ENGRACIO FRANCIA vs.

INTERMEDIATE APPELLATE COURT

G.R. No. L-67649, June 28, 1988

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.

HELD:
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.