G.R. No.

126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG LAY,
respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March
13, 1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive
portion of which states:

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of
the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively
known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG
LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court
of Baguio City was for accounting, liquidation and winding up of the alleged partnership formed after
World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an
amended complaint4 impleading private respondent herein BENGUET LUMBER COMPANY, as
represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated
May 3, 1991.5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng
Lay, pooling their resources and industry together, entered into a partnership engaged in the business of
selling lumber and hardware and construction supplies. They named their enterprise "Benguet Lumber"
which they jointly managed until Tan Eng Kee's death. Petitioners herein averred that the business
prospered due to the hard work and thrift of the alleged partners. However, they claimed that in 1981,
Tan Eng Lay and his children caused the conversion of the partnership "Benguet Lumber" into a
corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive
Tan Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed
for accounting of the partnership assets, and the dissolution, winding up and liquidation thereof, and
the equal division of the net assets of Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a
business venture and/or particular partnership called Benguet Lumber and as such should share in the
profits and/or losses of the business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co.
Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to
share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a
particular partnership have descended to the plaintiffs who are his legal heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet
Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the
plaintiffs know their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber
Company, Inc. until such time that said corporation is finally liquidated are directed to submit the name
of any person they want to be appointed as receiver failing in which this Court will appoint the Branch
Clerk of Court or another one who is qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the
instant case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the
assailed decision reversing the judgment of the trial court. Petitioners' motion for reconsideration7 was
denied by the Court of Appeals in a Resolution8 dated October 11, 1996.

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and
Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained
that Exhibits "4" to "4-U" offered by the defendants before the trial court, consisting of payrolls
indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based on the
discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against
Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged falsification of
commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio
City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the cases for
insufficiency of evidence.

In their assignment of errors, petitioners claim that:

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN
THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT;
(B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E) THERE WAS NO
TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).
II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY OF
RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG
KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH WERE
DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP
JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES
AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET LUMBER
COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF BENGUET
LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF STOCKS TO BE
SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE SUPPLIERS (PAGE
18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST
BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER
WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE
ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A PARTNERSHIP
(PAGE 16-17, DECISION).

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN
THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF
BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC
INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC
INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be
disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it must be emphasized,
does not include review of factual issues. Thus:
Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final
order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified petition for review on
certiorari. The petition shall raise only questions of law which must be distinctly set forth.11 [emphasis
supplied]

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the
evidentiary basis on which the lower court rendered judgment. Review of factual issues is therefore
warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken,
absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such
findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will
justify a different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they are
based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such
findings are contradicted by the evidence on record.12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the
existence of a partnership, the Court in turn went beyond that by justifying the existence of a joint
venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties,
equal proprietary interest and the exercise by the parties equally of the conduct of the business, thus:

xxx xxx xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before
the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the
entire stocks of the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the
war, because of the absence of capital to start a lumber and hardware business, Lay and Kee pooled the
proceeds of their individual businesses earned from buying and selling military supplies, so that the
common fund would be enough to form a partnership, both in the lumber and hardware business. That
Lay and Kee actually established the Benguet Lumber in Baguio City, was even testified to by witnesses.
Because of the pooling of resources, the post-war Benguet Lumber was eventually established. That the
father of the plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the
affairs of the business during Kee's lifetime, jointly, (2) they were the ones giving orders to the
employees, (3) they were the ones preparing orders from the suppliers, (4) their families stayed
together at the Benguet Lumber compound, and (5) all their children were employed in the business in
different capacities.

xxx xxx xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm
account, no firm letterheads submitted as evidence, no certificate of partnership, no agreement as to
profits and losses, and no time fixed for the duration of the partnership. There was even no attempt to
submit an accounting corresponding to the period after the war until Kee's death in 1984. It had no
business book, no written account nor any memorandum for that matter and no license mentioning the
existence of a partnership [citation omitted].

Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4,
1971, Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and
Hardware. His application for registration, effective 1954, in fact mentioned that his business started in
1945 until 1985 (thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an
employee of the Benguet Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3".
In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only
as an employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was
mentioned also as the proprietor.

xxx xxx xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form,
but when an immovable is constituted, the execution of a public instrument becomes necessary. This is
equally true if the capitalization exceeds P3,000.00, in which case a public instrument is also necessary,
and which is to be recorded with the Securities and Exchange Commission. In this case at bar, we can
easily assume that the business establishment, which from the language of the appellees, prospered
(pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real
properties and to the fact that it is now a compound. The execution of a public instrument, on the other
hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the members
of his family. There is no proof either that the capital assets of the partnership, assuming them to be in
existence, were maliciously assigned or transferred by Lay, supposedly to the corporation and since then
have been treated as a part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of
the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk
house in Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2)
that both Lay and Kee were seated on a table and were "commanding people" as testified to by the son,
Elpidio Tan; 3) that both were supervising the laborers, as testified to by Victoria Choi; and 4) that
Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80 pieces of the G.I. sheets
were added to the business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written.
However, if it involves real property or where the capital is P3,000.00 or more, the execution of a
contract is necessary; 2) the capacity of the parties to execute the contract; 3) money property or
industry contribution; 4) community of funds and interest, mentioning equality of the partners or one
having a proportionate share in the benefits; and 5) intention to divide the profits, being the true test of
the partnership. The intention to join in the business venture for the purpose of obtaining profits
thereafter to be divided, must be established. We cannot see these elements from the testimonial
evidence of the appellees.

