the course of a conversation with Elser told him to let the Carriedo
mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser testified to the conversation in which
Lyons used the words above quoted, and as that conversation supplies the most reasonable explanation of Elser's
recession from his purpose of relieving the Carriedo property, the trial court was, in our opinion, well justified in accepting
as a proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This concession was not only
reasonable under the circumstances, in view of the abundant solvency of Elser, but in view of the further fact that Elser
had given to Lyons 200 shares of the stock of the J. K. Pickering & Co., having a value of nearly P8,000 in excess of the
indebtedness which Elser had owed to Lyons upon statement of account. The trial court found in effect that the excess
value of these shares over Elser's actual indebtedness was conceded by Elser to Lyons in consideration of the assistance
that had been derived from the mortgage placed upon Lyon's interest in the Carriedo property. Whether the agreement
was reached exactly upon this precise line of thought is of little moment, but the relations of the parties had been such
that it was to be expected that Elser would be generous; and he could scarcely have failed to take account of the use he
had made of the joint property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of P50,000 to Uy Siuliong
on January 18, 1921, although it was not due until more than five months later. It will thus be seen that the mortgaging of
the Carriedo property never resulted in damage to Lyons to the extent of a single cent; and although the court refused to
allow the defendant to prove the Elser was solvent at this time in an amount much greater than the entire encumbrance
placed upon the property, it is evident that the risk imposed upon Lyons was negligible. It is also plain that no money
actually deriving from this mortgage was ever applied to the purchase of the San Juan Estate. What really happened was
the Elser merely subjected the property to a contingent liability, and no actual liability ever resulted therefrom. The
financing of the purchase of the San Juan Estate, apart from the modest financial participation of his three associates in
the San Juan deal, was the work of Elser accomplished entirely upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity of redemption in the
Carriedo property, Lyons, as half owner of said property, became, as it were, involuntarily the owner of an undivided
interest in the property acquired partly by that money; and it is insisted for him that, in consideration of this fact, he is
entitled to the four hundred forty-six and two-thirds shares of J. K. Pickering & Company, with the earnings thereon, as
claimed in his complaint.
Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong in the manner
already explained had been used to held finance the purchase of the San Juan Estate. He seems to have supposed that
the Carried property had been mortgaged to aid in putting through another deal, namely, the purchase of a property
referred to in the correspondence as the "Ronquillo property"; and in this connection a letter of Elser of the latter part of
May, 1920, can be quoted in which he uses this language:

As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part of the money for
Ronquillo buy (P60,000) if the owner comes through.
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property, and Lyons leads us to
infer that he thought that the money obtained by mortgaging the Carriedo property had been used in the purchase of this
property. It doubtedless appeared so to him in the retrospect, but certain consideration show that he was inattentive to the
contents of the quotation from the letter above given. He had already been informed that, although Elser was angling for
the Ronquillo property, its price had gone up, thus introducing a doubt as to whether he could get it; and the quotation
above given shows that the intended use of the money obtained by mortgaging the Carriedo property was that only part of
the P50,000 thus obtained would be used in this way, if the deal went through. Naturally, upon the arrival of Lyons in
September, 1920, one of his first inquiries would have been, if he did not know before, what was the status of the
proposed trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something to this effect;: "I have
mortgaged the property on Carriedo Street, secured by my personal note. You are amply protected. I wish you to join me
in the San Juan Subdivision. Borrow all money you can." Lyons says that no such cablegram was received by him, and
we consider this point of fact of little moment, since the proof shows that Lyons knew that the Carriedo mortgage had
been executed, and after his arrival in Manila he consented for the mortgage to remain on the property until it was paid
off, as shortly occurred. It may well be that Lyons did not at first clearly understand all the ramifications of the situation, but
he knew enough, we think, to apprise him of the material factors in the situation, and we concur in the conclusion of the
trial court that Elser did not act in bad faith and was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If Elser had used any
money actually belonging to Lyons in this deal, he would under article 1724 of the Civil Code and article 264 of the Code
of Commerce, be obligated to pay interest upon the money so applied to his own use. Under the law prevailing in this
jurisdiction a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to
another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual relation of
partnership had existed in the money used, the case might be difference; and much emphasis is laid in the appellant's
brief upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of partnership,
under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any
partnership composed of himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons a
participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and the United States
with reference to trust supply a basis for this action. The doctrines referred to operate, however, only where money
belonging to one person is used by another for the acquisition of property which should belong to both; and it takes but
little discernment to see that the situation here involved is not one for the application of that doctrine, for no money
belonging to Lyons or any partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San
Juan Estate. Of course, if any damage had been caused to Lyons by the placing of the mortgage upon the equity of
redemption in the Carriedo property, Elser's estate would be liable for such damage. But it is evident that Lyons was not
prejudice by that act.
The appellee insist that the trial court committed error in admitting the testimony of Lyons upon matters that passed
between him and Elser while the latter was still alive. While the admission of this testimony was of questionable propriety,
any error made by the trial court on this point was error without injury, and the determination of the question is not
necessary to this decision. We therefore pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.
Avancea, C.J., Johnson, Malcolm, Villamor, Villa-Real and Imperial, JJ., concur.

G.R. No. 5837

September 15, 1911

CATALINO GALLEMIT, plaintiff-appellant,

vs.
CEFERINO TABILIRAN, defendant-appellee.
Troadio Galicano, for appellant.
Emilio Pineda, for appellee.
TORRES, J.:
This is an appeal raised by the plaintiff from the judgment rendered by the Honorable Judge Ramon Avancea.
On March, 10, 1908, the plaintiff filed a written complaint, twice amended with the permission of the court, wherein, after
its second amendment, he alleged that the plaintiff and the defendant, while residents of the municipality of Dapitan, had
acquired, in joint tenancy, in or about the month of January, 1904, a parcel of land from its original owner, Lui Ganong,
under a verbal, civil contract of partnership, for the price of P44; that it was stipulated that each of the said purchasers
should pay one-half of the price, or P22, and that an equal division should be made between them of the land thus
purchased, situate in the place called Tangian, of the barrio of Dohinob, municipality of Dapitan, sub-district of the same
name, Moro Province, and bounded on the north and east by the Tangian river, on the south and west by government
forests, and containing 19.968 square meters, approximately, planted with 200 abaca plants; that, notwithstanding the
demands he had repeatedly made upon the defendant to divide the said land, the latter, after having promised him on
several occasions that he would make such partition, finally refused, without good reason, and still continued to refuse to
divide the land and, moreover, without the knowledge and consent of the plaintiff, gathered the abaca crops of the years
1904, 1905 and 1906, produced on the land in question, and extracted the hemp therefrom in the amount of about 12
arrobas to each crop, he being the sole beneficiary of the fiber obtained; that the plaintiff, relying upon the several
promises made him by the defendant to divide the said land, took to the latter 1,500 seeds to be planted in the part
thereof which would have fallen to the plaintiff in the division, all of which seeds died, as an indirect result of the
defendant's never having made the partition he offered to make; and, that since the year 1904, up to the time of the
complaint, he alone had been paying the taxes on the land, without the defendant's having contributed to their payment.
There fore the plaintiff petitioned the court render judgment in his favor by ordering a partition to be made of the said land
through the mediation of commissioners appointed for the purpose, and by sentencing the defendant to pay to the plaintiff,
as damages, the total value of the seed lost, amounting to P50, to restore to him one-half of the abaca harvested or the
value thereof, and to the payment of the costs of the case. Defendant's counsel received a copy of this amended
complaint.
The defendant, Ceferino Tabiliran, having been notified and summoned, in his answer to the preceding amended
complaint denied each and all of the facts alleged in each and all of the paragraphs thereof and asked that he be
absolved from the complaint, with the costs against the plaintiff.
After the hearing of the case and the production of oral evidence by the parties thereto, the court, on the 10th of the same
month, rendered judgment by absolving the defendant from the complaint, with the costs against the plaintiff. Counsel for
the latter excepted to this judgment and by a written motion asked for its annulment, and the holding of a new trial on the
ground that the findings of the court were contrary to law. This motion was denied by an order of March 11, 1909,
excepted to by the plaintiff's counsel, and the proper bill of exceptions having been duly filed, the same was certified and
forwarded to the clerk of this court.
This suit concerns the partition of a piece of land held pro indiviso which the plaintiff and the defendant had acquired in
common from its original owner. By the refusal of the defendant to divide the property, the plaintiff was compelled to bring
the proper action for the enforcement of partition, referred to in section 181 and following of the Code of Civil Procedure.
The record shows it to have been duly proved that Catalino Gallemit and Ceferino Tabiliran by mutual agreement acquired
by purchase the land concerned, situate in Tangian, municipality of Dapitan, from its original owner, Luis Ganong, for the
sum of P44. It was stipulated between the purchasers that they each should pay one-half of the price and that the
property should be divided equally between them. The vendor testified under oath that the plaintiff Gallemit paid him the
sum of P22, one-half of the price that it was incumbent upon him to pay, and that four months afterwards the defendant
paid his part of the price, although, owing to the refusal of the defendant, who was then the justice of the peace of the
pueblo, to comply with the stipulation made, the deed of sale was not executed, nor was a partition effected of the land
which they had acquired. The defendant, instead of delivering to the plaintiff the share that belonged to the latter, the
proportionate price for which the plaintiff had already paid, kept all the land which belonged to them in common, in
violation of the stipulations agreed upon, notwithstanding that he paid the vendor only one-half of the price thereof.
There is community of property when the ownership of a thing belongs to different persons undividedly. (Art. 392, Civil
Code.) No coownership shall be obliged to remain a party to the community. Each of them may ask at any time the
division of the thing owned in common. (Art. 400 of the same code.)
Considering the terms of the claim made by the plaintiff and those of the defendant's answer, and the relation of facts
contained in the judgment appealed from, it does not appear that any contract of partnership whatever was made between
them for the purposes expressed in article 1665 of the Civil Code, for the sole transaction performed by them was the
acquisition jointly by mutual agreement of the land in question, since it was undivided, under the condition that they each
should pay one-half of the price thereof and that the property so acquired should be divided between the two purchasers;
and as, under this title, the plaintiff and the defendant are the coowners of the said land, the partition or division of such

property held in joint tenancy must of course be allowed, and the present possessor of the land has no right to deny the
plaintiff's claim on grounds or reasons unsupported by proof.
The circumstance of the plaintiff's to present any document whatever to prove that he and the defendant did actually
purchase jointly the land in litigation can not be a successful defense in the action for partition, notwithstanding the
provision contained in paragraph 5 of section 335 of the Code of Civil Procedure, inasmuch as the trial record discloses
that testimony was adduced, unobjected to on the part of the defendant, to prove that the purchase was actually made by
both litigants of the land in question from its original owner, Luis Ganong; furthermore, it was proved that after the contract
was made the deed of sale was not drawn up on account of the opposition of the defendant, Tabiliran, to this being done,
with the indubitable purpose, as has been seen, of his keeping the whole of the land purchased, though he paid but onehalf of its price.
In the decision rendered in the case of Conlu et al. vs. Araneta and Guanko (15 Phil. Rep., 387), the following appears in
the syllabus:
The decision in the case of Thunga Chui vs. Que Bentec (1 Phil. Rep., 561) and Couto vs. Cortes (8 Phil. Rep.,
459) followed to the extent of holding that "an oral contract for the sale of real estate, made prior to the enactment
of the Code of Civil Procedure in Civil Actions, is binding between the parties thereto." The contract exists and is
valid though it may not be clothed with the necessary form, and the effect of a noncompliance with the provisions
of the statute (sec. 335 of the Code of Civil Procedure in Civil Actions) is simply complied with; but a failure to
except to the evidence because it does not conform with the statute, is a waiver of the provisions of the law. If the
parties to the action, during the trial, made no objection to the admissibility of oral evidence to support the contract
of sale of real property, thus permitting the contract to be proved, it will be just as binding upon the parties as if it
had been reduced to writing.
So that, once it has been proven by the testimony of witnesses that the purchase of a piece of real estate was made by a
verbal contract between the interested parties, if the oral evidence was taken at the petition of one of them without
opposition on the part of the other, such proven verbal contract, as the one herein concerned, must be held to be valid.
On these premises it is, therefore, not indispensable that a written instrument be presented in order to prove a contract of
purchase and sale of real estate; neither it is necessary that the record show proof of a contract of partnership, in order
that a demand may be made for the division of a real property acquired jointly and undividedly by two or more interested
parties, inasmuch as the land was acquired by the two purchasers, not for the purpose of undertaking any business, nor
for its cultivation in partnership, but solely to divide it equally between themselves. Therefore, it is sufficient to show proof
of the fact that a real property was actually purchased by them jointly, in order to insure a successful issue of an action
brought to enforce partition, in accordance with the provisions of sections 181 to 196 of the Code of Civil Procedure in
Civil Actions, since the plaintiff is really a coowner of the undivided land.
It is neither just nor permissible for the defendant to violate a contract made, even though verbally, with the plaintiff, and to
keep without good reason, for his exclusive benefit and to the prejudice only of his coowner, the plaintiff, the whole of the
land belonging to both of them in common, because each paid a half of the value thereof.
"Contracts shall be binding," prescribes article 1278 of the Civil Code, "whatever may be the form in which they may have
been executed, provided the essential conditions required for their validity exist." These conditions are enumerated in
article 1261 of the same code, and they are also requisite in a verbal contract that has been proved.
As the plaintiff suffered damage through the loss of the seed which could not be planted in the part of the land belonging
to him, on account of the refusal of the defendant to accede to division of the property, in accordance with the agreement
made, it is right and just that the latter be compelled to make indemnity for the amount of the damage occasioned through
his fault.
With respect to the abaca obtained by the defendant, to his exclusive benefit, from the land of joint ownership: inasmuch
as the amount and value of the fiber gathered is not shown in the trial record, there are no means available in law
whereby a proper determination may be reached in the matter.
Therefore, we are of opinion that the judgment appealed from should be, as it is hereby, reversed. It is held to be proper
to effect the partition of the land in question, and the judge of the Court of First Instance is directed to decree, through the
proceedings prescribed by law, the division of the said land in conformity with the petition made by the plaintiff, and an
indemnity, in behalf of the latter, in the sum of P50, the value of the seed lost. The delivery to the plaintiff of one-half of the
abaca harvested on the land, or the value thereof, can not be ordered, on account of the lack of proof in the premises. No
special finding is made as to costs. So ordered.

