Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE
COURT OF TAX APPEALS, respondents.

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April
8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case
No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax
liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code
of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821.982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities
stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years
1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax
credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner of
Internal Revenue v. Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it follows
that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle
the amount plus interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against
its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6,
1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the
amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated
and demandable. "Liquidated" debts are those where the exact amount has
already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol.
IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for
VAT refund is still pending litigation, and still has to be determined by this Court
(C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the
government cannot, therefore, be set-off against the unliquidated claim which
Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs.
French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the
CTA decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit
and Petitioner is hereby ORDERED to PAY the Respondent the amount of
P110,677,668.52 representing excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August
6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as
amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as
CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the
Court of Tax Appeals observation. The pertinent portion of which reads: 12

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED

and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated
July 11, 1996. 13

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain
its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and
1994, computed as follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should,
ipso jure, off-set its excise tax liabilities 15 since both had already become "due and demandable,
as well as fully liquidated;" 16 hence, legal compensation can properly take place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes
cannot be subject to compensation for the simple reason that the government and the taxpayer
are not creditors and debtors of each other. 17 There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. 18 We find no cogent reason to deviate from the
aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically

held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, 20 which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc

Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability
even though the refund has not yet been approved by the Commissioner, 21 is no longer without
any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored on
Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc
pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc
cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of
surcharge and interest for the non-payment of the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities
within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in
tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render
ineffective our tax collection system. Too simplistic, it finds no support in law or in
jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than
a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any
taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for
refund or credit, this would adversely affect the government revenue system. A taxpayer cannot
refuse to pay his taxes when they fall due simply because he has a claim against the government
or that the collection of the tax is contingent on the result of the lawsuit it filed against the
government. 27 Moreover, Philex's theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit and offset their tax
liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is
not vested with any authority to waive the collection thereof. 28 The same cannot be condoned
for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its
tax liabilities.

Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue
Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years
for the latter to grant its tax claim for VAT input credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of
proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once
the claimant has submitted all the required documents it is the function of the BIR to assess these
documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is
but just that government render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and
judicious with their duty, it could have granted the refund earlier. We need not remind the BIR
that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing
less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly
held in Roxas v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg" And, in order to maintain the general
public's trust and confidence in the Government this power must be used justly
and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is
a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37
Again, while we understand Philex's predicament, it must be stressed that the same is not a valid
reason for the non-payment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet
needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter
can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38
Second, if the inaction can be characterized as willful neglect of duty, then recourse under the
Civil Code and the Tax Code can also be availed of.

Art. 27 of the Civil Code provides:

Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may
file an action for damages and other relief against the latter, without prejudice to
any disciplinary action that may be taken.

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum collected
in the performance of duty or wilfully neglecting to perform, any other duties
enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening
the country's development. We take judicial notice of the taxpayer's generally negative
perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing its duties, still,
the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take
the law into his own hands" should have guided Philex's action.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.

SO ORDERED.
Narvasa, C.J., Kapunan and Purisima, JJ., concur.

Footnotes

1 Penned by Justice Artemon D. Luna, concurred in by Justices Ramon A. Barcelona and

Portia Alino-Hormachuelos.

2 Penned by Associate Judge Manuel K. Gruba. concurred in by Presiding Judge Ernesto

D. Acosta and Associate Judge Ramon O. De Veyra.

3 CTA Records, pp. 34-35.

4 Rollo, pp. 172-174.

5 28 SCRA 867 (1969).

6 Id., pp. 175-176.

7 Docketed as Case No. 4872. Rollo, pp. 177-187.

8 Rollo, p. 55.

9 CTA Decision, Rollo, p. 59.

10 Rollo, pp. 59-60.

11 Rollo, pp. 87-101.

12 Rollo, p. 45.

13 Rollo, p. 48.

14 Rollo, pp. 112-116.

15 Memorandum, Rollo, pp. 307-308.

16 Ibid.

17 Cordero v. Gonda, 18 SCRA 331 (1966).

18 Commissioner of Internal Revenue v. Palanca, 18 SCRA 496 (1966).

19 162 SCRA 753 (1988).

