COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE AIRLINES, INC., respondent.

A franchise is a legislative grant to operate a public utility. Like those of any other statute, the
ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature. In the
present case, Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two
alternatives: (a) "the basic corporate income tax based on PALs annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code" or (b) "a franchise tax of two percent of
gross revenues." Availment of either of these two alternatives shall exempt the airline from the payment of "all
other taxes," including the 20 percent final withholding tax on bank deposits.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the September 30,
2003 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 67970. The CA reversed the June 13, 2001
Decision3and the November 13, 2001 Resolution4 of the Court of Tax Appeals (CTA) in CTA Case No. 5824.
The assailed CA Decision disposed as follows:
"WHEREFORE, the petition is GRANTED, and [the] Commissioner of Internal Revenue is hereby directed to
refund to the [respondent] the amount of P731,190.45 representing the 20% final withholding tax collected and
deducted by depository banks on the petitioners interest income or, in the alternative, to allow the [respondent]
a tax credit for the same amount."5
The Facts
The CA narrates the facts thus:
"[Respondent] Philippine Airlines, Inc. (PAL) is a domestic corporation organized in accordance with the
laws of the Republic of the Philippines, while [Petitioner] Commissioner of Internal Revenue (CIR) is in-charge
of the assessment and collection of the 20% final tax on interest on Philippine currency bank deposits and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, imposed
on domestic corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code
(NIRC).
"On November 5, 1997, [respondents] AVP-Revenue Operations and Tax Services Officer, Atty.
Edgardo P. Curbita, filed with the Office of the then Commissioner of Internal Revenue, Mdm. Liwayway
Vinzons-Chato, a written request for refund of the amount of P2,241,527.22 which represents the total amount
of 20% final withholding tax withheld from the [respondent] by various withholding agent banks, and which
amount includes the 20% final withholding tax withheld by the United Coconut Planters Bank (UCPB) and Rizal
Commercial Banking Corporation (RCBC) for the period starting March 1995 through February 1997.
"On December 4, 1997, the [respondents] AVP-Revenue Operations and Tax Services Officer again
filed with [petitioner] CIR another written request for refund of the amount of P1,048,047.23, representing the
total amount of 20% final withholding tax withheld by various depository banks of the [respondent] which
amount includes the 20% withholding tax withheld by the Philippine National Bank (PNB), Equitable Banking
Corporation (EBC), and the Jade Progressive Savings & Mortgage Bank (JPSMB) for the period starting March
1995 through November 1997.
"The amounts, subject of this petition, and which represent the 20% final withholding tax allegedly erroneously
withheld and remitted to the BIR by the aforesaid banks may be summarized as follows:
Bank Period Covered
Source
Amount
Jan. 9, 1997 Feb. 21,
Interest income on prime
UCPB 1997
savings deposit
P60,328.38
Interest income on
government securities
and/or commercial papers 78,658.52 P131,986.65
Interest income on FBTB
Jan. 6, 1997 Feb. 28,
and Treasury Bills
RCBC 1997
placements
47,763.55
Feb. 19, 1997 Nov. 14,
Interest income on PNBIG
PNB 1997
savings account
514,120.22
Jan. 3, 1997 Feb. 28,
Interest income on
EBC 1997
Treasury Bills placement
33,357.25
Jan. 1, 1997 Feb. 28,
Interest income on
JPSMB 1997
deposits
3,962.78
"[Petitioner] CIR failed to act on the [respondents] request for refund; thus, a petition was filed before the CTA
on April 23, 1999."6