G.R. No. L-2880 December 4, 1906

FRANK S. BOURNS, plaintiff-appellee,
vs.
D. M. CARMAN, ET AL., defendants-appellants.
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a contract for the
sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said work was entered into by the said
Lo-Chim-Lim, acting as in his own name with the plaintiff, and it appears that the said Lo-Chim-Lim personally agreed to
pay for the work himself. The plaintiff, however, has brought this action against Lo-Chim-Lim and his codefendants jointly,
alleging that, at the time the contract was made, they were the joint proprietors and operators of the said lumber yard
engaged in the purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to
show by the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the said lumber-yard
business.lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on the ground that
they were not the partners of Lo-Chim-Lim, and rendered judgment against the other defendants for the amount claimed
in the complaint with the costs of proceedings. Vicente Palanca and Go-Tauco only excepted to the said judgment, moved
for a new trial, and have brought the case to this court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain lumber yard in
Calle Lemery of the city of Manila, and that he was the manager of the same, having ordered the plaintiff to do some work
for him at his sawmill in the city of Manila; and that Vicente Palanca was his partner, and had an interest in the said
business as well as in the profits and losses thereof . . .," and that Go-Tuaco received part of the earnings of the lumber
yard in the management of which he was interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in Calle Lemmery of
the city of Manila in the year 1904, and participated in the profits and losses of business and that Lo-Chim-Lim was
managing partner of the said lumber yard." In other words, coparticipants with the said Lo-Chim-Lim in the business in
question.
Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in conflict with the
above finding of that court. Such finding should therefore be sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal nature of the
participation which the appellants had in Lo-Chim-Lim's lumber yard, and consequently their liability toward the plaintiff, in
connection with the transaction which gave rise to the present suit.
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal agreement only. At
least there is no evidence tending to show that the said agreement was reduced to writing, or that it was ever recorded in
a public instrument.
Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the partnership was
engaged in business under the name and style of Lo-Chim-Lim only, which according to the evidence was the name of
one of the defendants. On the other hand, and this is very important, it does not appear that there was any mutual
agreement, between the parties, and if there were any, it has not been shown what the agreement was. As far as the
evidence shows it seems that the business was conducted by Lo-Chim-Lim in his own name, although he gave to the
appellants a share was has been shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no evidence that the partnership over contracted in any other form. Under such
circumstances we find nothing upon which to consider this partnership other than as a partnership of cuentas en
participacion. It may be that, as a matter of fact, it is something different, but a simple business and scant evidence
introduced by the partnership We see nothing, according to the evidence, but a simple business conducted by Lo-ChimLim exclusively, in his own name, the names of other persons interested in the profits and losses of the business nowhere
appearing. A partnership constituted in such a manner, the existence of which was only known to those who had an
interest in the same, being no mutual agreements between the partners and without a corporate name indicating to the
public in some way that there were other people besides the one who ostensibly managed and conducted the business, is
exactly the accidental partnership of cuentas en participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en participacion is
conducted, shall have only a right of action against such person and not against the other persons interested, and the
latter, on the other hand, shall have no right of action against the third person who contracted with the manager unless
such manager formally transfers his right to them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff
has no right to demand from the appellants the payment of the amount claimed in the complaint, as Lo-Chim-Lim was the
only one who contracted with him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly
dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the complaint without express
provisions as to the costs of both instances. After the expiration of twenty days let judgment be entered in accordance
herewith, and ten days thereafter the cause be remanded to the court below for execution. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Willard and Tracey, JJ., concur.

G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner,
vs.
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J.:

+.wph!1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered petitioner
Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate that: t.hqw
xxx xxx xxx
... on February 22, 1971 Pecson and Moran entered into an agreement whereby both would contribute
P15,000 each for the purpose of printing 95,000 posters (featuring the delegates to the 1971
Constitutional Convention), with Moran actually supervising the work; that Pecson would receive a
commission of P l,000 a month starting on April 15, 1971 up to December 15, 1971; that on December 15,
1971, a liquidation of the accounts in the distribution and printing of the 95,000 posters would be made,
that Pecson gave Moran P10,000 for which the latter issued a receipt; that only a few posters were
printed; that on or about May 28, 1971, Moran executed in favor of Pecson a promissory note in the
amount of P20,000 payable in two equal installments (P10,000 payable on or before June 15, 1971 and
P10,000 payable on or before June 30, 1971), the whole sum becoming due upon default in the payment
of the first installment on the date due, complete with the costs of collection.
Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery of a sum of money
and alleged in his complaint three (3) causes of action, namely: (1) on the alleged partnership agreement, the return of his
contribution of P10,000.00, payment of his share in the profits that the partnership would have earned, and, payment of
unpaid commission; (2) on the alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary
damages and attorney's fees.
After the trial, the Court of First Instance held that: t.hqw
From the evidence presented it is clear in the mind of the court that by virtue of the partnership agreement
entered into by the parties-plaintiff and defendant the plaintiff did contribute P10,000.00, and another sum
of P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of the expected 95,000 copies of the
posters, the defendant was able to print 2,000 copies only authorized of which, however, were sold at
P5.00 each. Nothing more was done after this and it can be said that the venture did not really get off the
ground. On the other hand, the plaintiff failed to give his full contribution of P15,000.00. Thus, each party
is entitled to rescind the contract which right is implied in reciprocal obligations under Article 1385 of the
Civil Code whereunder 'rescission creates the obligation to return the things which were the object of the
contract ...
WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to return to
plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate from the filing of the
complaint on June 19, 1972, and the costs of the suit.
For insufficiency of evidence, the counterclaim is hereby dismissed.
From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise rendered a decision
against the petitioner. The dispositive portion of the decision reads: t.hqw
PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is hereby
rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to pay plaintiff- appellant Mariano E.
Pecson:
(a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to Pecson under
their agreement);
(b) Eight thousand (P8,000), (the commission for eight months);
(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project);
(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time payment is
made)
The petitioner contends that the respondent Court of Appeals decided questions of substance in a way not in accord with
law and with Supreme Court decisions when it committed the following errors:

I
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR.
LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED
PROFITS DUE HIM.
II
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR.
LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN THE
PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.
III
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR.
LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF
INVESTMENT IN A MAGAZINE VENTURE.
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE HONORABLE
COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN.
V
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S
COMPULSORY COUNTERCLAIM FOR DAMAGES.
The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share in the
unrealized profits of the partnership. The petitioner contends that the award is highly speculative. The petitioner maintains
that the respondent court did not take into account the great risks involved in the business undertaking.
We agree with the petitioner that the award of speculative damages has no basis in fact and law.
There is no dispute over the nature of the agreement between the petitioner and the private respondent. It is a contract of
partnership. The latter in his complaint alleged that he was induced by the petitioner to enter into a partnership with him
under the following terms and conditions: t.hqw
1. That the partnership will print colored posters of the delegates to the Constitutional Convention;
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;
3. That they will print Ninety Five Thousand (95,000) copies of the said posters;
4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month starting April 15,
1971 up to December 15, 1971;
5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account
pertaining to the distribution and printing of the said 95,000 posters shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.
The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the
partnership for whatever he may have promised to contribute (Art. 1786, Civil Code) and for interests and damages from
the time he should have complied with his obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which
interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in
favor of the appellee because the appellant therein was remiss in his obligations as a partner and as prime contractor of
the construction projects in question. This case was decided on a particular set of facts. We awarded compensatory
damages in the Uy case because there was a finding that the constructing business is a profitable one and that the UP
construction company derived some profits from its contractors in the construction of roads and bridges despite its
deficient capital." Besides, there was evidence to show that the partnership made some profits during the periods from
July 2, 1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two government
contracts worth P2,327,335.76 were not speculative. In the instant case, there is no evidence whatsoever that the
partnership between the petitioner and the private respondent would have been a profitable venture. In fact, it was a
failure doomed from the start. There is therefore no basis for the award of speculative damages in favor of the private
respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more than what was
expected of him. In this case, however, there was mutual breach. Private respondent failed to give his entire contribution
in the amount of P15,000.00. He contributed only P10,000.00. The petitioner likewise failed to give any of the amount

expected of him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed
only 2,000 copies.
Article 1797 of the Civil Code provides: t.hqw
The losses and profits shall be distributed in conformity with the agreement. If only the share of each
partner in the profits has been agreed upon, the share of each in the losses shall be in the same
proportion.
Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in
the absence of fraud, the other partner cannot claim a right to recover the highly speculative profits. It is a rare business
venture guaranteed to give 100% profits. In this case, on an investment of P15,000.00, the respondent was supposed to
earn a guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing P2.00 each
but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is obvious. We have to take various
factors into account. The failure of the Commission on Elections to proclaim all the 320 candidates of the Constitutional
Convention on time was a major factor. The petitioner undesirable his best business judgment and felt that it would be a
losing venture to go on with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture
have to be considered.
It does not follow however that the private respondent is not entitled to recover any amount from the petitioner. The
records show that the private respondent gave P10,000.00 to the petitioner. The latter used this amount for the printing of
2,000 posters at a cost of P2.00 per poster or a total printing cost of P4,000.00. The records further show that the 2,000
copies were sold at P5.00 each. The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00
from the gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount to only
P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the private respondent. And since
only P4,000.00 was undesirable by the petitioner in printing the 2,000 copies, the remaining P6,000.00 should therefore
be returned to the private respondent.
Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's supposed
commission has no justifiable basis in law.
Again, we agree with the petitioner.
The partnership agreement stipulated that the petitioner would give the private respondent a monthly commission of
Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly commissions. The agreement does not
state the basis of the commission. The payment of the commission could only have been predicated on relatively
extravagant profits. The parties could not have intended the giving of a commission inspite of loss or failure of the venture.
Since the venture was a failure, the private respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in holding him liable to
the private respondent in the sum of P7,000.00 as a supposed return of investment in a magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice of the Veterans"
magazine venture, the respondent court ruled that: t.hqw
xxx xxx xxx
... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not question
the due execution of said note. Must Moran therefore pay the amount of P20,000? The evidence indicates
that the P20,000 was assigned by Moran to cover the following: t.hqw
(a) P 7,000 the amount of the PNB check given by Pecson to Moran
representing Pecson's investment in Moran's other project (the
publication and printing of the 'Voice of the Veterans');
(b) P10,000 to cover the return of Pecson's contribution in the project
of the Posters;
(c) P3,000 representing Pecson's commission for three months (April,
May, June, 1971).
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans' project,
for this project never left the ground) ...
As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal to this
Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the record or are based on substantial evidence
(Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain exceptions. Thus, in Carolina
Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review
and rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd and impossible; (3)