20 208 SCRA 726 (1992).

21 Rollo, p. 33.

22 Aban, Law on Basic Taxation, 1994, p. 19.

23 Memorandum, Rollo, p. 389.

24 Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 9 (1988).

25 I Cooley, Taxation, 22.

26 Ibid.

27 Supra, note 19.

28 Republic v. Philippine Bank of Commerce, 34 SCRA 361 (1970).

29 Jamora v. Meer, 74 Phil. 22 (1942).

30 (e) Period within which refund of input taxes may be made by the Commissioner.
The Commissioner shall refund input taxes within 60 days from the date the application
for refund was filed with him or his duly authorized representative. No refund of input
taxes shall be allowed unless the VAT-registered person files an application for refund
within the period prescribed in paragraphs (a), (b) and (c) as the case may be.

31 Rollo, pp. 32-33.

32 This provision has been amended by Section 112 (D) of Republic Act 8424 entitled
the "National Internal Revenue Act of 1997."

"(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In
proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of submission
of complete documents in support of the application filed in accordance with Subsections
(A) and (B) hereof.

In case of full of partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed above,
the taxpayer affected, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals."

33 Commissioner of Internal Revenue v. Tokyo Shipping Co. Ltd., 244 SCRA 332
(1995).

34 Ibid.
35 Citibank of N.A. v. Court of Appeals. G.R. No. 107434, October 10, 1997.

36 23 SCRA 276 (1968).

37 Commissioner of Internal Revenue v. Proctor and Gamble PMC, 160 SCRA 560
(1988).

38 Insular Lumber Co. v. Court of Appeals, 104 SCRA 721 (1981); Commissioner of
Internal Revenue v. Victoria Milling Co., Inc., 22 SCRA 12 (1968).

39 Tolentino, Civil Code of the Philippines, Vol. 1, 1983, p. 117.

Case digest

THIRD DIVISION

[G.R. No. 125704. August 28, 1998]

PHILEX MINING CORPORATION

vs.
COMMISSIONER OF INTERNAL REVENUE,FACTS:

On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise taxliabilities amounting to
P123,821,982.52. Philex protested the demand for payment of the tax liabilities stating that it has pending claims
for VAT input credit/refund for thetaxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest.Therefore, these claims for tax credit/refund should be applied against the tax liabilities.In reply, the BIR
held that since these pending claims have not yet been established or determined with certainty, it follows that no
legal compensation can take place. Hence,the BIR reiterated its demand that Philex settle the amount plus interest
within 30 daysfrom the receipt of the letter.

Philex raised the issue to the Court of Tax Appeals and in the course of theproceedings, the BIR issued a Tax
Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52;
effectively lowered the latters tax obligation of
P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay theremaining balance of
P110,677,688.52 plus interest, elucidating its reason

that taxes
cannot be subject to set-off on compensation since claim for taxes is not a debt or contract.

Philex appealed the case before the Court of Appeals. Nonetheless, the Court of Appeals affirmed the Court
of Tax Appeals observation.

Philex filed a motion for reconsideration which was again denied. However, a few days after the denial of
itsmotion for reconsideration, Philex was able to obtain its VAT input credit/refund not onlyfor the taxable year
1989 to 1991 but also for 1992 and 1994, computed amounting to205,595,289.20.

In view of the grant of its VAT input credit/refund, Philex now contends that the sameshould,
ipso jure
, off-set its excise tax liabilities
since both had already become dueand demandable, as well as fully liquidated;
hence, legal compensation can properlytake place.
ISSUE:
Whether or not the petitioner is correct in its contention that tax liability and VATinput credit/refund can be
subjected to legal compensation.

