NINTH DIVISION

[CA-G.R. SP No. 42873. January 8, 1998.]

ISHWAR AND SONYA RAMNANI , petitioners, vs . HON. COURT OF TAX

APPEALS and THE COMMISSIONER OF INTERNAL REVENUE ,
respondents.

DECISION

MONTOYA , J : p

This is a petition for review on certiorari of the Decision of the Court of Tax
Appeals dated September 13, 1996 in CTA Case No. 5108 entitled "Ishwar Jethmal
Ramnani and Sonya Jethmal Ramnani vs. Commissioner of Internal Revenue," the
dispositive portion of which reads: cdasia

"WHEREFORE, in view of the foregoing, the subject BIR Rulings, dated

August 6, 1993, October 6, 1993 and March 22, 1994, are hereby SET ASIDE.
Petitioner is considered a resident alien taxable in the same manner as a resident
citizen under Section 21(f) of the NIRC. Harish Ramnani, assignor of Choithram
Ramnani, and Ortigas & Co., Ltd., Partnership, are hereby ORDERED TO
WITHHOLD the amount of P1,243,968.25, representing the 5% withholding tax on
the rental income earned from 1967 to May 31, 1992 in the amount of
P24,879,365.00. The withholding tax of P1,243,968.25 shall be creditable from
the income tax due and payable by petitioners in the year said income was
received. Petitioner is hereby ORDERED to pay an additional income tax as
determined by this Court in the amount of P5,180,215.53 plus interest computed
from the promulgation of decision until fully paid.

SO ORDERED."

and the Resolution dated December 11, 1996 denying reconsideration of said Decision.
It appears that herein petitioners spouses Ishwar and Sonya Jethmal Ramnani
were litigants in a civil case against Choithram Ramnani, Moti C. Ramnani, Nirmla V.
Ramnani and Ortigas Company, Ltd. The civil case was resolved in favor of herein
petitioners. The Supreme Court in G.R. No. 85494 rendered judgment ordering
Choithram Ramnani, Moti C. Ramnani, Nirmla V. Ramnani and Ortigas Company, Ltd. to
pay herein petitioners by way of actual and compensatory damages the rental incomes,
the cash value of the land in litigation and the improvements thereon plus moral and
exemplary damages and attorney's fees.
In a clari catory resolution, the Supreme Court declared that the subject
properties are solely owned by herein petitioners and that there is no need for
reconveyance of the said properties to the latter.
On September 17, 1992, the Regional Trial Court of Pasay City, Branch 119,
executed the judgment in G.R. No. 85494 and issued an order granting a partial writ of
execution, the relevant dispositive portion of which reads:
"WHEREFORE in consonance with the judgment of the Supreme Court
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 dated May 7, 1991 as amended by its resolution dated February 26, 1992 and as
prayed for by plaintiffs, let the corresponding partial writ of execution issue with
respect to the following:

a) the rental income of the properties and improvements from 1967 up to

May 31, 1992 in the amount of P24,897,365.00;

b) the 1986 appraised value of the properties in the amount of

P22,364,000.00; P500,000.00 moral damages; P200,000.00
exemplary damages and 10% of said amounts as attorney's fees,
plus 6% legal interest on the totality of the amounts from the time
judgment become final until fully paid.

On July 19, 1993, the parties in G.R. No. 85494, particularly herein petitioners and
Choithram Jethmal Ramnani and Ortigas & Company, Ltd. partnership entered into a
Tripartite Agreement, which in part reads:
"2. To expeditiously terminate said proceedings, the parties (excluding Moti
and Nirmla Ramnani) hereby set the money value of the said judgment including
the other monetary awards due Sps. Ishwar provisionally at P65 Million. The nal
and total monetary awards to Sps. Ishwar could be more than P65 Million. It
could also be less than said amount. Consequently, without waiting for the
Court's determination aforesaid parties agree to suspend hearings on valuation
and proceedings in execution of the judgment in G.R No. 85494 and G.R. No.
85496, under the following terms: LLpr

The judgment dated provisionally set at P65 Million shall be paid jointly
and severally by the defendants Ortigas and Choithram Jethmal Ramnani to
plaintiffs Sps. Ishwar Jethmal Ramnani and Sonya Jethmal Ramnani, as follows:

a. P40 Million upon the signing hereof by the parties;

b. P10 Million within thirty (30) days from July 5, 1993 or on or before
August 4, 1993.

c. P15 Million within sixty (60) days from July 5, 1993 or on or before
September 3, 1993.
Choithram and/or Harish Ramnani shall issue to plaintiffs postdated checks on
the amounts covered by paragraph 2 (b and c) above, immediately encashable on
due dates.