where there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; and (5) when the
court, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both the
appellant and the appellee.
In this case, there is misapprehension of facts. The evidence of the private respondent himself shows that his investment
in the "Voice of Veterans" project amounted to only P3,000.00. The remaining P4,000.00 was the amount of profit that the
private respondent expected to receive.
The records show the following exhibits- t.hqw
E Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of defendant.
Defendant admitted the authenticity of this check and of his receipt of the proceeds thereof (t.s.n., pp. 3-4,
Nov. 29, 1972). This exhibit is being offered for the purpose of showing plaintiff's capital investment in the
printing of the "Voice of the Veterans" for which he was promised a fixed profit of P8,000. This investment
of P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory note for P14,000
dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff
as Exhibit P. Later, defendant returned P3,000.00 of the P6,000.00 investment thereby proportionately
reducing the promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised profit),
defendant signed and executed the promissory note for P7,000 marked Exhibit 3 for the defendant and
Exhibit M for plaintiff. Of this P7,000, defendant paid P4,000 representing full return of the capital
investment and P1,000 partial payment of the promised profit. The P3,000 balance of the promised profit
was made part consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is,
therefore, being presented to show the consideration for the P20,000 promissory note.
F Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant. The
authenticity of the check and his receipt of the proceeds thereof were admitted by the defendant (t.s.n.,
pp. 3-4, Nov. 29, 1972). This P 7,000 is part consideration, and in cash, of the P20,000 promissory note
(t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show the consideration for the P20,000 note and
the existence and validity of the obligation.
xxx xxx xxx
L-Book entitled "Voice of the Veterans" which is being offered for the purpose of showing the subject
matter of the other partnership agreement and in which plaintiff invested the P6,000 (Exhibit E) which,
together with the promised profit of P8,000 made up for the consideration of the P14,000 promissory note
(Exhibit 2; Exhibit P). As explained in connection with Exhibit E. the P3,000 balance of the promised profit
was later made part consideration of the P20,000 promissory note.
M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This document is
being offered for the purpose of further showing the transaction as explained in connection with Exhibits E
and L.
N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital investment of
P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also defendant's Exhibit 4. This
document is being offered in support of plaintiff's explanation in connection with Exhibits E, L, and M to
show the transaction mentioned therein.
xxx xxx xxx
P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for the purpose of
showing the transaction as explained in connection with Exhibits E, L, M, and N above.
Explaining the above-quoted exhibits, respondent Pecson testified that: t.hqw
Q During the pre-trial of this case, Mr. Pecson, the defendant presented a promissory
note in the amount of P14,000.00 which has been marked as Exhibit 2. Do you know this
promissory note?
A Yes, sir.
Q What is this promissory note, in connection with your transaction with the defendant?
A This promissory note is for the printing of the "Voice of the Veterans".
Q What is this "Voice of the Veterans", Mr. Pecson?
A It is a book.t.hqw
(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the promissory note, Exhibit 2,
represent?
A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the
Philippine National Bank Manager's check and the P8,000.00 profit assured me by Mr.
Moran which I will derive from the printing of this "Voice of the Veterans" book.
Q You said that the P6,000.00 of this P14,000.00 is covered by, a Manager's check. I
show you Exhibit E, is this the Manager's check that mentioned?
A Yes, sir.
Q What happened to this promissory note of P14,000.00 which you said represented
P6,000.00 of your investment and P8,000.00 promised profits?
A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2) of the
P6,000.00 capital I gave to him.
Q As a consequence of the return by Mr. Moran of one-half (1/2) of the P6,000.00 capital
you gave to him, what happened to the promised profit of P8,000.00?
A It was reduced to one-half (1/2) which is P4,000.00.
Q Was there any document executed by Mr. Moran in connection with the Balance of
P3,000.00 of your capital investment and the P4,000.00 promised profits?
A Yes, sir, he executed a promissory note.
Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971 which
for purposes of Identification I request the same to be marked as Exhibit M. . .
Court t.hqw
Mark it as Exhibit M.
Q (continuing) is this the promissory note which you said was executed by Mr. Moran in
connection with your transaction regarding the printing of the "Voice of the Veterans"?
A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).
Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson?
A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory note.
Q Was there a receipt issued by you covering this payment of P4,000.00 in favor of Mr.
Moran?
A Yes, sir.
(T.S.N., p. 23, Nov. 29, 1972).
Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the P7,000.00
covered by the promissory note, Exhibit M. What does this P4,000.00 covered by Exhibit
N represent?
A This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00
capital investment and the P1,000.00 represents partial payment of the P4,000.00 profit
that was promised to me by Mr. Moran.
Q And what happened to the balance of P3,000.00 under the promissory note, Exhibit M?
A The balance of P3,000.00 and the rest of the profit was applied as part of the
consideration of the promissory note of P20,000.00.
(T.S.N., pp. 23-24, Nov. 29, 1972).
The respondent court erred when it concluded that the project never left the ground because the project did take place.
Only it failed. It was the private respondent himself who presented a copy of the book entitled "Voice of the Veterans" in

the lower court as Exhibit "L". Therefore, it would be error to state that the project never took place and on this basis
decree the return of the private respondent's investment.
As already mentioned, there are risks in any business venture and the failure of the undertaking cannot entirely be blamed
on the managing partner alone, specially if the latter exercised his best business judgment, which seems to be true in this
case. In view of the foregoing, there is no reason to pass upon the fourth and fifth assignments of errors raised by the
petitioner. We likewise find no valid basis for the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now Intermediate Appellate
Court) is hereby SET ASIDE and a new one is rendered ordering the petitioner Isabelo Moran, Jr., to pay private
respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS representing the amount of the private respondent's
contribution to the partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing
one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000) copies of the posters,
with interests at the legal rate on both amounts from the date the complaint was filed until full payment is made.
SO ORDERED.

1wph1.t

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had
acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on
March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were coowners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue
required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax
on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56
as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a
mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture
within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co.,
102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as
partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in
any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve
the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica seala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la

finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any property from which the returns
are derived". There must be an unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small
amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won
the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the
De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question proindiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or
expand the inherited properties; they merely continued dedicating the property to the use to which it had
been put by their forebears; they individually reported in their tax returns their corresponding shares in the
income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in
order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA
Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income
of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals
or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in
Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the coheirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was
held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased
a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, and
from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces
of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two
cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might
have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.

G.R. No. 135813

October 25, 2001

FERNANDO SANTOS, petitioner,

vs.
SPOUSES ARSENIO and NIEVES REYES, respondents.
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on the Supreme
Court. However, there are several exceptions to this principle. In the present case, we find occasion to apply both the rule
and one of the exceptions.
The
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,1 as well as the August 17,
1998 and the October 9, 1998 Resolutions,2 issued by the Court of Appeals (CA) in CA-GR CV No. 34742. The Assailed
Decision disposed as follows:
"WHEREFORE, the decision appealed from is AFFIRMED save as for the
counterclaim which is hereby DISMISSED. Costs against [petitioner]." 3
Resolving respondent's Motion for Reconsideration, the August 17, 1998
Resolution ruled as follows:
"WHEREFORE, [respondents'] motion for reconsideration is GRANTED.
Accordingly, the court's decision dated November 28, 1997 is hereby
MODIFIED in that the decision appealed from is AFFIRMED in toto, with costs
against [petitioner]."4
The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for Reconsideration of the August 17, 1998
Resolution.5
The Facts
The events that led to this case are summarized by the CA as follows:
"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent]
Nieves Reyes were introduced to each other by one Meliton Zabat regarding a
lending business venture proposed by Nieves. It was verbally agreed that
[petitioner would] act as financier while [Nieves] and Zabat [would] take charge
of solicitation of members and collection of loan payments. The venture was
launched on June 13, 1986, with the understanding that [petitioner] would
receive 70% of the profits while x x x Nieves and Zabat would earn 15% each.
"In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera,
as chairman of the Monte Maria Development Corporation6 (Monte Maria, for
brevity), sought short-term loans for members of the corporation. [Petitioner]
and Gragera executed an agreement providing funds for Monte Maria's
members. Under the agreement, Monte Maria, represented by Gragera, was
entitled to P1.31 commission per thousand paid daily to [petitioner] (Exh. 'A')x
x x . Nieves kept the books as representative of [petitioner] while [Respondent]
Arsenio, husband of Nieves, acted as credit investigator.
"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article
of Agreement' which formalized their earlier verbal arrangement.
"[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in
the same lending business in competition with their partnership[.] Zabat was
thereby expelled from the partnership. The operations with Monte Maria
continued.
"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money
and damages. [Petitioner] charged [respondents], allegedly in their capacities
as employees of [petitioner], with having misappropriated funds intended for
Gragera for the period July 8, 1986 up to March 31, 1987. Upon Gragera's
complaint that his commissions were inadequately remitted, [petitioner]
entrusted P200,000.00 to x x x Nieves to be given to Gragerax x x . Nieves
allegedly failed to account for the amount. [Petitioner] asserted that after
examination of the records, he found that of the total amount of P4,623,201.90
entrusted to [respondents], only P3,068,133.20 was remitted to Gragera,
thereby leaving the balance of P1,555,065.70 unaccounted for.

"In their answer, [respondents] asserted that they were partners and not mere
employees of [petitioner]. The complaint, they alleged, was filed to preempt
and prevent them from claiming their rightful share to the profits of the
partnership.
"x x x Arsenio alleged that he was enticed by [petitioner] to take the place of
Zabat after [petitioner] learned of Zabat's activities. Arsenio resigned from his
job at the Asian Development Bank to join the partnership.
"For her part, x x x Nieves claimed that she participated in the business as a
partner, as the lending activity with Monte Maria originated from her initiative.
Except for the limited period of July 8, 1986 through August 20, 1986, she did
not handle sums intended for Gragera. Collections were turned over to
Gragera because he guaranteed 100% payment of all sums loaned by Monte
Maria. Entries she made on worksheets were based on this assumptive 100%
collection of all loans. The loan releases were made less Gragera's agreed
commission. Because of this arrangement, she neither received payments
from borrowers nor remitted any amount to Gragera. Her job was merely to
make worksheets (Exhs. '15' to '15-DDDDDDDDDD') to convey to [petitioner]
how much he would earn if all the sums guaranteed by Gragera were
collected.
"[Petitioner] on the other hand insisted that [respondents] were his mere
employees and not partners with respect to the agreement with Gragera. He
claimed that after he discovered Zabat's activities, he ceased infusing funds,
thereby causing the extinguishment of the partnership. The agreement with
Gragera was a distinct partnership [from] that of [respondent] and Zabat.
[Petitioner] asserted that [respondents] were hired as salaried employees with
respect to the partnership between [petitioner] and Gragera.
"[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she
received all payments from which Nieves deducted Gragera's commission.
The commission would then be remitted to Gragera. She likewise determined
loan releases.
"During the pre-trial, the parties narrowed the issues to the following points:
whether [respondents] were employees or partners of [petitioner], whether
[petitioner] entrusted money to [respondents] for delivery to Gragera, whether
the P1,555,068.70 claimed under the complaint was actually remitted to
Gragera and whether [respondents] were entitled to their counterclaim for
share in the profits."7
Ruling of the
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of petitioner. It
further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner moreover failed to prove
that he had entrusted any money to Nieves. Thus, respondents' counterclaim for their share in the partnership and for
damages was granted. The trial court disposed as follows:
"39.

WHEREFORE, the Court hereby renders judgment as follows:

39.1.

THE SECOND AMENDED COMPLAINT dated July 26, 1989 is

DISMISSED.

39.2.

The [Petitioner] FERNANDO J. SANTOS is ordered to pay the

[Respondent] NIEVES S. REYES, the following:

39.2.1.

P3,064,428.00

39.2.2.

Six(6) percent of - As damages from August 3, 1987 until the

P3,064,428.00
P3,064,428.00 is fully paid.

39.2.3.

P50,000.00

- As moral damages

39.2.4.

P10,000.00

- As exemplary damages

39.3.

The [petitioner] FERNANDO J. SANTOS is ordered to pay the

[respondent] ARSENIO REYES, the following:

39.3.1.

P2,899,739.50

39.3.2.