HELD:

The Supreme Court has already made the pronouncement that taxes cannot be subjectto compensation for the
simple reason that the government and the taxpayer are notcreditors and debtors of each other. There is a material
distinction between a tax anddebt. Debts are due to the Government in its corporate capacity, while taxes are due
tothe Government in its sovereign capacity.
Philexs
claim is an outright disregard of the basic principle in tax law that taxes are thelifeblood of the government and so
should be collected without unnecessary hindrance.
Evidently, to countenance Philexs whimsical reason would render ineffective our tax
collection system.Philex is not allowed to refuse the payment of its tax liabilities on the ground that it has apending
tax claim for refund or credit against the government which has not yet beengranted. It must be noted that a
distinguishing feature of a tax is that it is compulsoryrather than a matter of bargain. Hence, a tax does not depend
upon the consent of thetaxpayer.If any payer can defer the payment of taxes by raising the defense that it stillhas a
pending claim for refund or credit, this would adversely affect the governmentrevenue system. A taxpayer cannot
refuse to pay his taxes when they fall due simplybecause he has a claim against the government or that the
collection of the tax iscontingent on the result of the lawsuit it filed against the government. Moreover,
Philex'stheory that would automatically apply its VAT input credit/refund against its tax liabilitiescan easily give
rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.

"The power of taxation is sometimes called also the power to destroy. Therefore itshould be exercised with caution
to minimize injury to the proprietary rights of ataxpayer. It must be exercised fairly, equally and uniformly, lest the
tax collector kill the'hen that lays the golden egg.' And, in the order to maintain the general public's trustand
confidence in the Government this power must be used justly and nottreacherously."

The petition is hereby dismissed.

Or

Philex Mining Corp. v. Commissioner of Internal Revenue

G.R. No. 148187 April 16, 2008 Ynares-Santiago, J.
FACTS:

Philex Mining Corp. entered into an agreement with Baguio Gold Mining Co. for the former to
manageand operate the latters mining claim, known as the Sto. Nino Mine. The
parties agreement wasdenominated as Power of Attorney which provides inter alia:4.
Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available
tothe MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in
such amounts asfrom time to time may be required by the MANAGERS within the
said 3-year period, for use in theMANAGEMENT of the STO. NINO MINE. The said
ELEVEN MILLION PESOS (P11,000,000.00) shall bedeemed, for internal audit purposes, as
the owners account in the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL
from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be added
to such owners account.5. Whenever the MANAGERS shall deem it necessary and convenient
in connection with theMANAGEMENT of the STO. NINO MINE, they may transfer their own
funds or property to the Sto. NinoPROJECT, in accordance with the following arrangements:(a)
The properties shall be appraised and, together with the cash, shall be carried by the Sto.Nino
PROJECT as a special fund to be known as the MANAGERS account.(b) The total of the
MANAGERS account shall not exceed P11,000,000.00, except with priorapproval of the
PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
hereinprovided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in
cash shall beadded to the MANAGERS account.(c) The cash and property shall not thereafter
be withdrawn from the Sto. Nino PROJECT untiltermination of this Agency.(d) The
MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL
toextend to the MANAGERS the benefit of subsequent appreciation of property,
upon a projectedtermination of this Agency, the ratio which the MANAGERS account has to
the owners account willbe determined, and the corresponding proportion of the entire
assets of the STO. NINO MINE,excluding the claims, shall be transferred to the
MANAGERS, except that such transferred assets shall not include mine development,
roads, buildings, and similar property which will be valueless, orof slight value, to the
MANAGERS. The MANAGERS can, on the other hand, require at their option that
property originally transferred by them to the Sto. Nino PROJECT be re-transferred to them.
Untilsuch assets are transferred to the MANAGERS, this Agency shall remain subsisting.x x x
x12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the
Sto.Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income
tax on theircompensation, while the PRINCIPAL shall pay income tax on the net profit of the
Sto. Nino PROJECTafter deduction therefrom of the MANAGERS compensation.

