ENGRACIO FRNCIA vs IAC

GR NO. L-67649 | JUNE 28, 1988

DOCTRINE: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or municipality to
one who is liable to the state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued on.

FACTS:
Engracio Francia was the owner of a 328 square meter land in Pasay City. In October 1977, a
portion of his land (125 square meter) was expropriated by the government for P4,116.00. The
expropriation was made to give way to the expansion of a nearby road.

It also appears that Francia failed to pay his real estate taxes since 1963 amounting to
P2,400.00. So in December 1977, the remaining 203 square meters of his land was sold at a
public auction (after due notice was given him). The highest bidder was a certain Ho Fernandez
who paid the purchase price of P2,400.00 (which was lesser than the price of the portion of his
land that was expropriated).

Later, Francia filed a complaint to annul the auction sale on the ground that the selling price was
grossly inadequate. He further argued that his land should have never been auctioned because
the P2,400.00 he owed the government in taxes should have been set-off by the debt the
government owed him (legal compensation). He alleged that he was not paid by the government
for the expropriated portion of his land because though he knew that the payment therefor was
deposited in the Philippine National Bank, he never withdrew it.

ISSUE:
Whether or not the tax owed by Francia should be set-off by the “debt” owed him by the
government.

RULING:
No. As a rule, set-off of taxes is not allowed. There is no legal basis for the contention. By legal
compensation, obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). This is not applicable in taxes.
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 Supreme Court emphasized: A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly,
in the light of public policy, to exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction sued on.

Further, the government already Francia. All he has to do was to withdraw the money. Had he
done that, he could have paid his tax obligations even before the auction sale or could have
exercised his right to redeem – which he did not do.

Anent the issue that the selling price of P2,400.00 was grossly inadequate, the same is not
tenable. The Supreme Court said: “alleged gross inadequacy of price is not material when the
law gives the owner the right to redeem as when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for the owner to effect redemption.” If mere
inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in
this manner would be greatly embarrassed, if not rendered altogether impracticable. “Where
land is sold for taxes, the inadequacy of the price given is not a valid objection to the sale.” This
rule arises from necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers
at tax sales are grossly out of proportion to the value of the land.