Six(6) percent of - As damages from August 3, 1987 until the

P2,899,739.50
P2,899,739.50 is fully paid.

39.3.3.

P25,000.00

- The 15 percent share of the [respondent] NIEVES S.

REYES in the profits of her joint venture with the
[petitioner].

- The balance of the 15 percent share of the

[respondent] ARSENIO REYES in the profits of his
joint venture with the [petitioner].

- As moral damages

39.3.4.

P10,000.00

39.4.

- As exemplary damages
The [petitioner] FERNANDO J. SANTOS is ordered to
pay the [respondents]:

39.4.1.

P50,000.00

- As attorney's fees; and

39.4.2.

The cost of the suit."8

Ruling of the Court of Appeals

On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was dismissed. Upon the
latter's Motion for Reconsideration, however, the trial court's Decision was reinstated in toto. Subsequently, petitioner's
own Motion for Reconsideration was denied in the CA Resolution of October 9, 1998.
The CA ruled that the following circumstances indicated the existence of a partnership among the parties: (1) it was
Nieves who broached to petitioner the idea of starting a money-lending business and introduced him to Gragera; (2)
Arsenio received "dividends" or "profit-shares" covering the period July 15 to August 7, 1986 (Exh. "6"); and (3) the
partnership contract was executed after the Agreement with Gragera and petitioner and thus showed the parties' intention
to consider it as a transaction of the partnership. In their common venture, petitioner invested capital while respondents
contributed industry or services, with the intention of sharing in the profits of the business.
The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000 which was supposed to be
delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due, while hers was merely to
prepare the daily cash flow reports (Exhs. "15-15DDDDDDDDDD") to keep track of his collections.
Hence, this Petition.9
Issue
Petitioner asks this Court to rule on the following issues: 10
"Whether or not Respondent Court of Appeals acted with grave abuse of
discretion tantamount to excess or lack of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not
employees of Santos in connection with the agreement between Santos and
Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase 'Received by' on
documents signed by Nieves Reyes signified receipt of copies of the
documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;
4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of
P200,000.00 for delivery to Gragera;
5 Affirming the dismissal of Santos' [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents'
counterclaim;
7. Denying Santos' motion for reconsideration dated September 11, 1998."
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties' relationship was one of
partnership or of employer employee; (2) whether Nieves misappropriated the sums of money allegedly entrusted to her
for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the partnership profits as
determined by the trial court.
The Court's Ruling
The Petition is partly meritorious.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending venture with Gragera,
with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to Santos did not make
her a partner. She was only a witness to the Agreement between the two. Separate from the partnership between
petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved when
Zabat was expelled.

On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled that the business relationship
was one of partnership. We quote from the CA Decision, as follows:
"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself
provided the initiative in the lending activities with Monte Maria. In consonance
with the agreement between appellant, Nieves and Zabat (later replaced by
Arsenio), [respondents] contributed industry to the common fund with the
intention of sharing in the profits of the partnership. [Respondents] provided
services without which the partnership would not have [had] the wherewithal to
carry on the purpose for which it was organized and as such [were] considered
industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).
"While concededly, the partnership between [petitioner,] Nieves and Zabat
was technically dissolved by the expulsion of Zabat therefrom, the remaining
partners simply continued the business of the partnership without undergoing
the procedure relative to dissolution. Instead, they invited Arsenio to
participate as a partner in their operations. There was therefore, no intent to
dissolve the earlier partnership. The partnership between [petitioner,] Nieves
and Arsenio simply took over and continued the business of the former
partnership with Zabat, one of the incidents of which was the lending
operations with Monte Maria.
xxx

xxx

xxx

"Gragera and [petitioner] were not partners. The money-lending activities

undertaken with Monte Maria was done in pursuit of the business for which the
partnership between [petitioner], Nieves and Zabat (later Arsenio) was
organized. Gragera who represented Monte Maria was merely paid
commissions in exchange for the collection of loans. The commissions were
fixed on gross returns, regardless of the expenses incurred in the operation of
the business. The sharing of gross returns does not in itself establish a
partnership."11
We agree with both courts on this point. By the contract of partnership, two or more persons bind themselves to contribute
money, property or industry to a common fund, with the intention of dividing the profits among themselves. 12 The "Articles
of Agreement" stipulated that the signatories shall share the profits of the business in a 70-15-15 manner, with petitioner
getting the lion's share.13 This stipulation clearly proved the establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued lending money to the members
of the Monte Maria Community Development Group, Inc., which later on changed its business name to Private
Association for Community Development, Inc. (PACDI). Nieves was not merely petitioner's employee. She discharged her
bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement, which states as follows:
"2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation
and screening of prospective borrowers, and shall x x x each be responsible in
handling the collection of the loan payments of the borrowers that they each
solicited.
"3. That the bookkeeping and daily balancing of account of the business
operation shall be handled by the SECOND PARTY." 14
The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenio's duties as
credit investigator are subsumed under the phrase "screening of prospective borrowers." Because of this Agreement and
the disbursement of monthly "allowances" and "profit shares" or "dividends" (Exh. "6") to Arsenio, we uphold the factual
finding of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was formalized
only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to petitioner's contention,
there is no evidence to show that a different business venture is referred to in this Agreement, which was executed on
August 6, 1986, or about a month after the Memorandum had been signed by petitioner and Gragera on July 14, 1986.
The Agreement itself attests to this fact:
"WHEREAS, the parties have decided to formalize the terms of their business
relationship in order that their respective interests may be properly defined and
established for their mutual benefit and understanding." 15
Second Issue:
No Proof of Misappropriation of Gragera's Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's commission. According
to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit "B." (the "Schedule of Daily Payments"),
which bears her signature under the words "received by." For the period July 1986 to March 1987, Gragera should have

earned a total commission of P4,282,429.30. However, only P3,068,133.20 was received by him. Thus, petitioner infers
that she misappropriated the difference of P1,214,296.10, which represented the unpaid commissions. Exhibit "H." is an
untitled tabulation which, according to him, shows that Gragera was also entitled to a commission of P200,000, an amount
that was never delivered by Nieves.16
On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received for delivery to Gragera any
amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such exhibits were insufficient
proof that she had embezzled P200,000. Said the CA:
"The presentation of Exhibit "D" vaguely denominated as 'members ledger'
does not clearly establish that Nieves received amounts from Monte Maria's
members. The document does not clearly state what amounts the entries
thereon represent. More importantly, Nieves made the entries for the limited
period of January 11, 1987 to February 17, 1987 only while the rest were
made by Gragera's own staff.
"Neither can we give probative value to Exhibit 'E' which allegedly shows
acknowledgment of the remittance of commissions to Verona Gonzales. The
document is a private one and its due execution and authenticity have not
been duly proved as required in [S]ection 20, Rule 132 of the Rules of Court
which states:
'SECTION 20. Proof of Private Document Before any private
document offered as authentic is received in evidence, its due
execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or
handwriting of the maker.
'Any other private document need only be identified as that which it is
claimed to be.'
"The court a quo even ruled that the signature thereon was a forgery, as it
found that:
'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed
that it is a forgery. The initial stroke of Exh. E-1 starts from up and
goes downward. The initial stroke of the genuine signatures of
NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and
goes upward. This difference in the start of the initial stroke of the
signatures Exhs. E-1 and of the genuine signatures lends credence to
Nieves' claim that the signature Exh. E-1 is a forgery.'
xxx

xxx

xxx

"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were
based on the predetermined 100% collection as guaranteed by Gragera is
credible and clearly in accord with the evidence. A perusal of Exhs. "B" and
"F" as well as Exhs. '15' to 15-DDDDDDDDDD' reveal that the entries were
indeed based on the 100% assumptive collection guaranteed by Gragera.
Thus, the total amount recorded on Exh. 'B' is exactly the number of borrowers
multiplied by the projected collection of P150.00 per borrower. This holds true
for Exh. 'F.'
"Corollarily, Nieves' explanation that the documents were pro forma and that
she signed them not to signify that she collected the amounts but that she
received the documents themselves is more believable than [petitioner's]
assertion that she actually handled the amounts.
"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally
establish that x x x Nieves received P200,000.00 as commission for Gragera.
As correctly stated by the court a quo, the document showed a liquidation of
P240.000 00 and not P200,000.00.
"Accordingly, we find Nieves' testimony that after August 20, 1986, all
collections were made by Gragera believable and worthy of credence. Since
Gragera guaranteed a daily 100% payment of the loans, he took charge of the
collections. As [petitioner's] representative,

Nieves merely prepared the daily cash flow reports (Exh. '15' to '15
DDDDDDDDDD') to enable [petitioner] to keep track of Gragera's operations.
Gragera on the other hand devised the schedule of daily payment (Exhs. 'B'
and 'F') to record the projected gross daily collections.
"As aptly observed by the court a quo:
'26.1. As between the versions of SANTOS and NIEVES on how the
commissions of GRAGERA [were] paid to him[,] that of NIEVES is
more logical and practical and therefore, more believable. SANTOS'
version would have given rise to this improbable situation: GRAGERA
would collect the daily amortizations and then give them to NIEVES;
NIEVES would get GRAGERA's commissions from the amortizations
and then give such commission to GRAGERA."'17
These findings are in harmony with the trial court's ruling, which we quote
below:
"21. Exh. H does not prove that SANTOS gave to NIEVES and the latter
received P200,000.00 for delivery to GRAGERA. Exh. H shows under its sixth
column 'ADDITIONAL CASH' that the additional cash was P240,000.00. If
Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS, then
his claim is not true. This is so because it is a liquidation of the sum of
P240,000.00.
"21.1. SANTOS claimed that he learned of NIEVES' failure to give the
P200,000.00 to GRAGERA when he received the latter's letter complaining of
its delayed release. Assuming as true SANTOS' claim that he gave
P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did
not give it to GRAGERA. The only proof that NIEVES did not give it is the
letter. But SANTOS did not even present the letter in evidence. He did not
explain why he did not.
"21.2. The evidence shows that all money transactions of the money-lending
business of SANTOS were covered by petty cash vouchers. It is therefore
strange why SANTOS did not present any voucher or receipt covering the
P200,000.00."18
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the partnership. She did
not remit P1,214,296.10 to Gragera, because he had deducted his commissions before remitting his collections. Exhibits
"B" and "F" are merely computations of what Gragera should collect for the day; they do not show that Nieves received
the amounts stated therein. Neither is there sufficient proof that she misappropriated P200,000, because Exhibit "H." does
not indicate that such amount was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-entrenched is the
basic rule that factual findings of the Court of Appeals affirming those of the trial court are binding and conclusive on the
Supreme Court.19 Although there are exceptions to this rule, petitioner has not satisfactorily shown that any of them is
applicable to this issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents' claims on the profits of the partnership. He maintains that "both business
propositions were flops," as his investments were "consumed and eaten up by the commissions orchestrated to be due
Gragera" a situation that "could not have been rendered possible without complicity between Nieves and Gragera."
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid payment of the
demands of Nieves, because sometime in March 1987, she "signified to petitioner that it was about time to get her share
of the profits which had already accumulated to some P3 million." Respondents add that while the partnership has not
declared dividends or liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled P20,429,520 (Exhs. "10" et seq.
and "15" et seq.). Based on that income, her 15 percent share under the joint venture amounts to P3,064,428 (Exh. "10-I3"); and Arsenio's, P2,026,000 minus the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. "6, 6A to 6-B").
The CA originally held that respondents' counterclaim was premature, pending an accounting of the partnership. However,
in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the trial court's ruling on the counterclaim, it
held as follows:
"We earlier ruled that there is still need for an accounting of the profits and
losses of the partnership before we can rule with certainty as to the respective
shares of the partners. Upon a further review of the records of this case,