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that
TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have
held that whether a partnership exists is a factual matter; consequently, since the appeal is brought to
us under Rule 45, we cannot entertain inquiries relative to the correctness of the assessment of the
evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial court had reached
conflicting conclusions, perforce we must examine the record to determine if the reversal was justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A
contract of partnership is defined by law as one where:

. . . two or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession.14

Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound
themselves to contribute money, property, or industry to a common fund, and (2) they intend to divide
the profits among themselves.15 The agreement need not be formally reduced into writing, since
statute allows the oral constitution of a partnership, save in two instances: (1) when immovable
property or real rights are contributed,16 and (2) when the partnership has a capital of three thousand
pesos or more.17 In both cases, a public instrument is required.18 An inventory to be signed by the
parties and attached to the public instrument is also indispensable to the validity of the partnership
whenever immovable property is contributed to the partnership.19

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it
said is akin to a particular partnership.20 A particular partnership is distinguished from a joint
adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the participating merchants
can transact business under their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination may continue for a number of years; a partnership
generally relates to a continuing business of various transactions of a certain kind.21

A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in
which each party has an equal proprietary interest in the capital or property contributed, and where
each party exercises equal rights in the conduct of the business."22 Nonetheless, in Aurbach, et. al. v.
Sanitary Wares Manufacturing Corporation, et. al.,23 we expressed the view that a joint venture may be
likened to a particular partnership, thus:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has
been generally understood to mean an organization formed for some temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable from the partnership, since their elements are
similar — community of interest in the business, sharing of profits and losses, and a mutual right of
control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939];
Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by
most opinions in common law jurisdiction is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single transaction,
and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil
Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a corporation cannot enter
into a partnership contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v.
Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981).

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of
partnership but there is none. The alleged partnership, though, was never formally organized. In
addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was
allegedly formed sometime in 1945, although the contrary may well be argued that nothing prevented
the parties from complying with the provisions of the New Civil Code when it took effect on August 30,
1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A review of the record persuades us that
the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by
petitioners falls short of the quantum of proof required to establish a partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have
expounded on the precise nature of the business relationship between them. In the absence of
evidence, we cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources
to a common fund for the purpose of establishing a partnership. The testimonies to that effect of
petitioners' witnesses is directly controverted by Tan Eng Lay. It should be noted that it is not with the
number of witnesses wherein preponderance lies;24 the quality of their testimonies is to be considered.
None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company,
except perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo.25 He stated
that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to get
80 pieces of G.I. sheets supposedly owned by both brothers.26 Tan Eng Lay, however, denied knowledge
of this meeting or of the conversation between Peralta and his brother.27 Tan Eng Lay consistently
testified that he had his business and his brother had his, that it was only later on that his said brother,
Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here,
of the G.I. sheets) is not an indicium of the existence of a partnership.28

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in
existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners
share in the profits and losses.29 Each has the right to demand an accounting as long as the partnership
exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the partners at the
start of the business and all the partners are more interested in seeing the firm grow rather than get
immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in the situation in
the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to
take ordinary care of his concerns.32 As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did
not furnish any help or intervention in the management of the theatre. In the third place, it does not
appear that she has even demanded from defendant any accounting of the expenses and earnings of
the business. Were she really a partner, her first concern should have been to find out how the business
was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She
was absolutely silent with respect to any of the acts that a partner should have done; all that she did
was to receive her share of P3,000.00 a month, which cannot be interpreted in any manner than a
payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always
acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows that
both parties considered this offer as the real contract between them.33 [emphasis supplied]

A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee
appeared never to have made any such demand for accounting from his brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls
purporting to show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then
called. The authenticity of these documents was questioned by petitioners, to the extent that they filed
criminal charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal cases were
dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received
sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners
as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a
partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not
a partner. Even if the payrolls as evidence were discarded, petitioners would still be back to square one,
so to speak, since they did not present and offer evidence that would show that Tan Eng Kee received
amounts of money allegedly representing his share in the profits of the enterprise. Petitioners failed to
show how much their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet Lumber
Company for any particular period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay
intended to divide the profits of the business between themselves, which is one of the essential features
of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership
from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that
both were supervising the employees; that both were the ones who determined the price at which the
stocks were to be sold; and that both placed orders to the suppliers of the Benguet Lumber Company.
They also point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet
Lumber Company compound, a privilege not extended to its ordinary employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges
granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the
following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates.
So long, therefore, that an employee's position is higher in rank, it is not unusual that he orders around
those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can
order materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does
not necessarily have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a
partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was
not accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan
Eng Lay. Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave
his brother, and which were not given the other employees, only proves the kindness and generosity of
Tan Eng Lay towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the
pricing of stocks, this does not adequately prove the existence of a partnership relation between them.
Even highly confidential employees and the owners of a company sometimes argue with respect to
certain matters which, in no way indicates that they are partners as to each other.35

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances
taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective
effect of these circumstances may be such as to support a finding of the existence of the parties'
intent.36 Yet, in the case at bench, even the aforesaid circumstances when taken together are not
persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the
operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that
as a member of the family, he occupied a niche above the rank-and-file employees. He would have
enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber
Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby
entitling him to exercise powers of supervision. It may even be that among his duties is to place orders
with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to the
conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a
business organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of.
Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is hereby
AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.
G.R. No. 172690 March 3, 2010

HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,

vs.
JULIET VILLA LIM, Respondent.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure,
assailing the Court of Appeals (CA) Decision2 dated June 29, 2005, which reversed and set aside the
decision3 of the Regional Trial Court (RTC) of Lucena City, dated April 12, 2004.

The facts of the case are as follows:

Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad (Cresencia);
and their children Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim (petitioners),
represented by Elenito Lim (Elenito). They filed a Complaint4 for Partition, Accounting and Damages
against respondent Juliet Villa Lim (respondent), widow of the late Elfledo Lim (Elfledo), who was the
eldest son of Jose and Cresencia.

Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban, Quezon.
Sometime in 1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto),
formed a partnership to engage in the trucking business. Initially, with a contribution of ₱50,000.00
each, they purchased a truck to be used in the hauling and transport of lumber of the sawmill. Jose
managed the operations of this trucking business until his death on August 15, 1981. Thereafter, Jose's
heirs, including Elfledo, and partners agreed to continue the business under the management of Elfledo.
The shares in the partnership profits and income that formed part of the estate of Jose were held in
trust by Elfledo, with petitioners' authority for Elfledo to use, purchase or acquire properties using said
funds.

Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his father’s
driver in the trucking business. He was never a partner or an investor in the business and merely
supervised the purchase of additional trucks using the income from the trucking business of the
partners. By the time the partnership ceased, it had nine trucks, which were all registered in Elfledo's
name. Petitioners asseverated that it was also through Elfledo’s management of the partnership that he
was able to purchase numerous real properties by using the profits derived therefrom, all of which were
registered in his name and that of respondent. In addition to the nine trucks, Elfledo also acquired five
other motor vehicles.

On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed that
respondent took over the administration of the aforementioned properties, which belonged to the
estate of Jose, without their consent and approval. Claiming that they are co-owners of the properties,
petitioners required respondent to submit an accounting of all income, profits and rentals received from
the estate of Elfledo, and to surrender the administration thereof. Respondent refused; thus, the filing
of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of
Norberto and Jimmy. Respondent also claimed that per testimony of Cresencia, sometime in 1980, Jose
gave Elfledo ₱50,000.00 as the latter's capital in an informal partnership with Jimmy and Norberto.
When Elfledo and respondent got married in 1981, the partnership only had one truck; but through the
efforts of Elfledo, the business flourished. Other than this trucking business, Elfledo, together with
respondent, engaged in other business ventures. Thus, they were able to buy real properties and to put
up their own car assembly and repair business. When Norberto was ambushed and killed on July 16,
1993, the trucking business started to falter. When Elfledo died on May 18, 1995 due to a heart attack,
respondent talked to Jimmy and to the heirs of Norberto, as she could no longer run the business.
Jimmy suggested that three out of the nine trucks be given to him as his share, while the other three
trucks be given to the heirs of Norberto. However, Norberto's wife, Paquita Uy, was not interested in
the vehicles. Thus, she sold the same to respondent, who paid for them in installments.

Respondent also alleged that when Jose died in 1981, he left no known assets, and the partnership with
Jimmy and Norberto ceased upon his demise. Respondent also stressed that Jose left no properties that
Elfledo could have held in trust. Respondent maintained that all the properties involved in this case
were purchased and acquired through her and her husband’s joint efforts and hard work, and without
any participation or contribution from petitioners or from Jose. Respondent submitted that these are
conjugal partnership properties; and thus, she had the right to refuse to render an accounting for the
income or profits of their own business.

Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of petitioners, thus:

WHEREFORE, premises considered, judgment is hereby rendered:

1) Ordering the partition of the above-mentioned properties equally between the plaintiffs and heirs of
Jose Lim and the defendant Juliet Villa-Lim; and

2) Ordering the defendant to submit an accounting of all incomes, profits and rentals received by her
from said properties.

SO ORDERED.

Aggrieved, respondent appealed to the CA.

On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners' complaint for
lack of merit. Undaunted, petitioners filed their Motion for Reconsideration,5 which the CA, however,
denied in its Resolution6 dated May 8, 2006.

Hence, this Petition, raising the sole question, viz.:

IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE PARTIES, CAN THE
TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A FORMER
PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP?7

In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving partner,
Elfledo was not a partner; and that he and Norberto entered into a partnership with Jose. Thus, the CA
erred in not giving that testimony greater weight than that of Cresencia, who was merely the spouse of
Jose and not a party to the partnership.8

Respondent counters that the issue raised by petitioners is not proper in a petition for review on
certiorari under Rule 45 of the Rules of Civil Procedure, as it would entail the review, evaluation,
calibration, and re-weighing of the factual findings of the CA. Moreover, respondent invokes the
rationale of the CA decision that, in light of the admissions of Cresencia and Edison and the testimony of
respondent, the testimony of Jimmy was effectively refuted; accordingly, the CA's reversal of the RTC's
findings was fully justified.9

We resolve first the procedural matter regarding the propriety of the instant Petition.

Verily, the evaluation and calibration of the evidence necessarily involves consideration of factual issues
— an exercise that is not appropriate for a petition for review on certiorari under Rule 45. This rule
provides that the parties may raise only questions of law, because the Supreme Court is not a trier of
facts. Generally, we are not duty-bound to analyze again and weigh the evidence introduced in and
considered by the tribunals below.10 When supported by substantial evidence, the findings of fact of
the CA are conclusive and binding on the parties and are not reviewable by this Court, unless the case
falls under any of the following recognized exceptions:

(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same
is contrary to the admissions of both appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of specific evidence on which they are
based;

(9) When the facts set forth in the petition as well as in the petitioners' main and reply briefs are not
disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on the supposed absence of
evidence and contradicted by the evidence on record.11

We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our review
of such findings is warranted.

On the merits of the case, we find that the instant Petition is bereft of merit.
A partnership exists when two or more persons agree to place their money, effects, labor, and skill in
lawful commerce or business, with the understanding that there shall be a proportionate sharing of the
profits and losses among them. A contract of partnership is defined by the Civil Code as one where two
or more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.12

Undoubtedly, the best evidence would have been the contract of partnership or the articles of
partnership. Unfortunately, there is none in this case, because the alleged partnership was never
formally organized. Nonetheless, we are asked to determine who between Jose and Elfledo was the
"partner" in the trucking business.

A careful review of the records persuades us to affirm the CA decision. The evidence presented by
petitioners falls short of the quantum of proof required to establish that: (1) Jose was the partner and
not Elfledo; and (2) all the properties acquired by Elfledo and respondent form part of the estate of Jose,
having been derived from the alleged partnership.

Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against
respondent. It must be considered and weighed along with petitioners' other evidence vis-à-vis
respondent's contrary evidence. In civil cases, the party having the burden of proof must establish his
case by a preponderance of evidence. "Preponderance of evidence" is the weight, credit, and value of
the aggregate evidence on either side and is usually considered synonymous with the term "greater
weight of the evidence" or "greater weight of the credible evidence." "Preponderance of evidence" is a
phrase that, in the last analysis, means probability of the truth. It is evidence that is more convincing to
the court as worthy of belief than that which is offered in opposition thereto.13 Rule 133, Section 1 of
the Rules of Court provides the guidelines in determining preponderance of evidence, thus:

SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden of proof
must establish his case by a preponderance of evidence. In determining where the preponderance or
superior weight of evidence on the issues involved lies, the court may consider all the facts and
circumstances of the case, the witnesses' manner of testifying, their intelligence, their means and
opportunity of knowing the facts to which they are testifying, the nature of the facts to which they
testify, the probability or improbability of their testimony, their interest or want of interest, and also
their personal credibility so far as the same may legitimately appear upon the trial. The court may also
consider the number of witnesses, though the preponderance is not necessarily with the greater
number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals14 is enlightening. Therein, we
cited Article 1769 of the Civil Code, which provides:

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners
as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a
partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.

Applying the legal provision to the facts of this case, the following circumstances tend to prove that
Elfledo was himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo
₱50,000.00, as share in the partnership, on a date that coincided with the payment of the initial capital
in the partnership;15 (2) Elfledo ran the affairs of the partnership, wielding absolute control, power and
authority, without any intervention or opposition whatsoever from any of petitioners herein;16 (3) all of
the properties, particularly the nine trucks of the partnership, were registered in the name of Elfledo; (4)
Jimmy testified that Elfledo did not receive wages or salaries from the partnership, indicating that what
he actually received were shares of the profits of the business;17 and (5) none of the petitioners, as
heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his lifetime. As
repeatedly stressed in Heirs of Tan Eng Kee,18 a demand for periodic accounting is evidence of a
partnership.

Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties
acquired and registered in the names of Elfledo and respondent formed part of the estate of Jose,
having been derived from Jose's alleged partnership with Jimmy and Norberto. They failed to refute
respondent's claim that Elfledo and respondent engaged in other businesses. Edison even admitted that
Elfledo also sold Interwood lumber as a sideline.19 Petitioners could not offer any credible evidence
other than their bare assertions. Thus, we apply the basic rule of evidence that between documentary
and oral evidence, the former carries more weight.20

Finally, we agree with the judicious findings of the CA, to wit:

The above testimonies prove that Elfledo was not just a hired help but one of the partners in the
trucking business, active and visible in the running of its affairs from day one until this ceased operations
upon his demise. The extent of his control, administration and management of the partnership and its
business, the fact that its properties were placed in his name, and that he was not paid salary or other
compensation by the partners, are indicative of the fact that Elfledo was a partner and a controlling one
at that. It is apparent that the other partners only contributed in the initial capital but had no say
thereafter on how the business was ran. Evidently it was through Elfredo’s efforts and hard work that
the partnership was able to acquire more trucks and otherwise prosper. Even the appellant participated
in the affairs of the partnership by acting as the bookkeeper sans salary.1avvphi1

It is notable too that Jose Lim died when the partnership was barely a year old, and the partnership and
its business not only continued but also flourished. If it were true that it was Jose Lim and not Elfledo
who was the partner, then upon his death the partnership should have

been dissolved and its assets liquidated. On the contrary, these were not done but instead its operation
continued under the helm of Elfledo and without any participation from the heirs of Jose Lim.

Whatever properties appellant and her husband had acquired, this was through their own concerted
efforts and hard work. Elfledo did not limit himself to the business of their partnership but engaged in
other lines of businesses as well.

In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are amply
supported by the law and by the evidence on record.

WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated June 29, 2005
is AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

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

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of
land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized
a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in
1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of
tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered
partnership was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case
No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct from
that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT

COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN

UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD
BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among
others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the
tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used
in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companies collectives), a tax upon such income equal
to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited
by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial
portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This
was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transcations undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property acquired by petitioners
in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to
business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive,
paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists
became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set
up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots
showing that the purpose was not limited to the conservation or preservation of the common fund or
even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller.
It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional
or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business transactions for the purpose of gain was not
present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property
by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed.,
pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital, and
no community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose of the
whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances,
they cannot be considered to have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals
of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.
G.R. No. 135813 October 25, 2001

FERNANDO SANTOS, petitioner,

vs.
SPOUSES ARSENIO and NIEVES REYES, respondents.

PANGANIBAN, J.:

As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are
binding on the Supreme Court. However, there are several exceptions to this principle. In the present
case, we find occasion to apply both the rule and one of the exceptions.

The Case

Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,1 as well as the
August 17, 1998 and the October 9, 1998 Resolutions,2 issued by the Court of Appeals (CA) in CA-GR CV
No. 34742. The Assailed Decision disposed as follows:

"WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is hereby
DISMISSED. Costs against [petitioner]."3

Resolving respondent's Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:

"WHEREFORE, [respondents'] motion for reconsideration is GRANTED. Accordingly, the court's decision
dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is AFFIRMED in toto,
with costs against [petitioner]."4

The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for Reconsideration of the
August 17, 1998 Resolution.5

The Facts

The events that led to this case are summarized by the CA as follows:

"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were introduced
to each other by one Meliton Zabat regarding a lending business venture proposed by Nieves. It was
verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat [would] take charge of
solicitation of members and collection of loan payments. The venture was launched on June 13, 1986,
with the understanding that [petitioner] would receive 70% of the profits while x x x Nieves and Zabat
would earn 15% each.

