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G.R. No. 136448. November 3, 1999.

*
LIM TONG LIM, petitioner, vs. PHILIPPINE
FISHING GEAR INDUSTRIES, INC., respondent.
Partnerships; A partnership may be deemed to exist
among parties who agree to borrow money to
pursue a business and to divide the profits or losses
that may arise therefrom, even if it is shown that
they have not contributed any capital of their own to
a common fund, as their contribution to such fund
could be an intangible like credit or industry.From
the factual findings of both lower courts, it is clear
that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from
Jesus Lim who was petitioners brother. In their
Compromise
Agreement,
they
subsequently
revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These
boats, the purchase and the repair of which were
financed with borrowed money, fell under the term
common fund under Article 1767. The contribution
to such fund need not be cash or fixed assets; it
could be an intangible like credit or industry. That
the parties agreed that any loss or profit from the
sale and operation of the boats would be divided
equally among them also shows that they had
indeed formed a partnership.
Same; Appeals; Petitions for Review; Pleadings and
Practice; Under Rule 45, a petition for review should
involve only questions of law, and a petitioner, in
assailing the factual findings of the two lower courts,
effectively goes beyond the bounds of a petition for
review.We stress that under Rule 45, a petition for
review like the present case should involve only
questions of law. Thus, the foregoing factual findings
of the RTC and the CA are binding on this Court,
absent any cogent proof that the present action is
embraced by one of the exceptions to the rule. In
assailing the factual findings of the two lower courts,
petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Same; Same; Same; A proper adjudication of
claimants rights mandates that courts must review
and thoroughly appraise all relevant facts.A proper
adjudication of claimants rights mandates that
courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and
have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts
have decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA and
the RTC delved into the history of the document and
explored
all
the
possible
consequential
combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual
findings mentioned above nullified petitioners
argument that the existence of a partnership was
based only on the Compromise Agreement.

Same; Loans; It is not uncommon to register the


properties acquired from a loan in the name of the
person the lender trusts.Verily, as found by the
lower courts, petitioner entered into a business
agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and
the upgrading of the vessels which would be used in
their fishing business. The sale of the boats, as well
as the division among the three of the balance
remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in
his name, was not his own property but an asset of
the partnership. It is not uncommon to register the
properties acquired from a loan in the name of the
person the lender trusts, who in this case is the
petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
Same; Corporation Law; Estoppel; Corporation by
Estoppel Doctrine; Agency; Those who act or purport
to act as the representatives or agents of an
ostensible corporate entity who is proven to be
legally inexistent do so without authority and at
their own risk.Even if the ostensible corporate
entity is proven to be legally nonexistent, a party
may be estopped from denying its corporate
existence. The reason behind this doctrine is
obviousan unincorporated association has no
personality and would be incompetent to act and
appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create
agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its
representatives or agents do so without authority
and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent
without authority or without a principal is himself
regarded as the principal, possessed of all the right
and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a
corporation which has no valid existence assumes
such privileges and obligations and becomes
personally liable for contracts entered into or for
other acts performed as such agent.
Same; Same; Same; Same; The doctrine of
corporation by estoppel may apply to the alleged
corporation and to a third party; An unincorporated
association, which represents itself to be a
corporation, will be estopped from denying its
corporate capacity in a suit against it by a third
person who relies in good faith on such
representation.The doctrine of corporation by
estoppel may apply to the alleged corporation and
to a third party. In the first instance, an
unincorporated association, which represented itself
to be a corporation, will be estopped from denying
its corporate capacity in a suit against it by a third
person who relied in good faith on such
representation. It cannot allege lack of personality
to be sued to evade its responsibility for a contract
it entered into and by virtue of which it received
advantages and benefits.

Same; Same; Same; Same; A third party who,


knowing an association to be unincorporated,
nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its
corporate existence in a suit brought against the
alleged corporation.A third party who, knowing an
association to be unincorporated, nonetheless
treated it as a corporation and received benefits
from it, may be barred from denying its corporate
existence in a suit brought against the alleged
corporation. In such case, all those who benefited
from the transaction made by the ostensible
corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly
assented to or took advantage of.
Same; Same; Same; Same; Under the law on
estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.
It is difficult to disagree with the RTC and the CA
that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude
the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.
Same; Same; Same; Same; A person who has
reaped the benefits of a contract entered into by
persons with whom he previously had an existing
relationship is deemed to be part of said association
and is covered by the scope of the doctrine of
corporation by estoppel.Technically, it is true that
petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of
the contract entered into by persons with whom he
previously had an existing relationship, he is
deemed to be part of said association and is
covered by the scope of the doctrine of corporation
by estoppel. We reiterate the ruling of the Court in
Alonso v. Villamor: A litigation is not a game of
technicalities in which one, more deeply schooled
and skilled in the subtle art of movement and
position, entraps and destroys the other. It is, rather,
a contest in which each contending party fully and
fairly lays before the court the facts in issue and
then, brushing aside as wholly trivial and indecisive
all imperfections of form and technicalities of
procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by
a rapiers thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant
consideration from courts. There should be no
vested rights in technicalities. [Lim Tong Lim vs.
Philippine Fishing Gear Industries, Inc., 317 SCRA
728(1999)]
G.R. No. 84197. July 28, 1989.*