Ruling of the Court of Tax Appeals

The CTA ruled that Respondent PAL was not entitled to the refund. Section 13 of Presidential Decree
No. 1590, PALs franchise,7 allegedly gave respondent the option to pay either its corporate income tax under
the provisions of the NIRC or a franchise tax of two percent of its gross revenues. Payment of either tax would
be in lieu of all "other taxes." Had respondent paid the two percent franchise tax, then the final withholding
taxes would have been considered as "other taxes." Since it chose to pay its corporate income tax, payment of
the final withholding tax is deemed part of this liability and therefore not refundable.8
Ruling of the Court of Appeals
As stated earlier, the Court of Appeals reversed the Decision of the CTA. The CA held that PAL was bound to
pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. 1590 exempts
respondent from paying all other taxes, duties, royalties and other fees of any kind.9 Respondent chose to pay
its basic corporate income tax, which, after considering the factors allowed by law, resulted in a zero tax
liability.10This zero tax liability should neither be taken against respondent nor deprive it of the exemption
granted by the law.11 Having chosen to pay its corporate income tax liability, respondent should now be exempt
from paying all other taxes including the final withholding tax.
Hence, this Petition.12
The Issue
The sole issue raised by petitioner is stated in this wise:
"The Court of Appeals erred on a question of law ruling that the in lieu of all other taxes provision in Section
13 of PD No. 1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the
said decree."13
The Courts Ruling
The Petition has no merit.
Sole Issue:
Tax Liability of PAL
The resolution of the instant case hinges on the interpretation of Section 13 of PALs franchise, which states in
part:
"SEC. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine
Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a
lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without
distinction as to transport or non-transport operations; provided, that with respect to international air-transport
service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this
tax.
"The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed, or collected by any municipal, city, provincial, or national authority or
government agency, now or in the future, x x x."14
Two points are evident from this provision. First, as consideration for the franchise, PAL is liable to pay either a)
its basic corporate income tax based on its net taxable income, as computed under the National Internal
Revenue Code; or b) a franchise tax of two percent based on its gross revenues, whichever is lower. Second,
the tax paid is "in lieu of all other taxes" imposed by all government entities in the country.
Interpretation of PALs Franchise
According to the CA and PAL, the "other taxes in lieu of all other taxes" proviso includes final
withholding taxes.15When respondent availed itself of the basic corporate income tax as its chosen tax liability,
it became exempt from final withholding taxes.
On the other hand, the CTA held that the "in lieu of all other taxes" proviso implied the existence of something
for which a substitution would be made.16 Final withholding taxes come under basic corporate income tax
liability; hence, payment of the latter cannot mean an exemption from the former. To be exempt from final
withholding taxes, PAL should have paid the franchise tax of two percent, which would have been in lieu of all
other taxes including the final withholding tax.
The CIR argues that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL
actually pays something; that is, either the basic corporate income tax or the franchise tax.17 Because of the

zero tax liability of respondent under the basic corporate income tax system, it was not eligible for exemption
from other taxes.18
Construing Subsection (a)
of Section 13 of PD 1590
Vis--vis the Corporate Income Tax
PAL availed itself of PD 1590, Section 13, Subsection (a), the crux of which hinged on the terms "basic
corporate income tax" and "annual net taxable income." The applicable laws (PALs franchise and the Tax
Code) do not define the terms "basic corporate income tax."19 On the other hand, "annual net taxable income"
is computed in accordance with the provisions of the National Internal Revenue Code.
The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the National Internal
Revenue Code of 1997 under Chapter IV: "Tax on Corporations." Section 27 enumerates the rate of income tax
on domestic corporations; Section 28, the rates for foreign corporations; Section 29, the taxes on improperly
accumulated earnings; and Section 30, the corporations exempt from tax.
Being a domestic corporation, PAL is subject to Section 27, which reads as follows:
"Section 27. Rates of Income Tax on Domestic Corporations.
"(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each taxable year from all sources within and without
the Philippines by every corporation, x x x, organized in, or existing under the laws of the Philippines x x x." 20
The NIRC also imposes final taxes on certain passive incomes, as follows: 1) 20 percent on the
interests on currency bank deposits, other monetary benefits from deposit substitutes, trust funds and similar
arrangements, and royalties derived from sources within the Philippines;21 2) 5 percent and 10 percent on the
net capital gains realized from the sale of shares of stock in a domestic corporation not traded in the stock
exchange;22 3) 10 percent on income derived by a depositary bank under the expanded foreign currency
deposit system;23 and 4) 6 percent on the gain presumed to be realized on the sale or disposition of lands and
buildings treated as capital assets.24 These final taxes are withheld at source.25
A corporate income tax liability, therefore, has two components: the general rate of 35 percent, which is
not disputed; and the specific final rates for certain passive incomes. PALs request for a refund in the present
case pertains to the passive income on bank deposits, which is subject to the specific final tax of 20 percent.26
Computation of Taxable
Income Under the Tax Code
Note that the tax liability of PAL under the option it chose (Item "a" of Section 13 of PD 1590) is to be
"computed in accordance with the provisions of the National Internal Revenue Code," as follows:
"(a) The basic corporate income tax based on the grantees annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code[.]"
Taxable income means the pertinent items of gross income specified in the Tax Code, less the
deductions and/or personal and additional exemptions, if any, authorized for these types of income.27 Under
Section 32 of the Tax Code, gross income means income derived from whatever source, including
compensation for services; the conduct of trade or business or the exercise of a profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partners
distributive share in the net income of a general professional partnership. Section 34 enumerates the allowable
deductions; Section 35, personal and additional exemptions.
The definition of gross income is broad enough to include all passive incomes subject to specific rates or final
taxes. However, since these passive incomes are already subject to different rates and taxed finally at
source,they are no longer included in the computation of gross income, which determines taxable income.
Basic Corporate Income Tax Based
on Annual Net Taxable Income
To repeat, the pertinent provision in the case at bar reads: "basic corporate income tax based on the
grantees annual net taxable income computed in accordance with the provisions of the National Internal
Revenue Code." The Court has already illustrated that, under the Tax Code, "taxable income" does not include
passive income subjected to final withholding taxes. Clearly, then, the "basic corporate income tax" identified in
Section 13 (a) of the franchise relates to the general rate of 35 percent as stipulated in Section 27 of the Tax
Code. The final 20 percent taxes disputed in the present case are not covered under Section 13 (a) of PALs
franchise; thus, a refund is in order.
"Substitution Theory"
of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes"
proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590
intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise.
Either option excludes the payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax
payment that exempts it, but the exercise of its option.
Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as
earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By
basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which
taxable income may result in a negative amount and thus translate into a zero tax liability.
Notably, PAL was owned and operated by the government at the time the franchise was last
amended.28 It can reasonably be contemplated that PD 1590 sought to assist the finances of the government
corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes
are due; in this instance, it has a lower tax liability than that provided by Subsection (b).
The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one peso would
suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no
substantial distinction between a zero tax and a one-peso tax liability.
The Court is bound to effectuate the lawmakers intent, which is the controlling factor in interpreting a
statute.29Significantly, this Court has held that the soul of the law is intent:
"The intent of a statute is the law. If a statute is valid it is to have effect according to the purpose and
intent of the lawmaker. The intent is the vital part, the essence of the law, and the primary rule of construction
is to ascertain and give effect to the intent. The intention of the legislature in enacting a law is the law itself,
and must be enforced when ascertained, although it may not be consistent with the strict letter of the statute.
Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the
legislature and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives
life to a legislative enactment. In construing statutes the proper course is to start out and follow the true intent
of the legislature and to adopt that sense which harmonizes best with the context and promotes in the fullest
manner the apparent policy and objects of the legislature."30
While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the
taxpayer and in favor of the taxing power,31 Section 13 of the franchise of respondent leaves no room for
interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the "basic
corporate income tax" or the two percent gross revenue tax.
Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. This
matter is addressed to the sound discretion of the lawmaking department of government.
WHEREFORE, the Petition is DENIED. No pronouncement as to costs. SO ORDERED.
CIR VS. MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the CA and CIR vs. MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED
MINING AND DEVELOPMENT CORPORATION and the CA,
These cases, involving the same issue being contested by the same parties and having originated from
the same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for
brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the
projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract,
Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the
installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the
copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that
$9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970
in the sum of 4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00
from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in
United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue
show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would