Herein petitioners received the amount of the P40 million in accordance with par.
2(a) of said agreement.
On August 3, 1993, Atty. Mario Ongkiko, counsel of Choithram and Harish
Ramnani wrote to the Commissioner of Internal Revenue requesting clari cation on the
liability of his clients. The Commissioner of Internal Revenue responded on August 6,
1993. The letter reads:
'In reply to your letter dated 3 August 1993, please be informed that your
clients, Messrs. Harish Ramnani and Ortigas & Co., Ltd. Partnership, as payors of
the P65 Million, are constituted as the withholding agents of the 30% nal income
tax provided in Section 22(b), in relation to Sections 50(a) and 51(a) of the Tax
Code. The amount to be withheld is Twenty Million One Hundred Fifty Thousand
(P20,150,000.00) Pesos, broken down as follows:

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 30% final income tax
on P65,000,000.00 P19,500,000.00
1% documentary stamp
tax on P65,000,000.00 650,000.00
––——–––––––
P20,150,000.00
===========

Section 22(b) of the Tax Code is the applicable provisions of taxing the receipt of
the income by non-resident American citizens, such as rents, casual gains, profits,
and income. Inasmuch as the compromise settlement arose from a money
judgment involving ownership over real property, the income is taxable in the
Philippines notwithstanding the fact that the recipients thereof are American
citizens, as provided in Article 7(i) of the RP-US Tax Treaty where the location of
the real property is the situs of income taxation and not the residence of the
alienator."

Herein petitioners moved for a reconsideration of the CIR's position in her letter
of August 6, 1993 on the grounds that petitioner Ishwar Jethmal Ramnani is a resident
alien and that the money judgment in the civil case is in the nature of a mere return of
capital/investment and damages and attorney's fees.
On October 20, 1993, BIR Ruling No. 22(b) 000-00-417-93 was issued by the BIR
denying reconsideration of the August 6, 1993 letter. The ruling, however, modi ed the
earlier letter allowing the deduction of exemplary damages, moral damages and
attorney's fees from the money judgment in the computation of herein petitioner's
taxable income.
The petitioners eventually elevated the matter to the respondent Court of Tax
Appeals seeking a reversal of the said BIR Ruling.
On September 13, 1996, the respondent Court of Tax Appeals issued its decision
setting aside BIR Ruling No. 22(b) 000-00-417-97. It declared petitioners as resident
aliens pursuant to the de nition provided under Sec. 20(f) of the National Internal
Revenue Code. The CTA accordingly issued a computation of petitioners' income tax
liability, as follows: LLphil