however, there appears to be sufficient basis to determine the amount of

shares of the parties and damages incurred by [respondents]. The fact is that
the court a quo already made such a determination [in its] decision dated
August 13, 1991 on the basis of the facts on record." 20
The trial court's ruling alluded to above is quoted below:
"27. The defendants' counterclaim for the payment of their share in the profits
of their joint venture with SANTOS is supported by the evidence.
"27.1. NIEVES testified that: Her claim to a share in the profits is based on the
agreement (Exhs. 5, 5-A and 5-B). The profits are shown in the working
papers (Exhs. 10 to 10-I, inclusive) which she prepared. Exhs. 10 to 10-I
(inclusive) were based on the daily cash flow reports of which Exh. 3 is a
sample. The originals of the daily cash flow reports (Exhs. 3 and 15 to 15D(10) were given to SANTOS. The joint venture had a net profit of
P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to April
19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and
ARSENIO, about P2,926,000.00, in the profits.
"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending
business he was engaged in netted a profit and that the originals of the daily
case flow reports were furnished to him. SANTOS however alleged that the
money-lending operation of his joint venture with NIEVES and ZABAT resulted
in a loss of about half a million pesos to him. But such loss, even if true, does
not negate NIEVES' claim that overall, the joint venture among them
SANTOS, NIEVES and ARSENIO netted a profit. There is no reason for the
Court to doubt the veracity of [the testimony of] NIEVES.
"27.2 The P26,260.50 which ARSENIO received as part of his share in the
profits (Exhs. 6, 6-A and 6-B) should be deducted from his total share." 21
After a close examination of respondents' exhibits, we find reason to disagree with the CA. Exhibit "10-I" 22 shows that the
partnership earned a "total income" of P20,429,520 for the period June 13, 1986 until April 19, 1987. This entry is derived
from the sum of the amounts under the following column headings: "2-Day Advance Collection," "Service Fee," "Notarial
Fee," "Application Fee," "Net Interest Income" and "Interest Income on Investment." Such entries represent the collections
of the money-lending business or its gross income.
The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the partnership. For instance, it did
not factor in the "gross loan releases" representing the money loaned to clients. Since the business is money-lending,
such releases are comparable with the inventory or supplies in other business enterprises.
Noticeably missing from the computation of the "total income" is the deduction of the weekly allowance disbursed to
respondents. Exhibits "I" et seq. and "J" et seq.23 show that Arsenio received allowances from July 19, 1986 to March 27,
1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987, in the total amount of
P25,600. These allowances are different from the profit already received by Arsenio. They represent expenses that should
have been deducted from the business profits. The point is that all expenses incurred by the money-lending enterprise of
the parties must first be deducted from the "total income" in order to arrive at the "net profit" of the partnership. The share
of each one of them should be based on this "net profit" and not from the "gross income" or "total income" reflected in
Exhibit "10-I," which the two courts invariably referred to as "cash flow" sheets.
Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the business expenses incurred by
the parties, because they show only the daily cash collections. Contrary to the rulings of both the trial and the appellate
courts, respondents' exhibits do not reflect the complete financial condition of the money-lending business. The lower
courts obviously labored over a mistaken notion that Exhibit " 10-I-1" represented the "net profits" earned by the
partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares in the profits but is not liable
for the losses), the gross income from all the transactions carried on by the firm must be added together, and from this
sum must be subtracted the expenses or the losses sustained in the business. Only in the difference representing the net
profits does the industrial partner share. But if, on the contrary, the losses exceed the income, the industrial partner does
not share in the losses.25When the judgment of the CA is premised on a misapprehension of facts or a failure to notice
certain relevant facts that would otherwise justify a different conclusion, as in this particular issue, a review of its factual
findings may be conducted, as an exception to the general rule applied to the first two issues. 26The trial court has the
advantage of observing the witnesses while they are testifying, an opportunity not available to appellate courts. Thus, its
assessment of the credibility of witnesses and their testimonies are accorded great weight, even finality, when supported
by substantial evidence; more so when such assessment is affirmed by the CA. But when the issue involves the
evaluation of exhibits or documents that are attached to the case records, as in the third issue, the rule may be relaxed.
Under that situation, this Court has a similar opportunity to inspect, examine and evaluate those records, independently of
the lower courts. Hence, we deem the award of the partnership share, as computed by the trial court and adopted by the
CA, to be incomplete and not binding on this Court.WHEREFORE, the Petition is partly GRANTED. The assailed

.G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts. That the terms of a contract turn out to
be financially disadvantageous to them will not relieve them of their obligations therein. The lack of an inventory of real
property will not ipso facto release the contracting partners from their respective obligations to each other arising from
acts executed in accordance with their agreement.
The Case
The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of Appeals 2 (CA) in CAGR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The assailed Decision affirmed the ruling of
the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the
plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are likewise
ordered dismissed. No pronouncement as to costs. 3
The Facts
Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement" with Respondent
Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to the contract, they executed a Deed
of Sale covering the said parcel of land in favor of respondent, who then had it registered in his name. By mortgaging the
property, respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture Agreement, was to
be used for the development of the subdivision. 4 All three of them also agreed to share the proceeds from the sale of the
subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of "respondent's lack of funds or means and skills." They add that
respondent used the loan not for the development of the subdivision, but in furtherance of his own company, Universal
Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With the said amount, he was
able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu City Council's approval of the
subdivision project which he advertised in a local newspaper. He also caused the construction of roads, curbs and gutters.
Likewise, he entered into a contract with an engineering firm for the building of sixty low-cost housing units and actually
even set up a model house on one of the subdivision lots. He did all of these for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their relatives had separately
caused the annotations of adverse claims on the title to the land, which eventually scared away prospective buyers.
Despite his requests, petitioners refused to cause the clearing of the claims, thereby forcing him to give up on the project.
5

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were however acquitted.
Thereafter, they filed the present civil case which, upon respondent's motion, was later dismissed by the trial court in an
Order dated September 6, 1982. On appeal, however, the appellate court remanded the case for further proceedings.
Thereafter, the RTC issued its assailed Decision, which, as earlier stated, was affirmed by the CA.
Hence, this Petition. 6
Ruling of the Court of Appeals
In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a partnership for the
development of the subdivision. Thus, they must bear the loss suffered by the partnership in the same proportion as their
share in the profits stipulated in the contract. Disagreeing with the trial court's pronouncement that losses as well as profits
in a joint venture should be distributed equally, 7 the CA invoked Article 1797 of the Civil Code which provides:
Art. 1797 The losses and profits shall be distributed in conformity with the agreement. If only the share
of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same
proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the

profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital.
The Issue
Petitioners impute to the Court of Appeals the following error:
. . . [The] Court of Appeals erred in concluding that the transaction
. . . between the petitioners and respondent was that of a joint venture/partnership, ignoring outright the
provision of Article 1769, and other related provisions of the Civil Code of the Philippines. 8
The Court's Ruling
The Petition is bereft of merit.
Main Issue:
Existence of a Partnership
Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture Agreement and the
earlier Deed of Sale, both of which were the bases of the appellate court's finding of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is liable for his failure to
implement the project. Because the agreement entitled them to receive 60 percent of the proceeds from the sale of the
subdivision lots, they pray that respondent pay them damages equivalent to 60 percent of the value of the property. 9
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by
and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES,
and MISS EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at
Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of
17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency upon the execution of this contract for the property entrusted by
the SECOND PARTY, for sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the
respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969, in the
amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50)
Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine
Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations and this
particular amount will serve as an advance payment from the FIRST PARTY for the property mentioned
to be sub-divided and to be deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal
amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the
sub-division project is terminated and ready for sale to any interested parties, and the amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by
the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales after the
development of the sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the
SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or

whatever income deriving from the sales will be divided equally according to the . . . percentage [agreed
upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work and all
improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall [be]
decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned
provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the
SECOND PARTY, will be paid in full to the FIRST PARTY, including all necessary improvements spent by
the FIRST PARTY, and-the FIRST PARTY will be given a grace period to turnover the property
mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and
voluntarily for the uses and purposes therein stated. 10
A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant to Article
1767 of the Civil Code, which provides:
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form of land which was
to be developed into a subdivision; while respondent would give, in addition to his industry, the amount needed for general
expenses and other costs. Furthermore, the income from the said project would be divided according to the stipulated
percentage. Clearly, the contract manifested the intention of the parties to form a partnership. 11
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the land to
facilitate its use in the name of the respondent. On the other hand, respondent caused the subject land to be mortgaged,
the proceeds of which were used for the survey and the subdivision of the land. As noted earlier, he developed the roads,
the curbs and the gutters of the subdivision and entered into a contract to construct low-cost housing units on the
property.
Respondent's actions clearly belie petitioners' contention that he made no contribution to the partnership. Under Article
1767 of the Civil Code, a partner may contribute not only money or property, but also industry.
Petitioners Bound by
Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly stipulated, but also to
all necessary consequences thereof, as follows:
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the terms of the contract they
voluntarily signed. If it was not in consonance with their expectations, they should have objected to it and insisted on the
provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and the fact that the
contractual stipulations may turn out to be financially disadvantageous will not relieve parties thereto of their obligations.
They cannot now disavow the relationship formed from such agreement due to their supposed misunderstanding of its
terms.
Alleged Nullity of the
Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which provides:
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.
They contend that since the parties did not make, sign or attach to the public instrument an inventory of the real property
contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states
that under the aforecited provision which is a complement of Article 1771, 12 "The execution of a public instrument would

be useless if there is no inventory of the property contributed, because without its designation and description, they
cannot be subject to inscription in the Registry of Property, and their contribution cannot prejudice third persons. This will
result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty in which the
immovables may consist. Thus, the contract is declared void by the law when no such inventory is made." The case at bar
does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay them
60 percent of the value of the property. 13 They cannot in one breath deny the contract and in another recognize it,
depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract
and courts will not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an
ordinary contract from which the parties' rights and obligations to each other may be inferred and enforced.
Partnership Agreement Not the Result
of an Earlier Illegal Contract
Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil Code, because it is the
direct result of an earlier illegal contract, which was for the sale of the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale was the
expectation of profits from the subdivision project. Its first stipulation states that petitioners did not actually receive
payment for the parcel of land sold to respondent. Consideration, more properly denominated as cause, can take different
forms, such as the prestation or promise of a thing or service by another. 15
In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in the expectation of
profits from the subdivision project, for which the land was intended to be used. As explained by the trial court, "the land
was in effect given to the partnership as [petitioner's] participation therein. . . . There was therefore a consideration for the
sale, the [petitioners] acting in the expectation that, should the venture come into fruition, they [would] get sixty percent of
the net profits."
Liability of the Parties
Claiming that rerpondent was solely responsible for the failure of the subdivision project, petitioners maintain that he
should be made to pay damages equivalent to 60 percent of the value of the property, which was their share in the profits
under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of the failure of the
project. 16 But it also ruled that neither was respondent responsible therefor. 17 In imputing the blame solely to him,
petitioners failed to give any reason why we should disregard the factual findings of the appellate court relieving him of
fault. Verily, factual issues cannot be resolved in a petition for review under Rule 45, as in this case. Petitioners have not
alleged, not to say shown, that their Petition constitutes one of the exceptions to this doctrine. 18 Accordingly, we find no
reversible error in the CA's ruling that petitioners are not entitled to damages.
WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs against petitioners.
SO ORDERED
G.R. No. L-24193

June 28, 1968

MAURICIO AGAD, plaintiff-appellant,

vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance of Davao, we are
called upon to determine the applicability of Article 1773 of our Civil Code to the contract of partnership on which the
complaint herein is based.
Alleging that he and defendant Severino Mabato are pursuant to a public instrument dated August 29, 1952, copy of
which is attached to the complaint as Annex "A" partners in a fishpond business, to the capital of which Agad
contributed P1,000, with the right to receive 50% of the profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts of the operations of the partnership; and that, despite
repeated demands, Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the partnership for the period from 1957 to

1963, in addition to P1,000 as attorney's fees, and ordering the dissolution of the partnership, as well as the winding up of
its affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of said partnership, upon
the ground that the contract therefor had not been perfected, despite the execution of Annex "A", because Agad had
allegedly failed to give his P1,000 contribution to the partnership capital. Mabato prayed, therefore, that the complaint be
dismissed; that Annex "A" be declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary
damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause of action and that the
lower court had no jurisdiction over the subject matter of the case, because it involves principally the determination of
rights over public lands. After due hearing, the court issued the order appealed from, granting the motion to dismiss the
complaint for failure to state a cause of action. This conclusion was predicated upon the theory that the contract of
partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond
referred in said instrument had not been attached thereto. A reconsideration of this order having been denied, Agad
brought the matter to us for review by record on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if inventory of
said property is not made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or real rights" have been contributed to the partnership
under consideration. Mabato alleged and the lower court held that the answer should be in the affirmative, because "it is
really inconceivable how a partnership engaged in the fishpond business could exist without said fishpond property
(being) contributed to the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was
established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the partners contributed
either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of P1,000 each. Indeed,
Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which One
Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand (P1,000.00) Pesos
has been contributed by Mauricio Agad.
xxx

xxx

xxx

The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said fishpond nor a real
right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real right
thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed from should be,
as it is hereby set aside and the case remanded to the lower court for further proceedings, with the costs of this instance
against defendant-appellee, Severino Mabato. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. 143340