PIONEER
INSURANCE
&
SURETY
CORPORATION, petitioner, vs. THE HON.
COURT OF APPEALS, BORDER MACHINERY &
HEAVY
EQUIPMENT,
INC.,
(BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM,
respondents.
G.R. No. 84157. July 28, 1989.*
JACOB S. LIM, petitioner, vs. COURT OF APPEALS,
PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO.,
INC., FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.
Insurance; Real party in interest; The real party in
interest with regard to the portion of the indemnity
paid is the insurer and not insured; Petitioner was
not the real party in interest in the complaint and
therefore has no cause of action against the
respondents.Interpreting the aforesaid provision,
we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (10 Phil. 1031 [1957]) which we
subsequently
applied
in
Manila
Mahogany
Manufacturing Corporation v. Court of Appeals (154
SCRA 650 [1987]): Note that if a property is insured
and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer
is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by
the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the
deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of
the indemnity paid is the insurer and not the
insured. (Italics supplied) It is clear from the
records that Pioneer sued in its own name and not
as an attorney-in-fact of the reinsurer. Accordingly,
the appellate court did not commit a reversible error
in dismissing the petitioners complaint as against
the respondents for the reason that the petitioner
was not the real party in interest in the complaint
and, therefore, has no cause of action against the
respondents.
Corporation Law; Partnership; Persons who attempt
but fail to form a corporation and who carry on
business under the corporate name occupy the
position of partners inter se.While it has been
held that as between themselves the rights of the
stockholders
in
a
defectively
incorporated
association should be governed by the supposed
charter and the laws of the state relating thereto
and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am.
S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who
carry on business under the corporate name occupy
the position of partners inter se (Lynch v. Perryman,
119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065).
Thus, where persons associate themselves together
under articles to purchase property to carry on a
business, and their organization is so defective as to
come short of creating a corporation within the

statute, they become in legal effect partners inter


se, and their rights as members of the company to
the property acquired by the company will be
recognized.
Same; Same; Same; Such a relation does not
necessarily exist however for ordinarily persons
cannot be made to assume the relation of partners
as between themselves when their purpose is that
no partnership shall exist.However, such a relation
does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners,
as between themselves, when their purpose is that
no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U. S. 461, 472, 29
L.Ed. 688), and it should be implied only when
necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock
in a proposed corporation which is never legally
formed does not become a partner with other
subscribers who engage in business under the name
of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged
partnership and contribution (Ward v. Brigham, 127
Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also
directors, will not be implied in the absence of an
agreement, so as to make the former liable to
contribute for payment of debts illegally contracted
by the latter.
Same; Same; Same; Same; Petitioner never had the
intention to form a corporation with the respondents
despite his representations to them.It is therefore
clear that the petitioner never had the intention to
form a corporation with the respondents despite his
representations to them. This gives credence to the
cross-claims of the respondents to the effect that
they were induced and lured by the petitioner to
make contributions to a proposed corporation which
was never formed because the petitioner reneged
on their agreement.
Same; Same; Same; Same; Same; No de facto
partnership was created among the parties which
would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation.
Applying therefore the principles of law earlier cited
to the facts of the case, necessarily, no de facto
partnership was created among the parties which
would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation.
The record shows that the petitioner was acting on
his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes
and spare parts. [Pioneer Insurance & Surety
Corporation vs. Court of Appeals, 175 SCRA
668(1989)]
LORENZO T. OA,and HEIRS OF JULIA
BUNALES,namely: RODOLFO B. OA,MARIANO
B. OA,LUZ B. OA,VIRGINIA B. OA,and
LORENZO B. OA,JR., petitioners, vs. THE