"In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the Monte
Maria Development Corporation6 (Monte Maria, for brevity), sought short-term loans for members of
the corporation. [Petitioner] and Gragera executed an agreement providing funds for Monte Maria's
members. Under the agreement, Monte Maria, represented by Gragera, was entitled to P1.31
commission per thousand paid daily to [petitioner] (Exh. 'A')x x x . Nieves kept the books as
representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as credit
investigator.
"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article of Agreement' which
formalized their earlier verbal arrangement.

"[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending
business in competition with their partnership[.] Zabat was thereby expelled from the partnership. The
operations with Monte Maria continued.

"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages. [Petitioner]
charged [respondents], allegedly in their capacities as employees of [petitioner], with having
misappropriated funds intended for Gragera for the period July 8, 1986 up to March 31, 1987. Upon
Gragera's complaint that his commissions were inadequately remitted, [petitioner] entrusted
P200,000.00 to x x x Nieves to be given to Gragerax x x . Nieves allegedly failed to account for the
amount. [Petitioner] asserted that after examination of the records, he found that of the total amount
of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was remitted to Gragera, thereby
leaving the balance of P1,555,065.70 unaccounted for.

"In their answer, [respondents] asserted that they were partners and not mere employees of
[petitioner]. The complaint, they alleged, was filed to preempt and prevent them from claiming their
rightful share to the profits of the partnership.

"x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner]
learned of Zabat's activities. Arsenio resigned from his job at the Asian Development Bank to join the
partnership.

"For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending
activity with Monte Maria originated from her initiative. Except for the limited period of July 8, 1986
through August 20, 1986, she did not handle sums intended for Gragera. Collections were turned over to
Gragera because he guaranteed 100% payment of all sums loaned by Monte Maria. Entries she made on
worksheets were based on this assumptive 100% collection of all loans. The loan releases were made
less Gragera's agreed commission. Because of this arrangement, she neither received payments from
borrowers nor remitted any amount to Gragera. Her job was merely to make worksheets (Exhs. '15' to
'15-DDDDDDDDDD') to convey to [petitioner] how much he would earn if all the sums guaranteed by
Gragera were collected.

"[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners
with respect to the agreement with Gragera. He claimed that after he discovered Zabat's activities, he
ceased infusing funds, thereby causing the extinguishment of the partnership. The agreement with
Gragera was a distinct partnership [from] that of [respondent] and Zabat. [Petitioner] asserted that
[respondents] were hired as salaried employees with respect to the partnership between [petitioner]
and Gragera.

"[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she received all payments from
which Nieves deducted Gragera's commission. The commission would then be remitted to Gragera. She
likewise determined loan releases.

"During the pre-trial, the parties narrowed the issues to the following points: whether [respondents]
were employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents] for
delivery to Gragera, whether the P1,555,068.70 claimed under the complaint was actually remitted to
Gragera and whether [respondents] were entitled to their counterclaim for share in the profits."7

Ruling of the Trial Court

In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere
employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner, not
his partner. Petitioner moreover failed to prove that he had entrusted any money to Nieves. Thus,
respondents' counterclaim for their share in the partnership and for damages was granted. The trial
court disposed as follows:

"39.

WHEREFORE, the Court hereby renders judgment as follows:

39.1.

THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.

39.2.

The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, the
following:

39.2.1.

P3,064,428.00

- The 15 percent share of the [respondent] NIEVES S. REYES in the profits of her joint venture with the
[petitioner].

39.2.2.

Six(6) percent of P3,064,428.00

- As damages from August 3, 1987 until the P3,064,428.00 is fully paid.

39.2.3.

P50,000.00

- As moral damages

39.2.4.

P10,000.00

- As exemplary damages
39.3.

The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the following:

39.3.1.

P2,899,739.50

- The balance of the 15 percent share of the [respondent] ARSENIO REYES in the profits of his joint
venture with the [petitioner].

39.3.2.

Six(6) percent of P2,899,739.50

- As damages from August 3, 1987 until the P2,899,739.50 is fully paid.

39.3.3.

P25,000.00

- As moral damages

39.3.4.

P10,000.00

- As exemplary damages

39.4.

The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:

39.4.1.

P50,000.00

- As attorney's fees; and

39.4.2.

The cost of the suit."8

Ruling of the Court of Appeals

On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was
dismissed. Upon the latter's Motion for Reconsideration, however, the trial court's Decision was
reinstated in toto. Subsequently, petitioner's own Motion for Reconsideration was denied in the CA
Resolution of October 9, 1998.

The CA ruled that the following circumstances indicated the existence of a partnership among the
parties: (1) it was Nieves who broached to petitioner the idea of starting a money-lending business and
introduced him to Gragera; (2) Arsenio received "dividends" or "profit-shares" covering the period July
15 to August 7, 1986 (Exh. "6"); and (3) the partnership contract was executed after the Agreement with
Gragera and petitioner and thus showed the parties' intention to consider it as a transaction of the
partnership. In their common venture, petitioner invested capital while respondents contributed
industry or services, with the intention of sharing in the profits of the business.

The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000 which was
supposed to be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts
due, while hers was merely to prepare the daily cash flow reports (Exhs. "15-15DDDDDDDDDD") to keep
track of his collections.

Hence, this Petition.9

Issue

Petitioner asks this Court to rule on the following issues:10

"Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to
excess or lack of jurisdiction in:

1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;

2. Affirming the findings of the trial court that the phrase 'Received by' on documents signed by Nieves
Reyes signified receipt of copies of the documents and not of the sums shown thereon;

3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;

4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to
Gragera;

5 Affirming the dismissal of Santos' [Second] Amended Complaint;

6. Affirming the decision of the trial court, upholding private respondents' counterclaim;

7. Denying Santos' motion for reconsideration dated September 11, 1998."

Succinctly put, the following were the issues raised by petitioner: (1) whether the parties' relationship
was one of partnership or of employer employee; (2) whether Nieves misappropriated the sums of
money allegedly entrusted to her for delivery to Gragera as his commissions; and (3) whether
respondents were entitled to the partnership profits as determined by the trial court.