August 15, 2001

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,

vs.
LAMBERTO T. CHUA, respondent.
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision 1 of the Court of Appeals
dated January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth Sunga Chan and Cecilia Sunga" and of the
Resolution dated May 23, 2000 denying the motion for reconsideration of herein petitioners Lilibeth Sunga and Cecilia
Sunga (hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan (hereafter
petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of the deceased
Jacinto L. Sunga (hereafter Jacinto), for "Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of
Shares and Damages with Writ of Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan,
Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of Shellane
Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto allegedly agreed to register
the business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of
Jacinto as a sole proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to Jacinto
while the latter in turn produced P100,000.00 as his counterpart contribution, with the intention that the profits would be
equally divided between them. The partnership allegedly had Jacinto as manager, assisted by Josephine Sy (hereafter
Josephine), a sister of the wife respondent, Erlinda Sy. As compensation, Jacinto would receive a manager's fee or
remuneration of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her wages and
other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite and was
profitable. Respondent claimed that he could attest to success of their business because of the volume of orders and
deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished
respondent with the merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent
however suspected that the amount indicated in these documents were understated and undervalued by Jacinto and
Josephine for their own selfish reasons and for tax avoidance.
Upon Jacinto's death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his daughter, petitioner
Lilibeth, took over the operations, control, custody, disposition and management of Shellite without respondent's consent.
Despite respondent's repeated demands upon petitioners for accounting, inventory, appraisal, winding up and restitution
of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of
Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out the alibis and reasons to evade respondent's
demands, she disbursed out of the partnership funds the amount of P200,000.00 and partially paid the same to
respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented partial payment of the
latter's share in the partnership, with a promise that the former would make the complete inventory and winding up of the
properties of the business establishment. Despite such commitment, petitioners allegedly failed to comply with their duty
to account, and continued to benefit from the assets and income of Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange Commission
(SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte had jurisdiction over the action. Respondent
opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in from and substance denied the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counter-claims, contending that they are not liable
for partnership shares, unreceived income/profits, interests, damages and attorney's fees, that respondent does not have
a cause of action against them, and that the trial court has no jurisdiction over the nature of the action, the SEC being the
agency that has original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorney's fees and
expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for winding up of
partnership affairs, accounting and recovery of shares in partnership affairs, accounting and recovery of shares in
partnership assets/properties should be dismissed and prosecuted against the estate of deceased Jacinto in a probate or
intestate proceeding.
On August 16, 1993, the trial denied the second motion to dismiss for lack of merit.

On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the Court of Appeals
docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as petitioners failed to show
that a reversible error was committed by the appellate court." 2
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the trial court on
April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case of January 17,
1996. Respondent presented his evidence while petitioners were considered to have waived their right to present
evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive of the Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and
standards of the properties, assets, income and profits of the Shellite Gas Appliance Center Since the
time of death of Jacinto L. Sunga, from whom they continued the business operations including all
businesses derived from Shellite Gas Appliance Center, submit an inventory, and appraisal of all these
properties, assets, income, profits etc. to the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income and
profits they misapplied and converted to their own use and advantage the legally pertain to the plaintiff
and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the
partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4-5 of
the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the partnership
from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the sum of P35,000.00
per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the interest, shares, participation and equity in the
partnership, or the value thereof in money or money's worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold them
liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic) and P25,000.00 as
litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED."3
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision reads:
"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects." 4
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon following grounds:
"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between respondent
Lamberto T. Chua and the late Jacinto L. Sunga upon the latter'' invitation and offer and that upon his death the
partnership assets and business were taken over by petitioners.

2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply in the
instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible evidence to
warrant the finding of a partnership, and assuming arguendo that indeed there was a partnership, the finding of
highly exaggerated amounts or values in the partnership assets and profits." 5
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a partnership existed
between respondent and Jacinto from 1977 until Jacinto's death. In the absence of any written document to show such
partnership between respondent and Jacinto, petitioners argues that these courts were proscribes from hearing the
testimonies of respondent and his witness, Josephine, to prove the alleged partnership three years after Jacinto's death.
To support this argument, petitioners invoke the "Dead Man's Statute' or "Survivorship Rule" under Section 23, Rule 130
of the Rules of Court that provides:
"SEC. 23. Disqualification by reason of death or insanity of adverse party. Parties or assignors of parties to a
case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other
representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the
estate of such deceased person, or against such person of unsound mind, cannot testify as to any matter of fact
occurring before the death of such deceased person or before such person became of unsound mind."
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should not have
been admitted to prove certain claims against a deceased person (Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property of real rights are contributed thereto, in
which case a public instrument shall necessary. 6 Hence, based on the intention of the parties, as gathered from the facts
and ascertained from their language and conduct, a verbal contract of partnership may arise. 7 The essential profits that
must be proven to that a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint
interest in the profits.8 Understandably so, in view of the absence of the written contract of partnership between
respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial evidence to prove said
partnership. The crucial issue to settle then is to whether or not the "Dead Man's Statute" applies to this case so as to
render inadmissible respondent's testimony and that of his witness, Josephine.
The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from testifying by death,
insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving his own
uncontradicted and unexplained account of the transaction. 9 But before this rule can be successfully invoked to bar the
introduction of testimonial evidence, it is necessary that:
"1. The witness is a party or assignor of a party to case or persons in whose behalf a case in prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person or a person of
unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased person or against
person of unsound mind;
4. His testimony refers to any matter of fact of which occurred before the death of such deceased person or
before such person became of unsound mind."10
Two reasons forestall the application of the "Dead Man's Statute" to this case.
First, petitioners filed a compulsory counterclaim 11 against respondents in their answer before the trial court, and with the
filing of their counterclaim, petitioners themselves effectively removed this case from the ambit of the "Dead Man's
Statute".12 Well entrenched is the rule that when it is the executor or administrator or representatives of the estates that
sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the deceased to
defeat the counterclaim.13 Moreover, as defendant in the counterclaim, respondent is not disqualified from testifying as to
matters of facts occurring before the death of the deceased, said action not having been brought against but by the estate
or representatives of the deceased.14
Second, the testimony of Josephine is not covered by the "Dead Man's Statute" for the simple reason that she is not "a
party or assignor of a party to a case or persons in whose behalf a case is prosecuted." Records show that respondent
offered the testimony of Josephine to establish the existence of the partnership between respondent and Jacinto.
Petitioners' insistence that Josephine is the alter ego of respondent does not make her an assignor because the term
"assignor" of a party means "assignor of a cause of action which has arisen, and not the assignor of a right assigned
before any cause of action has arisen."15 Plainly then, Josephine is merely a witness of respondent, the latter being the
party plaintiff.
We are not convinced by petitioners' allegation that Josephine's testimony lacks probative value because she was
allegedly coerced coerced by respondent, her brother-in-law, to testify in his favor, Josephine merely declared in court
that she was requested by respondent to testify and that if she were not requested to do so she would not have testified.

We fail to see how we can conclude from this candid admission that Josephine's testimony is involuntary when she did not
in any way categorically say that she was forced to be a witness of respondent.
Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her testimony since
relationship per se, without more, does not affect the credibility of witnesses. 16
Petitioners' reliance alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail over the factual
findings of the trial court and the Court of Appeals that a partnership was established between respondent and Jacinto.
Based not only on the testimonial evidence, but the documentary evidence as well, the trial court and the Court of Appeals
considered the evidence for respondent as sufficient to prove the formation of partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial precedents, a factual
matter like the finding of the existence of a partnership between respondent and Jacinto cannot be inquired into by this
Court on review.17 This Court can no longer be tasked to go over the proofs presented by the parties and analyze, assess
and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that
piece of evidence of one party or the other.18 It must be also pointed out that petitioners failed to attend the presentation of
evidence of respondent. Petitioners cannot now turn to this Court to question the admissibility and authenticity of the
documentary evidence of respondent when petitioners failed to object to the admissibility of the evidence at the time that
such evidence was offered.19
With regard to petitioners' insistence that laches and/or prescription should have extinguished respondent's claim, we
agree with the trial court and the Court of Appeals that the action for accounting filed by respondents three (3) years after
Jacinto's death was well within the prescribed period. The Civil Code provides that an action to enforce an oral contract
prescribes in six (6) years20 while the right to demand an accounting for a partner's interest as against the person
continuing the business accrues at the date of dissolution, in the absence of any contrary agreement. 21 Considering that
the death of a partner results in the dissolution of the partnership 22, in this case, it was Jacinto's death that respondent as
the surviving partner had the right to an account of his interest as against petitioners. It bears stressing that while Jacinto's
death dissolved the partnership, the dissolution did not immediately terminate the partnership. The Civil Code 23 expressly
provides that upon dissolution, the partnership continues and its legal personality is retained until the complete winding up
of its business, culminating in its termination.24
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto, petitioners
maintain that said partnership that had initial capital of P200,000.00 should have been registered with the Securities and
Exchange Commission (SEC) since registration is mandated by the Civil Code, True, Article 1772 of the Civil Code
requires that partnerships with a capital of P3,000.00 or more must register with the SEC, however, this registration
requirement is not mandatory. Article 1768 of the Civil Code 25 explicitly provides that the partnership retains its juridical
personality even if it fails to register. The failure to register the contract of partnership does not invalidate the same as
among the partners, so long as the contract has the essential requisites, because the main purpose of registration is to
give notice to third parties, and it can be assumed that the members themselves knew of the contents of their contract. 26
In the case at bar, non-compliance with this directory provision of the law will not invalidate the partnership considering
that the totality of the evidence proves that respondent and Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.
SO ORDERED.