Philex Mining made advances of cash and property in accordance with

p a r a g r a p h 5 o f t h e agreement. However, the mine suffered continuing losses over the years
which resulted to PhilexMinings withdrawal as manager of the mine and in the eventual
cessation of mine operations.

The parties executed a Compromise with Dation in Payment wherein Baguio

Gold admitted anindebtedness to petitioner in the amount of P179,394,000.00 and agreed to
pay the same in threesegments by first assigning Baguio Golds tangible assets to Philex Mining,
transferring to the latterBaguio Golds equitable title in its Philodrill assets and finally settling
the remaining liability throughproperties that Baguio Gold may acquire in the future.

The parties executed an Amendment to Compromise with Dation in Payment

where the partiesdetermined that Baguio Golds indebtedness to petitioner actually amounted
to P259,137,245.00,which sum included liabilities of Baguio Gold to other creditors
that petitioner had assumed as guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted

by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Goldu n d e r t o o k t o p a y p e t i t i o n e r i n t w o
segments by first assigning its tangible assets
f o r P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. T h e p a r t i e s t h e n a s c e r t a i n e d t h a t B a g u i o G o l d h a d a
r e m a i n i n g o u t s t a n d i n g i n d e b t e d n e s s t o petitioner in the amount of P114,996,768.00.

Philex Mining wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that
were set up in 1981 andP2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount
of P112,136,000.00 as loss on settlement of receivables from Baguio Gold against
reserves andallowances. However, the BIR disa llowed the amount as deduction for
bad debt and assessedpetitioner a deficiency income tax of P62,811,161.39. Philex Mining
protested before the BIR arguingthat the deduction must be allowed since all requisites for a bad
debt deduction were satisfied, towit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) itw a s c h a r g e d o f f w i t h i n t h e t a x a b l e ye a r w h e n
i t w a s d e t e r m i n e d t o b e w o r t h l e s s . B I R d e n i e d petitioners protest. It held that the
alleged debt was not ascertained to be worthless since BaguioGold remained existing and had not
filed a petition for bankruptcy; and that the deduction did notconsist of a valid and subsisting
debt considering that, under the management contract, petitionerwas to be paid 50% of the
projects net profit.
ISSUE:
WON the parties entered into a contract of agency coupled with an interest which is
notrevocable at will
HELD:
No. An examination of the Power of Attorney reveals that a partnership or joint venture
wasindeed intended by the parties.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by theprincipal due to an interest of a third party that depends upon it, or
the mutual interest of bothprincipal and agent. In this case, the non-revocation or non-
withdrawal under paragraph 5(c) appliesto the advances made by petitioner who is
supposedly the agent and not the principal under the c o n t r a c t . T h u s , i t c a n n o t b e
i n f e r r e d f r o m t h e s t i p u l a t i o n t h a t t h e p a r t i e s r e l a t i o n u n d e r t h e agreement is
one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of theparties was one of agency and not a partnership. Although the
said provision states that thisAgency shall be irrevocable while any obligation of
the PRINCIPAL in favor of the MANAGERS isoutstanding, inclusive of the
MANAGERS account, it does not necessarily follow that the parties entered into an
agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.

The main object of the Power of Attorney was not to confer a power in favor of
petitioner tocontract with third persons on behalf of Baguio Gold but to create a business
relationship betweenpetitioner and Baguio Gold, in which the former was to manage
and operate the latters minethrough the parties mutual contribution of material
resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal andbring about business relations between the latter
and third persons.

The strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it
wouldreceive 50% of the net profits as compensation under paragra ph 12 of the
agreement. Thee n t i r e t y o f t h e p a r t i e s c o n t r a c t u a l s t i p u l a t i o n s s i m p l y l e a d s
t o n o o t h e r c o n c l u s i o n t h a n t h a t petitioners compensation is actually its share in the
income of the joint venture. Article 1769 (4) of the Civil Code explicitly provides that the
receipt by a person of a share in the profits of a businessis prima facie evidence that he is a
partner in the business.