COMMISSIONER
OF
INTERNAL
REVENUE,respondent.
Taxation; Partnership; When co-ownership converted
to co-partnership.For tax purposes, the coownership of inherited properties is automatically
converted into an unregistered partnership the
moment the said common properties and/or the
incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in
proportion to their respective shares in the
inheritance as determined in a project partition
either duly executed in an extra-judicial settlement
or approved by the court in the corresponding
testate or intestate proceeding. The reason is
simple. From the moment of such partition, the heirs
are entitled already to their respective definite
shares of the estate and the incomes thereof, for
each of them to manage and dispose of as
exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable
individually for all taxes in connection therewith. If
after such partition, he allows his share to be held in
common with his co-heirs under a single
management to be used with the intent of making
profit thereby in proportion to his share, there can
be no doubt that, even if no document or instrument
were executed for the purpose, for tax purposes, at
least, an unregistered partnership is formed.
Same; Same; Corporation; Partnerships considered
corporation for tax purposes.For purposes of the
tax on corporations, the National Internal Revenue
Code, includes partnershipswith the exception
only of duly registered general co-partnerships
within the purview of the term corporation.
Same; Same; When income derived from inherited
properties deemed part of partnership income.The
income derived from inherited properties may be
considered as individual income of the respective
heirs only so long as the inheritance or estate is not
distributed or, at least, partitioned, but the moment
their respective known shares are used as part of
the common assets of the heirs to be used in
making profits, it is but proper that the income of
such shares should be considered as part of the
taxable income of an unregistered partnership.
Same; Same; Effect on unregistered partnership
profits individual income tax paid.The partnership
profits distributable to the partners should be
reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the
petioners in his individual capacity overpaid his
income tax for the years in question. But as the
individual income tax liabilities of petitioners are not
in issue in the instant proceeding, it is not proper for
the Court to pass upon the same.
Same; Same; Where right to refund of overpaid
individual income tax has prescribed.A taxpayer
who did not pay the tax due on the income from an
unregistered partnership, of which he is a partner,
due to an erroneous belief that no partnership, but

only a co-ownership, existed between him and his


co-heirs, and who due to the payment of the
individual income tax corresponding to his share in
the unregistered partnership profits, on the balance,
overpaid his income tax has the right to be
reimbursed what he has erroneously paid. However,
the law is very clear that the claim and action for
such reimbursement are subject to the bar of
prescription. [Oa vs. Commissioner of Internal
Revenue, 45 SCRA 74(1972)]
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.
Taxation; The dictum that the power to tax involves
the power to destroy should be obviated.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.
Same; Partnership; Co-ownership; Where the father
sold his rights over two parcels of land to his four
children so they can build their residence, but the
latter after one (1) year sold them and paid the
capital gains, they should not be treated to have
formed an unregistered partnership and taxed
corporate income tax on the sale and dividend
income tax on their shares of the profit's from the
sale.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
coownership. 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.
Same; Same; Same; Mere sharing of gross income
from an isolated transaction does not establish a
partnership.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 j oint 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.
[Obillos, Jr. vs. Commissioner of Internal Revenue,
139 SCRA 436(1985)]
No. L-25532. February 28, 1969.
COMMISSIONER
OF
INTERNAL
REVENUE,
petitioner, vs. WILLIAM J. SUTER and THE
COURT OF TAX APPEALS, respondents.
Partnership; Where respondent company in the case
at bar is considered a particular partnership and not
universal.The respondent company was not a
universal partnership, but a particular one. As

appears f rom Articles 1674 and 1675 of the Spanish


Civil Code of 1889 (law in force when firm 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. Respondent company
was not such a universal partnership, since the
contributions of the partners were fixed sums of
money and neither one of them was an industrial
partner. It follows that respondent company was not
a partnership that spouses were forbidden to enter
by Article 1677 of the Civil Code of 1889. 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.
Same; Where marriage of partners does not make
the company a single proprietorship.The capital
contributions of re spondents-partners 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.
Same; Partnership has distinct and separate
personality from that of its partners; Section 24 of
Internal Revenue Code is exception to the rule.The
basic tenet of ,the Spanish and Philippine law is that
the partnership has a juridical personality of its own,
distinct and separate from that of its partners, 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 partnerships
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 copartnerships 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.
Same; Taxation; Change in membership does not
remove partnership from coverage of section 24.
The limited partnership is not a mere business
conduit of the partner-spouses; it was organized for
legitimate business purposes; it conducted its owndealings with its customers prior to appellees
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 to laws. Regularity, not otherwise, is
presumed. The limited partnership is taxable on its
income and to require that income to be included in
the indiviual tax return of respondent is to
overstretch the letter and intent of the law.
Same; Same; Members and not firm are taxable in
case of compaias colectivas.In fact, it would even
conflict with what it specifically provides in its
Section 24: for the appellants stand results in equal
treatment, taxwise, of a general copartnership
(compania 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. 8889).
Same; Same; Income of limited partnership forming
part of the conjugal partnership is not wholly
correct.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 is not wholly correct. The fruits of the wifes
paraphernal 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 appellants
argument erroneously conf ines itself to the
question of the legal personality of the limited

partnership since the law taxes the income of even


joint accounts that have no personality of their own.
(Agapito v. Molo, 59 Phil. 779; Peoples Bank v.
Register of Deeds of Manila, 60 Phil. 167; V.
Evangelista v. Collector of Internal Revenue, 102
Phil. 140; Collector v. Batangas Transportation Co.,
102 Phil. 822.)
Same; Same; What is taxable is income of both
spouses, not the conjugal partnership.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 partnernership 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.
Same; Same; Revenue code does not authorize
consolidation of income of limited partnership and
income of spouses.The diff erence 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. [Commissioner of Internal Revenue vs.
Suter, 27 SCRA 152(1969)]