1wphi1.nt

G.R. No. L-4935

May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.
This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover possesion of
registered land situated in barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times with respect to the extent and description of the land sought to be
recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name under Transfer
Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13 hectares more or less.
But the complaint was amended by reducing the area of 6 hectares, more or less, after the defendant had indicated the
plaintiff's surveyors the portion of land claimed and occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiff's surveyors that a portion of the area was embraced in another certificate of
title, which was plaintiff's Transfer Certificate of Title No. 37677. And still later, in the course of trial, after defendant's
surveyor and witness, Quirino Feria, had testified that the area occupied and claimed by defendant was about 13
hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to make its allegations
conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public and
notorious possession (of land in dispute) under claim of ownership, adverse to the entire world by defendant and his
predecessor in interest" from "time in-memorial". The answer further alleges that registration of the land in dispute was
obtained by plaintiff or its predecessors in interest thru "fraud or error and without knowledge (of) or interest either
personal or thru publication to defendant and/or predecessors in interest." The answer therefore prays that the complaint
be dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the land in
question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent of P132.62 from
January, 1940, until he vacates the land, and also to pay the costs.
Appealing directly to this court because of the value of the property involved, defendant makes the following assignment
or errors:
I. The trial court erred in not dismissing the case on the ground that the case was not brought by the real property
in interest.
II. The trial court erred in admitting the third amended complaint.
III. The trial court erred in denying defendant's motion to strike.
IV. The trial court erred in including in its decision land not involved in the litigation.
V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos. 37686 and
37677.
Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.
VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62 monthly
from January, 1940, until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the defendant.
As to the first assigned error, there is nothing to the contention that the present action is not brought by the real party in
interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an action be brought in the name of,
but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring
the action, that is to file the complaint, in the name of the plaintiff. That practice appears to have been followed in this
case, since the complaint is signed by the law firm of Araneta and Araneta, "counsel for plaintiff" and commences with the
statement "comes now plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is
"represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one
corporation being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio
Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into a
partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may
nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized
by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There
is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere reference to
section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. When issues not raised by the pleadings are tried by express or
implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise
these issues may be made upon motion of any party at my time, even of the trial of these issues. If evidence is
objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall be so freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would
prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable
the objecting party to meet such evidence.
Under this provision amendment is not even necessary for the purpose of rendering judgment on issues proved though
not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of Court:
Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that where the
facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint is necessary,
especially where defendant has himself raised the point on which recovery is based, and that the appellate court
treat the pleadings as amended to conform to the evidence, although the pleadings were not actually amended. (I
Moran, Rules of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that the land in
dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the name Quirino
Bolaos," defendant later changed his lawyer and also his theory and tried to prove that the land in dispute was not
covered by plaintiff's certificate of title. The evidence, however, is against defendant, for it clearly establishes that plaintiff
is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square
meters, more or less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot No.
4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less, covered by transfer certificate of
title No. 37677 of the land records of the same province, both lots having been originally registered on July 8, 1914 under
original certificate of title No. 735. The identity of the lots was established by the testimony of Antonio Manahan and
Magno Faustino, witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established by
the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the
portion claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-B-4, and is well within the
area covered by the two transfer certificates of title already mentioned. This fact also appears admitted in defendant's
answer to the third amended complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree of
registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year
has already elapsed from the issuance and entry of the decree. Neither court the decree be collaterally attacked by any
person claiming title to, or interest in, the land prior to the registration proceedings. (Sorogon vs. Makalintal,1 45 Off.
Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription
or adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of
ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45
Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession under a decree of registration does
not prescribed. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that
rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and
VI.
As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be sentenced to pay
plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it appears from the record that that
reasonable compensation for the use and occupation of the premises, as stipulated at the hearing was P10 a month for
each hectare and that the area occupied by defendant was 13.2619 hectares. The total rent to be paid for the area
occupied should therefore be P132.62 a month. It is appears from the testimony of J. A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant. And it cannot be
supposed that defendant has been paying rents, for he has been asserting all along that the premises in question 'have
always been since time immemorial in open, continuous, exclusive and public and notorious possession and under claim
of ownership adverse to the entire world by defendant and his predecessors in interest.' This assignment of error is thus
clearly without merit.
Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.
During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss alleging that
there is pending before the Court of First Instance of Rizal another action between the same parties and for the same
cause and seeking to sustain that allegation with a copy of the complaint filed in said action. But an examination of that
complaint reveals that appellant's allegation is not correct, for the pretended identity of parties and cause of action in the
two suits does not appear. That other case is one for recovery of ownership, while the present one is for recovery of
possession. And while appellant claims that he is also involved in that order action because it is a class suit, the complaint
does not show that such is really the case. On the contrary, it appears that the action seeks relief for each individual
plaintiff and not relief for and on behalf of others. The motion for dismissal is clearly without merit.
Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein
respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The
partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1 October 1947, the
limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among other
activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office and held itself out as a limited partnership, handling
and carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of
accounts and bank accounts, and had a quota allocation with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December
1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded with the
Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the income of
the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency
income tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance
with law, but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax Appeals, which
court, after trial, rendered a decision, on 11 November 1965, reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's aforesaid
decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for
income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a single
taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter and
Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of
P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their
subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited partnership,
and if they did not, the fiction of juridical personality of the partnership should be disregarded for income tax purposes
because the spouses have exclusive ownership and control of the business; consequently the income tax return of
respondent Suter for the years in question should have included his and his wife's individual incomes and that of the
limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents or non-residents, only
one consolidated return for the taxable year shall be filed by either spouse to cover the income of both
spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with
limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for dissolution of
the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical personality had not
been affected and since, as a limited partnership, as contra distinguished from a duly registered general partnership, it is
taxable on its income similarly with corporations, Suter was not bound to include in his individual return the income of the
limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law
because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one year
after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in Commentaries
and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code,
which applies in the absence of express provision in the Code of Commerce, persons prohibited from making
donations to each other are prohibited from entering into universal partnerships. (2 Echaverri 196) It follows that
the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella
58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a
universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of 1889

(which was the law in force when the subject firm was organized in 1947), a universal partnership requires either that the
object of the association be all the present property of the partners, as contributed by them to the common fund, or else
"all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of
money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It
follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article
1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva de los
contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y hay que
estar a la norma general segun la que toda persona es capaz para contratar mientras no sea declarado incapaz
por la ley. La jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su resolution de
3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the
causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally
erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and contributed
by them before their marriage; and after they were joined in wedlock, such contributions remained their respective
separate property under the Spanish Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common
property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own,
distinct and separate from that of its partners (unlike American and English law that does not recognize such separate
juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring
or disregarding clear statutory mandates and basic principles of our law. The limited partnership's separate individuality
makes it impossible to equate its income with that of the component members. True, section 24 of the Internal Revenue
Code merges registered general co-partnerships (compaias colectivas) with the personality of the individual partners for
income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can not be
extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution
of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal
personality of the corporations involved therein are not applicable to the present case. In the cited cases, the corporations
were already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so would
exempt the limited partnership from income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the
stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was organized for
legitimate business purposes; it conducted its own dealings with its customers prior to appellee's marriage, and had been
filing its own income tax returns as such independent entity. The change in its membership, brought about by the
marriage of the partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the
partnership from the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the
partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated
scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is
presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be included in the
individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with
what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal treatment, tax wise,
of a general copartnership (compaia colectiva) and a limited partnership, when the code plainly differentiates the two.
Thus, the code taxes the latter on its income, but not the former, because it is in the case of compaias colectivas that the
members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the
duly registered general partnership (Section 26, N.I.R.C.; Araas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp.
88-89).lawphi1.nt
But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and
forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil. 779,
and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become conjugal only
when no longer needed to defray the expenses for the administration and preservation of the paraphernal capital of the
wife. Then again, the appellant's argument erroneously confines itself to the question of the legal personality of the limited

partnership, which is not essential to the income taxability of the partnership since the law taxes the income of even joint
accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes that the conjugal
partnership of gains is a taxable unit, which it is not. What is taxable is the "income of both spouses" (Section 45 [d] in
their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of
husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions
in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and when split
from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands,
does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

G.R. No. 135813

October 25, 2001

FERNANDO SANTOS, petitioner,

vs.
SPOUSES ARSENIO and NIEVES REYES, respondents.
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on the
Supreme Court. However, there are several exceptions to this principle. In the present case, we find occasion to
apply both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision, 1 as well as the August
17, 1998 and the October 9, 1998 Resolutions,2 issued by the Court of Appeals (CA) in CA-GR CV No. 34742. The
Assailed Decision disposed as follows:
"WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is
hereby DISMISSED. Costs against [petitioner]." 3
Resolving respondent's Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:
"WHEREFORE, [respondents'] motion for reconsideration is GRANTED. Accordingly, the court's
decision dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is
AFFIRMED in toto, with costs against [petitioner]."4
The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for Reconsideration of the August 17,
1998 Resolution.5
The Facts
The events that led to this case are summarized by the CA as follows:
"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were
introduced to each other by one Meliton Zabat regarding a lending business venture proposed by
Nieves. It was verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat
[would] take charge of solicitation of members and collection of loan payments. The venture was
launched on June 13, 1986, with the understanding that [petitioner] would receive 70% of the profits
while x x x Nieves and Zabat would earn 15% each.
"In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the
Monte Maria Development Corporation6 (Monte Maria, for brevity), sought short-term loans for
members of the corporation. [Petitioner] and Gragera executed an agreement providing funds for
Monte Maria's members. Under the agreement, Monte Maria, represented by Gragera, was entitled
to P1.31 commission per thousand paid daily to [petitioner] (Exh. 'A')x x x . Nieves kept the books as
representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as credit
investigator.
"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article of Agreement' which
formalized their earlier verbal arrangement.

"[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending
business in competition with their partnership[.] Zabat was thereby expelled from the partnership.
The operations with Monte Maria continued.
"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages.
[Petitioner] charged [respondents], allegedly in their capacities as employees of [petitioner], with
having misappropriated funds intended for Gragera for the period July 8, 1986 up to March 31, 1987.
Upon Gragera's complaint that his commissions were inadequately remitted, [petitioner] entrusted
P200,000.00 to x x x Nieves to be given to Gragerax x x . Nieves allegedly failed to account for the
amount. [Petitioner] asserted that after examination of the records, he found that of the total amount
of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was remitted to Gragera, thereby
leaving the balance of P1,555,065.70 unaccounted for.
"In their answer, [respondents] asserted that they were partners and not mere employees of
[petitioner]. The complaint, they alleged, was filed to preempt and prevent them from claiming their
rightful share to the profits of the partnership.
"x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner]
learned of Zabat's activities. Arsenio resigned from his job at the Asian Development Bank to join the
partnership.
"For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending
activity with Monte Maria originated from her initiative. Except for the limited period of July 8, 1986
through August 20, 1986, she did not handle sums intended for Gragera. Collections were turned
over to Gragera because he guaranteed 100% payment of all sums loaned by Monte Maria. Entries
she made on worksheets were based on this assumptive 100% collection of all loans. The loan
releases were made less Gragera's agreed commission. Because of this arrangement, she neither
received payments from borrowers nor remitted any amount to Gragera. Her job was merely to make
worksheets (Exhs. '15' to '15-DDDDDDDDDD') to convey to [petitioner] how much he would earn if
all the sums guaranteed by Gragera were collected.
"[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners
with respect to the agreement with Gragera. He claimed that after he discovered Zabat's activities,
he ceased infusing funds, thereby causing the extinguishment of the partnership. The agreement
with Gragera was a distinct partnership [from] that of [respondent] and Zabat. [Petitioner] asserted
that [respondents] were hired as salaried employees with respect to the partnership between
[petitioner] and Gragera.
"[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she received all payments from
which Nieves deducted Gragera's commission. The commission would then be remitted to Gragera.
She likewise determined loan releases.
"During the pre-trial, the parties narrowed the issues to the following points: whether [respondents]
were employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents] for
delivery to Gragera, whether the P1,555,068.70 claimed under the complaint was actually remitted
to Gragera and whether [respondents] were entitled to their counterclaim for share in the profits." 7
Ruling of the Trial Court
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of
petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner
moreover failed to prove that he had entrusted any money to Nieves. Thus, respondents' counterclaim for their
share in the partnership and for damages was granted. The trial court disposed as follows:
"39.

WHEREFORE, the Court hereby renders judgment as follows:

39.1.

THE SECOND AMENDED COMPLAINT dated July 26, 1989 is

DISMISSED.

39.2.

The [Petitioner] FERNANDO J. SANTOS is ordered to pay the

[Respondent] NIEVES S. REYES, the following:

39.2.1. P3,064,428.00

- The 15 percent share of the [respondent] NIEVES

S. REYES in the profits of her joint venture with the
[petitioner].

39.2.2. Six(6) percent

of
P3,064,428.00

- As damages from August 3, 1987 until the

P3,064,428.00 is fully paid.

39.2.3. P50,000.00

- As moral damages

39.2.4. P10,000.00

- As exemplary damages

39.3.

The [petitioner] FERNANDO J. SANTOS is ordered to pay the

[respondent] ARSENIO REYES, the following:

39.3.1. P2,899,739.50

- The balance of the 15 percent share of the

[respondent] ARSENIO REYES in the profits of his
joint venture with the [petitioner].

39.3.2. Six(6) percent

of
P2,899,739.50

- As damages from August 3, 1987 until the

P2,899,739.50 is fully paid.

39.3.3. P25,000.00

- As moral damages

39.3.4. P10,000.00

- As exemplary damages

39.4.

The [petitioner] FERNANDO J. SANTOS is ordered

to pay the [respondents]:

39.4.1. P50,000.00

- As attorney's fees; and

39.4.2. The cost of the suit."8

Ruling of the Court of Appeals
On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was dismissed. Upon the
latter's Motion for Reconsideration, however, the trial court's Decision was reinstated in toto. Subsequently,
petitioner's own Motion for Reconsideration was denied in the CA Resolution of October 9, 1998.
The CA ruled that the following circumstances indicated the existence of a partnership among the parties: (1) it was
Nieves who broached to petitioner the idea of starting a money-lending business and introduced him to Gragera; (2)
Arsenio received "dividends" or "profit-shares" covering the period July 15 to August 7, 1986 (Exh. "6"); and (3) the
partnership contract was executed after the Agreement with Gragera and petitioner and thus showed the parties'
intention to consider it as a transaction of the partnership. In their common venture, petitioner invested capital while
respondents contributed industry or services, with the intention of sharing in the profits of the business.
The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000 which was supposed to
be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due, while hers was
merely to prepare the daily cash flow reports (Exhs. "15-15DDDDDDDDDD") to keep track of his collections.
Hence, this Petition.9
Issue
Petitioner asks this Court to rule on the following issues: 10
"Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to
excess or lack of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase 'Received by' on documents signed by
Nieves Reyes signified receipt of copies of the documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;
4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to
Gragera;
5 Affirming the dismissal of Santos' [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents' counterclaim;
7. Denying Santos' motion for reconsideration dated September 11, 1998."
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties' relationship was one of
partnership or of employer employee; (2) whether Nieves misappropriated the sums of money allegedly entrusted to
her for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the partnership profits
as determined by the trial court.
The Court's Ruling

The Petition is partly meritorious.