Total Money Judgment 1993 P65,000,000.00

Less:
1) capital investment P600,000.00
2) moral damages 500,000.00
3) exemplary damages 200,000.00
4) attorney's fees 6,500,000.00 7,800,000.00
––––––––––––––––––––––
Gross Income P57,200,000.00
Less: 40% Optional
Standard Deductions 22,880,000.00
––––––––––––
Net Income P34,302,000.00
===========
Income Tax Due P10,247,200.00
Less: Income Tax Paid On
4/15/94 3,823,021.22
5% Withholding Tax On
Rentals 1,243,963.25
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 –––––––––––
Income Tax Payable P5,180,215.53
==========
A motion for reconsideration was led by petitioners contending that the amount
of P5,180,215.53 as determined by the CTA was based on the amount of
P65,000,000.00 under the Tripartite Agreement. Petitioners claim that as of October 3,
1996, they have actually received only the amount of P40,000,000.00 from Ortigas &
Co., Ltd. and Choithram and Harish Ramnani and the balance of P25,000,000.50 had not
been paid to them. Therefore, they claim that the computation of their income tax
should be based on the P40,000,000.00 which they had actually received and any
additional amount they would recover shall be reposted on the taxable year in which
said amounts will be received as part of their taxable income.
On December 11, 1996, the respondent CTA issued a resolution denying
reconsideration of the earlier decision. The CTA held:
"The depositation of the balance amount of P25,000,000.00 with the
Branch Clerk of Court of the RTC of Pasay City, as agreed upon by the parties'
counsels is tantamount to payment. Albeit the balance amount is not yet actually
received by the herein petitioners, the same is ready for release to the plaintiffs
(herein petitioners) after the tax matter shall have been resolved by this Court.
This is the sole reason why the balance of P25,000,000.00 was deposited in
Court, otherwise the ORDER of the RTC of Pasay City will become moot and
academic. In fact, the Court orders the petitioner's counsel to receive the said
amount and invest it in the meantime in an interest bearing account and/or
money placement or treasury bills. For all things and purposes the defendants
have already settled their obligation and what remains is the determination of the
tax due. Thus, to comply with the said order, the tax due should be based on the
total amount of P65,000,000.00. In effect, to exclude the P25,000,000.00 from the
computation of the tax due, is to hinder the release of the said amount and to
prevent the government from receiving the tax legally due.

As far as this Court is concerned, the ORDER of the RTC — Branch 119 of
Pasay City has still the force and effect of law, until reversed by a Higher Court.

ACCORDINGLY, this Court hereby RESOLVED to DENY the Motion for

Reconsideration for lack of merit."

Hence, this petition by Ishwar and Sonya Jethmal Ramnani with a prayer for the
issuance of a temporary restraining order and a writ of preliminary injunction.
Petitioners reiterate their claim that the basis of the computation of accounts to be
paid by way of income tax after deductions and personal exemptions must only be on
amounts actually received by them from Ortigas & Company, Ltd. partnership and
Choithram and Harish Ramnani in the sum of P40 Million in 1993.
The records show that on August 19, 1993, petitioners led an urgent motion to
enforce the decision of May 7, 1991 and the resolution of February 26, 1992 and to
resume hearing in the Regional Court of Pasay City (Branch 119) because of the non-
payment of Ortigas & Company, Ltd. partnership and Choithram and Harish Ramnani of
the balance of P25 Million within the period provided under par. 2(b) and (c) of the
Tripartite Agreement.
On January 27, 1994, the Regional Trial Court of Pasay City (Branch 119) issued
an Order denying the motion for resumption of hearing with a ruling that defendants
were not in default. It stated in said Order that the defendants therein issued personal
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 checks covering the amounts representing the balance of their obligation under the
Tripartite Agreement. It also found that the balance of P25,000,000.00 was eventually
deposited with the Clerk of Court of Branch 119 "upon agreement of both parties". The
trial court, in part, held:
"The amount of P40 Million has admittedly been paid to and received by
plaintiffs. But problems cropped up when the tax question was raised and the
payment on the balance of P25 Million was, as the record shows, not actually
paid on the date speci ed in the Tripartite Agreement, although the two checks
covering the balance of the agreed payment were eventually deposited with the
Branch Clerk of this court, upon agreement of counsels, despite the fact that it
was some few days after the period agreed upon.

The bulk of the amount agreed upon, which was P40 Million, was paid as
stipulated but the issuance of the checks, representing the balance of P25 Million
was some days late, as earlier stated, but counsels nonetheless agreed that the
same be deposited with the court. In short, there has been a substantial
compliance of their agreement and de nitely plaintiffs have bene tted from it, as
correctly pointed out by counsel for defendant Ortigas.
That defendants' desire to pay the balance of the amount stipulated in
their Tripartite Agreement is apparent. Under the afore-stated facts and
circumstances, is it equitable that they be held in default? Article 1229 of the Civil
Code gives the court the power to equitably reduce penalty when the principal
obligation has been partly complied with by the debtor. In default cases, the court
may likewise, reconsider its order of default when the interest of justice so
dictates.
In order not to put to naught all the efforts of the parties in forging the
Tripartite Agreement which took them a long period of time to arrive at, the
Branch Clerk of Court is directed to immediately endorse to the counsel of
plaintiffs the two (2) checks in her custody but the defendants are directed to pay
the prevailing interest thereon from the time the amount of P25 Million was
actually due the plaintiffs, up to the time the same is encashed, under the
following terms:
1) that the Quasha Law firm receives the balance of the amount of P25
Million in compliance with the Tripartite Agreement, adverted to, and
subject to the tax claim of the BIR;