The Court's Ruling

The Petition is partly meritorious.

First Issue:
Business Relationship

Petitioner maintains that he employed the services of respondent spouses in the money-lending venture
with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced
Gragera to Santos did not make her a partner. She was only a witness to the Agreement between the
two. Separate from the partnership between petitioner and Gragera was that which existed among
petitioner, Nieves and Zabat, a partnership that was dissolved when Zabat was expelled.

On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled that the
business relationship was one of partnership. We quote from the CA Decision, as follows:

"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself provided the initiative in the
lending activities with Monte Maria. In consonance with the agreement between appellant, Nieves and
Zabat (later replaced by Arsenio), [respondents] contributed industry to the common fund with the
intention of sharing in the profits of the partnership. [Respondents] provided services without which the
partnership would not have [had] the wherewithal to carry on the purpose for which it was organized
and as such [were] considered industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).

"While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved by
the expulsion of Zabat therefrom, the remaining partners simply continued the business of the
partnership without undergoing the procedure relative to dissolution. Instead, they invited Arsenio to
participate as a partner in their operations. There was therefore, no intent to dissolve the earlier
partnership. The partnership between [petitioner,] Nieves and Arsenio simply took over and continued
the business of the former partnership with Zabat, one of the incidents of which was the lending
operations with Monte Maria.

xxx xxx xxx

"Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte
Maria was done in pursuit of the business for which the partnership between [petitioner], Nieves and
Zabat (later Arsenio) was organized. Gragera who represented Monte Maria was merely paid
commissions in exchange for the collection of loans. The commissions were fixed on gross returns,
regardless of the expenses incurred in the operation of the business. The sharing of gross returns does
not in itself establish a partnership."11

We agree with both courts on this point. By the contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund, with the intention of dividing
the profits among themselves.12 The "Articles of Agreement" stipulated that the signatories shall share
the profits of the business in a 70-15-15 manner, with petitioner getting the lion's share.13 This
stipulation clearly proved the establishment of a partnership.

We find no cogent reason to disagree with the lower courts that the partnership continued lending
money to the members of the Monte Maria Community Development Group, Inc., which later on
changed its business name to Private Association for Community Development, Inc. (PACDI). Nieves was
not merely petitioner's employee. She discharged her bookkeeping duties in accordance with
paragraphs 2 and 3 of the Agreement, which states as follows:

"2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of prospective
borrowers, and shall x x x each be responsible in handling the collection of the loan payments of the
borrowers that they each solicited.

"3. That the bookkeeping and daily balancing of account of the business operation shall be handled by
the SECOND PARTY."14

The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other hand,
Arsenio's duties as credit investigator are subsumed under the phrase "screening of prospective
borrowers." Because of this Agreement and the disbursement of monthly "allowances" and "profit
shares" or "dividends" (Exh. "6") to Arsenio, we uphold the factual finding of both courts that he
replaced Zabat in the partnership.

Indeed, the partnership was established to engage in a money-lending business, despite the fact that it
was formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera.
Contrary to petitioner's contention, there is no evidence to show that a different business venture is
referred to in this Agreement, which was executed on August 6, 1986, or about a month after the
Memorandum had been signed by petitioner and Gragera on July 14, 1986. The Agreement itself attests
to this fact:

"WHEREAS, the parties have decided to formalize the terms of their business relationship in order that
their respective interests may be properly defined and established for their mutual benefit and
understanding."15

Second Issue:
No Proof of Misappropriation of Gragera's Unpaid Commission

Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's
commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit
"B." (the "Schedule of Daily Payments"), which bears her signature under the words "received by." For
the period July 1986 to March 1987, Gragera should have earned a total commission of P4,282,429.30.
However, only P3,068,133.20 was received by him. Thus, petitioner infers that she misappropriated the
difference of P1,214,296.10, which represented the unpaid commissions. Exhibit "H." is an untitled
tabulation which, according to him, shows that Gragera was also entitled to a commission of P200,000,
an amount that was never delivered by Nieves.16

On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received for
delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was supposed to
come, and that such exhibits were insufficient proof that she had embezzled P200,000. Said the CA:

"The presentation of Exhibit "D" vaguely denominated as 'members ledger' does not clearly establish
that Nieves received amounts from Monte Maria's members. The document does not clearly state what
amounts the entries thereon represent. More importantly, Nieves made the entries for the limited
period of January 11, 1987 to February 17, 1987 only while the rest were made by Gragera's own staff.
"Neither can we give probative value to Exhibit 'E' which allegedly shows acknowledgment of the
remittance of commissions to Verona Gonzales. The document is a private one and its due execution
and authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the Rules of Court
which states:

'SECTION 20. Proof of Private Document — Before any private document offered as authentic is received
in evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

'Any other private document need only be identified as that which it is claimed to be.'

"The court a quo even ruled that the signature thereon was a forgery, as it found that:

'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial stroke
of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine signatures of NIEVES
(Exhs. A-3, B-1, F-1, among others) starts from below and goes upward. This difference in the start of the
initial stroke of the signatures Exhs. E-1 and of the genuine signatures lends credence to Nieves' claim
that the signature Exh. E-1 is a forgery.'

xxx xxx xxx

"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were based on the
predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the
evidence. A perusal of Exhs. "B" and "F" as well as Exhs. '15' to 15-DDDDDDDDDD' reveal that the entries
were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus, the total amount
recorded on Exh. 'B' is exactly the number of borrowers multiplied by the projected collection of
P150.00 per borrower. This holds true for Exh. 'F.'

"Corollarily, Nieves' explanation that the documents were pro forma and that she signed them not to
signify that she collected the amounts but that she received the documents themselves is more
believable than [petitioner's] assertion that she actually handled the amounts.

"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally establish that x x x Nieves
received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the document
showed a liquidation of P240.000 00 and not P200,000.00.