First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending venture with
Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to Santos
did not make her a partner. She was only a witness to the Agreement between the two. Separate from the
partnership between petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a
partnership that was dissolved when Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled that the business
relationship was one of partnership. We quote from the CA Decision, as follows:
"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself provided the initiative in
the lending activities with Monte Maria. In consonance with the agreement between appellant,
Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common
fund with the intention of sharing in the profits of the partnership. [Respondents] provided services
without which the partnership would not have [had] the wherewithal to carry on the purpose for which
it was organized and as such [were] considered industrial partners (Evangelista v. Abad Santos, 51
SCRA 416 [1973]).
"While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved
by the expulsion of Zabat therefrom, the remaining partners simply continued the business of the
partnership without undergoing the procedure relative to dissolution. Instead, they invited Arsenio to
participate as a partner in their operations. There was therefore, no intent to dissolve the earlier
partnership. The partnership between [petitioner,] Nieves and Arsenio simply took over and
continued the business of the former partnership with Zabat, one of the incidents of which was the
lending operations with Monte Maria.
xxx

xxx

xxx

"Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte
Maria was done in pursuit of the business for which the partnership between [petitioner], Nieves and
Zabat (later Arsenio) was organized. Gragera who represented Monte Maria was merely paid
commissions in exchange for the collection of loans. The commissions were fixed on gross returns,
regardless of the expenses incurred in the operation of the business. The sharing of gross returns
does not in itself establish a partnership." 11
We agree with both courts on this point. By the contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of dividing the profits among
themselves.12 The "Articles of Agreement" stipulated that the signatories shall share the profits of the business in a
70-15-15 manner, with petitioner getting the lion's share. 13 This stipulation clearly proved the establishment of a
partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued lending money to the
members of the Monte Maria Community Development Group, Inc., which later on changed its business name to
Private Association for Community Development, Inc. (PACDI). Nieves was not merely petitioner's employee. She
discharged her bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement, which states as
follows:
"2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of
prospective borrowers, and shall x x x each be responsible in handling the collection of the loan
payments of the borrowers that they each solicited.
"3. That the bookkeeping and daily balancing of account of the business operation shall be handled
by the SECOND PARTY."14
The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenio's
duties as credit investigator are subsumed under the phrase "screening of prospective borrowers." Because of this
Agreement and the disbursement of monthly "allowances" and "profit shares" or "dividends" (Exh. "6") to Arsenio,
we uphold the factual finding of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was
formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to
petitioner's contention, there is no evidence to show that a different business venture is referred to in this
Agreement, which was executed on August 6, 1986, or about a month after the Memorandum had been signed by
petitioner and Gragera on July 14, 1986. The Agreement itself attests to this fact:

"WHEREAS, the parties have decided to formalize the terms of their business relationship in order
that their respective interests may be properly defined and established for their mutual benefit and
understanding."15
Second Issue:
No Proof of Misappropriation of Gragera's Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's commission.
According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit "B." (the "Schedule of
Daily Payments"), which bears her signature under the words "received by." For the period July 1986 to March
1987, Gragera should have earned a total commission of P4,282,429.30. However, only P3,068,133.20 was
received by him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which
represented the unpaid commissions. Exhibit "H." is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by Nieves. 16
On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received for delivery to
Gragera any amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such
exhibits were insufficient proof that she had embezzled P200,000. Said the CA:
"The presentation of Exhibit "D" vaguely denominated as 'members ledger' does not clearly establish
that Nieves received amounts from Monte Maria's members. The document does not clearly state
what amounts the entries thereon represent. More importantly, Nieves made the entries for the
limited period of January 11, 1987 to February 17, 1987 only while the rest were made by Gragera's
own staff.
"Neither can we give probative value to Exhibit 'E' which allegedly shows acknowledgment of the
remittance of commissions to Verona Gonzales. The document is a private one and its due
execution and authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the
Rules of Court which states:
'SECTION 20. Proof of Private Document Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
'Any other private document need only be identified as that which it is claimed to be.'
"The court a quo even ruled that the signature thereon was a forgery, as it found that:
'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The
initial stroke of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine
signatures of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and goes
upward. This difference in the start of the initial stroke of the signatures Exhs. E-1 and of the
genuine signatures lends credence to Nieves' claim that the signature Exh. E-1 is a forgery.'
xxx

xxx

xxx

"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were based on the
predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the
evidence. A perusal of Exhs. "B" and "F" as well as Exhs. '15' to 15-DDDDDDDDDD' reveal that the
entries were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus, the
total amount recorded on Exh. 'B' is exactly the number of borrowers multiplied by the projected
collection of P150.00 per borrower. This holds true for Exh. 'F.'
"Corollarily, Nieves' explanation that the documents were pro forma and that she signed them not to
signify that she collected the amounts but that she received the documents themselves is more
believable than [petitioner's] assertion that she actually handled the amounts.
"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally establish that x x x Nieves
received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the
document showed a liquidation of P240.000 00 and not P200,000.00.
"Accordingly, we find Nieves' testimony that after August 20, 1986, all collections were made by
Gragera believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the
loans, he took charge of the collections. As [petitioner's] representative,

Nieves merely prepared the daily cash flow reports (Exh. '15' to '15 DDDDDDDDDD') to enable
[petitioner] to keep track of Gragera's operations. Gragera on the other hand devised the schedule of
daily payment (Exhs. 'B' and 'F') to record the projected gross daily collections.
"As aptly observed by the court a quo:
'26.1. As between the versions of SANTOS and NIEVES on how the commissions of
GRAGERA [were] paid to him[,] that of NIEVES is more logical and practical and therefore,
more believable. SANTOS' version would have given rise to this improbable situation:
GRAGERA would collect the daily amortizations and then give them to NIEVES; NIEVES
would get GRAGERA's commissions from the amortizations and then give such commission
to GRAGERA."'17
These findings are in harmony with the trial court's ruling, which we quote below:
"21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for
delivery to GRAGERA. Exh. H shows under its sixth column 'ADDITIONAL CASH' that the additional
cash was P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS,
then his claim is not true. This is so because it is a liquidation of the sum of P240,000.00.
"21.1. SANTOS claimed that he learned of NIEVES' failure to give the P200,000.00 to GRAGERA
when he received the latter's letter complaining of its delayed release. Assuming as true SANTOS'
claim that he gave P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did not
give it to GRAGERA. The only proof that NIEVES did not give it is the letter. But SANTOS did not
even present the letter in evidence. He did not explain why he did not.
"21.2. The evidence shows that all money transactions of the money-lending business of SANTOS
were covered by petty cash vouchers. It is therefore strange why SANTOS did not present any
voucher or receipt covering the P200,000.00." 18
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the partnership. She
did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before remitting his collections.
Exhibits "B" and "F" are merely computations of what Gragera should collect for the day; they do not show that
Nieves received the amounts stated therein. Neither is there sufficient proof that she misappropriated P200,000,
because Exhibit "H." does not indicate that such amount was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-entrenched is
the basic rule that factual findings of the Court of Appeals affirming those of the trial court are binding and
conclusive on the Supreme Court.19 Although there are exceptions to this rule, petitioner has not satisfactorily shown
that any of them is applicable to this issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents' claims on the profits of the partnership. He maintains that "both
business propositions were flops," as his investments were "consumed and eaten up by the commissions
orchestrated to be due Gragera" a situation that "could not have been rendered possible without complicity
between Nieves and Gragera."
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid payment of the
demands of Nieves, because sometime in March 1987, she "signified to petitioner that it was about time to get her
share of the profits which had already accumulated to some P3 million." Respondents add that while the partnership
has not declared dividends or liquidated its earnings, the profits are already reflected on paper. To prove the
counterclaim of Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled
P20,429,520 (Exhs. "10" et seq. and "15" et seq.). Based on that income, her 15 percent share under the joint
venture amounts to P3,064,428 (Exh. "10-I-3"); and Arsenio's, P2,026,000 minus the P30,000 which was already
advanced to him (Petty Cash Vouchers, Exhs. "6, 6-A to 6-B").
The CA originally held that respondents' counterclaim was premature, pending an accounting of the partnership.
However, in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the trial court's ruling on the
counterclaim, it held as follows:
"We earlier ruled that there is still need for an accounting of the profits and losses of the partnership
before we can rule with certainty as to the respective shares of the partners. Upon a further review of
the records of this case, however, there appears to be sufficient basis to determine the amount of
shares of the parties and damages incurred by [respondents]. The fact is that the court a quo
already made such a determination [in its] decision dated August 13, 1991 on the basis of the facts
on record."20

The trial court's ruling alluded to above is quoted below:

"27. The defendants' counterclaim for the payment of their share in the profits of their joint venture
with SANTOS is supported by the evidence.
"27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5,
5-A and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she
prepared. Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh. 3 is a
sample. The originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D(10) were given to
SANTOS. The joint venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from
June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and
ARSENIO, about P2,926,000.00, in the profits.
"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending business he was
engaged in netted a profit and that the originals of the daily case flow reports were furnished to him.
SANTOS however alleged that the money-lending operation of his joint venture with NIEVES and
ZABAT resulted in a loss of about half a million pesos to him. But such loss, even if true, does not
negate NIEVES' claim that overall, the joint venture among them SANTOS, NIEVES and
ARSENIO netted a profit. There is no reason for the Court to doubt the veracity of [the testimony
of] NIEVES.
"27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and
6-B) should be deducted from his total share."21
After a close examination of respondents' exhibits, we find reason to disagree with the CA. Exhibit "10-I" 22 shows
that the partnership earned a "total income" of P20,429,520 for the period June 13, 1986 until April 19, 1987. This
entry is derived from the sum of the amounts under the following column headings: "2-Day Advance Collection,"
"Service Fee," "Notarial Fee," "Application Fee," "Net Interest Income" and "Interest Income on Investment." Such
entries represent the collections of the money-lending business or its gross income.
The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the partnership. For instance,
it did not factor in the "gross loan releases" representing the money loaned to clients. Since the business is moneylending, such releases are comparable with the inventory or supplies in other business enterprises.
Noticeably missing from the computation of the "total income" is the deduction of the weekly allowance disbursed to
respondents. Exhibits "I" et seq. and "J" et seq.23 show that Arsenio received allowances from July 19, 1986 to
March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987, in the total
amount of P25,600. These allowances are different from the profit already received by Arsenio. They represent
expenses that should have been deducted from the business profits. The point is that all expenses incurred by the
money-lending enterprise of the parties must first be deducted from the "total income" in order to arrive at the "net
profit" of the partnership. The share of each one of them should be based on this "net profit" and not from the "gross
income" or "total income" reflected in Exhibit "10-I," which the two courts invariably referred to as "cash flow" sheets.
Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the business expenses
incurred by the parties, because they show only the daily cash collections. Contrary to the rulings of both the trial
and the appellate courts, respondents' exhibits do not reflect the complete financial condition of the money-lending
business. The lower courts obviously labored over a mistaken notion that Exhibit " 10-I-1" represented the "net
profits" earned by the partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares in the profits but is not
liable for the losses), the gross income from all the transactions carried on by the firm must be added together, and
from this sum must be subtracted the expenses or the losses sustained in the business. Only in the difference
representing the net profits does the industrial partner share. But if, on the contrary, the losses exceed the income,
the industrial partner does not share in the losses.25
When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain relevant facts
that would otherwise justify a different conclusion, as in this particular issue, a review of its factual findings may be
conducted, as an exception to the general rule applied to the first two issues. 26
The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not available to
appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are accorded great
weight, even finality, when supported by substantial evidence; more so when such assessment is affirmed by the
CA. But when the issue involves the evaluation of exhibits or documents that are attached to the case records, as in
the third issue, the rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect, examine
and evaluate those records, independently of the lower courts. Hence, we deem the award of the partnership share,
as computed by the trial court and adopted by the CA, to be incomplete and not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED, but the
challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSED and SET ASIDE. No costs.

SO ORDERED.