2) That it shall release to the plaintiffs the amount due them after the tax
matter on said amount shall have been resolved, and in the
meanwhile the said amount shall be deposited in an interest bearing
account and/or money placement in treasury bills; and

3) That upon receipt of the aforestated amounts, plaintiffs shall Execute

the Deed of Assignment of Judgment in favor of defendants Ortigas
& Co., Ltd. Partnership and Choithram Jethmal Ramnani and/or
third party Harish Ramnani in the proportion agreed upon by the
said defendants." (pp. 450-453, Folder III, BIR rec.)

It appears that herein petitioners led a Manifestation and Urgent Motion with
the Supreme Court in G.R. Nos. 85494, 85496, and 105091 assailing the
abovementioned Order. The petitioner contended therein that there was no valid
consignation with the court, and therefore, defendants therein should have been
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 declared in default. They also contended that they never agreed to have the amount
deposited with the Branch Clerk of Court and to consider such deposit a valid payment
of the balance under the Tripartite Agreement. pred

In said Manifestation and Motion, the petitioners specifically pray:

"WHEREFORE, premises considered, it is respectfully prayed that the orders
of January 27, 1994 and April 5, 1994 which denied plaintiff's motion for
immediate resumption of hearing, be reversed; that due to default of defendants,
herein petitioners in G.R. 835496/plaintiffs in Civil Case No. 0534-P, RTC Pasay
City, Branch 119 are entitled to enforce and execute the Supreme Court's
judgment against defendants in accordance with the terms of the nal and
executory decision of 7 May 1991 and resolution of 26 February 1992; and that
the trial court be directed to immediately resume proceedings in execution
including hearings on the valuation of the properties covered by TCT Nos. 403150
and 403152 of the Registry of the Registry of Deeds of Pasig, Rizal, for the
purpose of determining the nal and total monetary entitlement of plaintiffs Sps.
Ishwar Jethmal Ramnani and Sonya Jethmal Ramnani by way of damages under
the nal and executory decision of 7 May 1991 and resolution of 26 February
1992 in the above-entitled cases, which defendants Choithram, Moti, Nirmla V.
Ramnani, and Ortigas & Co., Ltd. Partnership are jointly and severally liable to pay
plaintiffs."

According to the petitioners, this Manifestation and Urgent Motion before the
Supreme Court has not yet been resolved and therefore, it was error for the respondent
Court of Tax Appeals to make them pay their income tax for the year 1993 based on the
amount of P65,000,000.00 which was inclusive of the balance of P25,000,000.00 which
had not been paid to them as yet.
While the Manifestation and Urgent Motion remains pending before the Supreme
Court, the Court of Tax Appeals cannot make a proper ruling on the issue of herein
petitioners' taxable income for the year 1993 because the Order of the trial court dated
January 27, 1994 is being questioned in the proceedings before the High Court. On that
point, the assessment made by the Bureau of Internal Revenue based on the ruling of
the Regional Trial Court that there was a proper consignation of the balance of P25
million and is thus deemed to have been paid to the petitioners in 1993 is now subject
to question and should not operate against petitioners precisely because that issue is
still pending resolution before the Supreme Court. Effectively, the Court of Tax Appeals
cannot yet order payment of additional income taxes by the petitioners without the
resolution of the Supreme Court resolving with nality whether there was valid payment
to petitioners of the balance of P25 million in 1993 as to include that amount in
computing petitioners' taxable income for fiscal year 1993.
WHEREFORE, the petition is hereby GRANTED. The Decision of September 13,
1996 and the Resolution dated December 11, 1996 of the Court of Tax Appeals are
hereby SET ASIDE insofar as they order the payment of income tax for the
P25,000,000.00 not yet received as income by the petitioners. cda

SO ORDERED.
Vidallon-Magtolis and Cosico, JJ ., concur.

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