use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and
that Mitsubishi had to pay back the total amount of loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to
the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National
Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted by
respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and
disclaimer of its interest in the claim for tax credit in favor of
Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded
on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled
and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is
the basis for private repondents' claim for exemption from paying the tax on the interest payments on the loan
as earlier stated. It was further claimed that the interest payments on the loan from the consortium of Japanese
banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The
provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which excludes from
gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional
financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still
being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on
November 16, 1976, the said division recommended to petitioner the approval of private respondent's claim.
However, before action could be taken thereon, respondent court scheduled the case for hearing on
September 30, 1977, during which trial private respondents presented their evidence while petitioner submitted
his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the
material averments of private respondents when he supposedly prayed "for judgment on the pleadings without
off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers and
documents pertaining to the loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this
was the same amount given to Atlas. It also observed that the money for the loans from the consortium of
private Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank. From these, respondent
court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or
conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to
this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld
and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same
basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as
CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration,
filed on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of
appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed
with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated
with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code
and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is
a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines
on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner
should be deemed to have admitted the allegations of the private respondents when it submitted the case on
the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of
petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of
its allegations. The records of the Bureau of Internal Revenue relevant to the case were duly submitted and
admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not only on the pleadings but on the evidence
adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if
there is a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling
circumstances obtaining and proven in these cases, however, warrant a departure from said general rule since
we are convinced that there is a misapprehension of facts on the part of the tax court to the extent that its
conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of
loan and Atlas as the seller of the copper concentrates. From the categorical language used in the document,
one prestation was in consideration of the other. The specific terms and the reciprocal nature of their
obligations make it implausible, if not vacuous to give credit to the cavalier assertion that Mitsubishi was a
mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a loan to
and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose
could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the
purpose as respondent court believes, said corporations would have specifically so stated, especially
considering their experience and expertise in financial transactions, not to speak of the amount involved and its
purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following
arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It is not a
mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where
the latter shall provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu,
while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper
concentrate that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the
consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of
the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from what
sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from
the EXIMBANK, of Japan and the consortium of Japanese banks financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private
entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans
were secured by MITSUBISHI primarily "as a loan to and in consideration for importing copper concentrates
from ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate
contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK,
that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales
Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in
the contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any
entity, private or public, for that matter.

Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and becomes the sole
property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said
amount ceased to be the property of the bank and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former
being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the
interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the 15% withholding
tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the interest income earned by
MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other
considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month
after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the
contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for
importing copper concentrates from Atlas, but all that this proves is the justification for the loan as represented
by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing
wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as
they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is
not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to
it that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a
failure to establish such submission by adequate evidence but it posits the unfair and unexplained imputation
that, for reasons subject only of surmise, said financing institution would deliberately circumvent its own charter
to accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real
obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming
the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.
Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in
paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and
Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It
should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while
Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual
cost beginning from and including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation
is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge.
Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax
code, are entitled to exemption and which should indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to
diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's
warning, of pervasive relevance at this time, that while international comity is invoked in this case on the
nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous
care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere
expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with
private foreign entities, which in turn will negotiate independently with their governments, could be availed of to
take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18,
1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE. SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT
OF TAX APPEALS

Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote
in his income tax return that a sum of money that he erroneously received and already spent is the subject of a
pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent
return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July
27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben
B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50%
surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by
her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal
(now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent
herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and
should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on
the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear,
immediate, and continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit
Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his
wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00 which they received under an implied trust for the
benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the
footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to
be a gift but turned out to be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the
acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices
for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before
December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years
1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue
that he was paying the deficiency income assessment for the year 1976 but denying that he had any
undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court
decision on the case filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner
of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980
letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is
definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10,
1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the
concluding portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here)
further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of
the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since
petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was
imposed, in all probability, by respondent (petitioner) because he considered the return filed false or fraudulent.
This additional requirement, to our mind, is much less called for because petitioner (private respondent), as

stated earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some money received
from abroad which he presumed to be gift but turned out to be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception
willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce the
Government to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as
to prevent its lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569,
August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for respondent to
examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.).
Besides, Section 29 is not too plain and simple to understand. Since the question involved in this case is of first
impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency
assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the
matter to us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision
which held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However,
he submitted in the samememorandum "that the issue may be raised in the case not for the purpose of
correcting or setting aside the decision which held him liable for deficiency income tax, but only to show that
there is no basis for the imposition of the surcharge." This subsequent disavowal therefore renders moot and
academic the posturings articulated in as Comment 10 on the non-taxability of the amount he erroneously
received and the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of
the Comments) would have been already too late to be seasonable. The petitioner, through the office of the
Solicitor General, stresses that:
The record however is not ambivalent, as the record clearly shows that private respondent is selfconvinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way,
the studied insinuation that private respondent may not be the beneficial owner of the money or income flowing
to him as enhanced by the studied claim that the amount is "subject of litigation" is belied by the record and
clearly exposed as a fraudulent ploy, as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the
amount of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in
the amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven
(11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said
dollar account in the sum of $975,000.00 or P7,020,000.00. . . . 11
In reply, the private respondent argues:
The petitioner contends that the private respondent committed fraud by not declaring the "mistaken
remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was the
recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now
subject of litigation." It is respectfully submitted that the said return was not fraudulent. The footnote was
practically an invitation to the petitioner to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d]
782), that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to
sustain a judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A.
Neddas, 40 BTA 672). The following circumstances attendant to the case at bar show that in filing the
questioned return, the private respondent was guided, not by that "willful and deliberate intent to prevent the
Government from making a proper assessment" which constitute fraud, but by an honest doubt as to whether
or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was
given very, very wide publicity by media; and only one who is not in his right mind would have entertained the
idea that the BIR would not make an assessment if the amount in question was indeed subject to the income
tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this
jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not
unanimous in holding that similar receipts are subject to the income tax. It should be noted that the decision in
the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one out of three
Judges of the respondent Court was of the opinion that the amount in question is not taxable. Thus, even
without the footnote, the failure to declare the "mistaken remittance" is not fraudulent.

Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by
the Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa
committed allegedly by his failure to return the money and by converting it to his personal benefit. The basic
tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using part of
the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in his income
tax return that the amount received was still under litigation. If he had paid the tax, would that not constitute
estafa for using the funds for his own personal benefit? and would the Government refund it to him if the courts
ordered him to refund the money to the Mellon Bank? 12
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue
Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of
the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the
falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing
of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax
return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation
and that Javier had literally "laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this
manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows
that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of
the petitioner as tainted with fraud and those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of
tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v. U.S.,
App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of
the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is
highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant
facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he
received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he
had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax
Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the
deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED.
No costs. SO ORDERED.