"Accordingly, we find Nieves' testimony that after August 20, 1986, all collections were made by Gragera
believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the loans, he
took charge of the collections. As [petitioner's] representative,

Nieves merely prepared the daily cash flow reports (Exh. '15' to '15 DDDDDDDDDD') to enable
[petitioner] to keep track of Gragera's operations. Gragera on the other hand devised the schedule of
daily payment (Exhs. 'B' and 'F') to record the projected gross daily collections.

"As aptly observed by the court a quo:

'26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA [were] paid
to him[,] that of NIEVES is more logical and practical and therefore, more believable. SANTOS' version
would have given rise to this improbable situation: GRAGERA would collect the daily amortizations and
then give them to NIEVES; NIEVES would get GRAGERA's commissions from the amortizations and then
give such commission to GRAGERA."'17

These findings are in harmony with the trial court's ruling, which we quote below:

"21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for delivery
to GRAGERA. Exh. H shows under its sixth column 'ADDITIONAL CASH' that the additional cash was
P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is
not true. This is so because it is a liquidation of the sum of P240,000.00.

"21.1. SANTOS claimed that he learned of NIEVES' failure to give the P200,000.00 to GRAGERA when he
received the latter's letter complaining of its delayed release. Assuming as true SANTOS' claim that he
gave P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did not give it to GRAGERA.
The only proof that NIEVES did not give it is the letter. But SANTOS did not even present the letter in
evidence. He did not explain why he did not.

"21.2. The evidence shows that all money transactions of the money-lending business of SANTOS were
covered by petty cash vouchers. It is therefore strange why SANTOS did not present any voucher or
receipt covering the P200,000.00."18

In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the
partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his commissions
before remitting his collections. Exhibits "B" and "F" are merely computations of what Gragera should
collect for the day; they do not show that Nieves received the amounts stated therein. Neither is there
sufficient proof that she misappropriated P200,000, because Exhibit "H." does not indicate that such
amount was received by her; in fact, it shows a different figure.

Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-
entrenched is the basic rule that factual findings of the Court of Appeals affirming those of the trial court
are binding and conclusive on the Supreme Court.19 Although there are exceptions to this rule,
petitioner has not satisfactorily shown that any of them is applicable to this issue.

Third Issue:
Accounting of Partnership

Petitioner refuses any liability for respondents' claims on the profits of the partnership. He maintains
that "both business propositions were flops," as his investments were "consumed and eaten up by the
commissions orchestrated to be due Gragera" — a situation that "could not have been rendered
possible without complicity between Nieves and Gragera."

Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid
payment of the demands of Nieves, because sometime in March 1987, she "signified to petitioner that it
was about time to get her share of the profits which had already accumulated to some P3 million."
Respondents add that while the partnership has not declared dividends or liquidated its earnings, the
profits are already reflected on paper. To prove the counterclaim of Nieves, the spouses show that from
June 13, 1986 up to April 19, 1987, the profit totaled P20,429,520 (Exhs. "10" et seq. and "15" et seq.).
Based on that income, her 15 percent share under the joint venture amounts to P3,064,428 (Exh. "10-I-
3"); and Arsenio's, P2,026,000 minus the P30,000 which was already advanced to him (Petty Cash
Vouchers, Exhs. "6, 6-A to 6-B").

The CA originally held that respondents' counterclaim was premature, pending an accounting of the
partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the
trial court's ruling on the counterclaim, it held as follows:

"We earlier ruled that there is still need for an accounting of the profits and losses of the partnership
before we can rule with certainty as to the respective shares of the partners. Upon a further review of
the records of this case, however, there appears to be sufficient basis to determine the amount of
shares of the parties and damages incurred by [respondents]. The fact is that the court a quo already
made such a determination [in its] decision dated August 13, 1991 on the basis of the facts on
record."20

The trial court's ruling alluded to above is quoted below:

"27. The defendants' counterclaim for the payment of their share in the profits of their joint venture
with SANTOS is supported by the evidence.

"27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5, 5-A
and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she prepared.
Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh. 3 is a sample. The
originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D(10) were given to SANTOS. The joint
venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to April
19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and ARSENIO, about P2,926,000.00,
in the profits.

"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending business he was engaged in
netted a profit and that the originals of the daily case flow reports were furnished to him. SANTOS
however alleged that the money-lending operation of his joint venture with NIEVES and ZABAT resulted
in a loss of about half a million pesos to him. But such loss, even if true, does not negate NIEVES' claim
that overall, the joint venture among them — SANTOS, NIEVES and ARSENIO — netted a profit. There is
no reason for the Court to doubt the veracity of [the testimony of] NIEVES.

"27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and 6-B)
should be deducted from his total share."21

After a close examination of respondents' exhibits, we find reason to disagree with the CA. Exhibit "10-
I"22 shows that the partnership earned a "total income" of P20,429,520 for the period June 13, 1986
until April 19, 1987. This entry is derived from the sum of the amounts under the following column
headings: "2-Day Advance Collection," "Service Fee," "Notarial Fee," "Application Fee," "Net Interest
Income" and "Interest Income on Investment." Such entries represent the collections of the money-
lending business or its gross income.
The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the partnership.
For instance, it did not factor in the "gross loan releases" representing the money loaned to clients.
Since the business is money-lending, such releases are comparable with the inventory or supplies in
other business enterprises.

Noticeably missing from the computation of the "total income" is the deduction of the weekly allowance
disbursed to respondents. Exhibits "I" et seq. and "J" et seq.23 show that Arsenio received allowances
from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12,
1986 to March 27, 1987, in the total amount of P25,600. These allowances are different from the profit
already received by Arsenio. They represent expenses that should have been deducted from the
business profits. The point is that all expenses incurred by the money-lending enterprise of the parties
must first be deducted from the "total income" in order to arrive at the "net profit" of the partnership.
The share of each one of them should be based on this "net profit" and not from the "gross income" or
"total income" reflected in Exhibit "10-I," which the two courts invariably referred to as "cash flow"
sheets.

Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the business
expenses incurred by the parties, because they show only the daily cash collections. Contrary to the
rulings of both the trial and the appellate courts, respondents' exhibits do not reflect the complete
financial condition of the money-lending business. The lower courts obviously labored over a mistaken
notion that Exhibit " 10-I-1" represented the "net profits" earned by the partnership.

For the purpose of determining the profit that should go to an industrial partner (who shares in the
profits but is not liable for the losses), the gross income from all the transactions carried on by the firm
must be added together, and from this sum must be subtracted the expenses or the losses sustained in
the business. Only in the difference representing the net profits does the industrial partner share. But if,
on the contrary, the losses exceed the income, the industrial partner does not share in the losses.25

When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain
relevant facts that would otherwise justify a different conclusion, as in this particular issue, a review of
its factual findings may be conducted, as an exception to the general rule applied to the first two
issues.26

The trial court has the advantage of observing the witnesses while they are testifying, an opportunity
not available to appellate courts. Thus, its assessment of the credibility of witnesses and their
testimonies are accorded great weight, even finality, when supported by substantial evidence; more so
when such assessment is affirmed by the CA. But when the issue involves the evaluation of exhibits or
documents that are attached to the case records, as in the third issue, the rule may be relaxed. Under
that situation, this Court has a similar opportunity to inspect, examine and evaluate those records,
independently of the lower courts. Hence, we deem the award of the partnership share, as computed by
the trial court and adopted by the CA, to be incomplete and not binding on this Court.

WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED,
but the challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSED and SET
ASIDE. No costs.

SO ORDERED.
G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals in CA-
G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No. 5200.
Also assailed is the April 3, 2001 Resolution3 denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement4
with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and operate the latter’s
mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties’
agreement was denominated as "Power of Attorney" and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the
MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-year period, for use in the
MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owner’s 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 owner’s account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino
PROJECT, 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 prior approval of
the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided
cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the
MANAGERS’ account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until
termination of this Agency.

(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the PRINCIPAL to extend to
the MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of
this Agency, the ratio which the MANAGERS’ account has to the owner’s account will be 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, or of 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. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.

xxxx

12. 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 their
compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after
deduction therefrom of the MANAGERS’ compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may
incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as security
for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and
as a means to fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’ account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency
shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to
the contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of
such withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS’ withdrawal.

x x x x5

In the course of managing and operating the project, Philex Mining made advances of cash and property
in accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over
the years which resulted to petitioner’s withdrawal as manager of the mine on January 28, 1982 and in
the eventual cessation of mine operations on February 20, 1982.6

Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in Payment"7
wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and
agreed to pay the same in three segments by first assigning Baguio Gold’s tangible assets to petitioner,
transferring to the latter Baguio Gold’s equitable title in its Philodrill assets and finally settling the
remaining liability through properties that Baguio Gold may acquire in the future.

On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in Payment"8
where the parties determined that Baguio Gold’s 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 Gold
undertook to pay petitioner in two segments by first assigning its tangible assets for P127,838,051.00
and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then
ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of
P114,996,768.00.

Subsequently, petitioner 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 and
P2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for
bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a
bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined
to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with
Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to the
management contract, formed part of Baguio Gold’s "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold’s long-term loans which legally
entitled petitioner to be subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it would not
be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be
considered worthless, petitioner claimed that it was neither required to institute a judicial action for
collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is
enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable
means to collect.

On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis. It held that
the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not
filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt
considering that, under the management contract, petitioner was to be paid fifty percent (50%) of the
project’s net profit.10

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit.
The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent

Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency interest due
computed from February 10, 1995, which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency amount x x x up to actual date of payment.

SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership with
Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the "Power
of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement. Since the
advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from
petitioner’s gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio
Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold
was not in default since its loans were not yet due and demandable. What petitioner did was to pre-pay
the loans as evidenced by the notice sent by Bank of America showing that it was merely demanding
payment of the installment and interests due. Moreover, Citibank imposed and collected a "pre-
termination penalty" for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13 petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.

The Court of Appeals erred in construing that the advances made by Philex in the management of the
Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a
loan.

II.

The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine
indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a
partnership.

III.

The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the
advances made by Philex.

IV.

The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-
off.14

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should
not only rely on the "Power of Attorney", but also on the subsequent "Compromise with Dation in
Payment" and "Amended Compromise with Dation in Payment" that the parties executed in 1982. These
documents, allegedly evinced the parties’ intent to treat the advances and payments as a loan and
establish a creditor-debtor relationship between them.
The petition lacks merit.

The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’ contractual intent must first be
discovered from the expressed language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise agreements were mere collateral
documents executed by the parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which established the juridical relation
of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties’ true intent. The compromise agreements were
executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the "Power of Attorney". The parties
entered into the compromise agreements as a consequence of the dissolution of their business
relationship. It did not define that relationship or indicate its real character.

An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed
intended by the parties. Under a contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.15 While a corporation, like petitioner, cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture
which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has
been generally understood to mean an organization formed for some temporary purpose. x x x It is in
fact hardly distinguishable from the partnership, since their elements are similar – community of
interest in the business, sharing of profits and losses, and a mutual right of control. x x x The main
distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for the execution of a
single transaction, and is thus of a temporary nature. x x x This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. x x x (Citations omitted) 16

Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.

Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property
and industry to the common fund known as the Sto. Niño mine.17 In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties to the development and operation
of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to
contribute equally to the joint venture assets under their respective accounts. Baguio Gold would
contribute P11M under its owner’s account plus any of its income that is left in the project, in addition
to its actual mining claim. Meanwhile, petitioner’s contribution would consist of its expertise in the
management and operation of mines, as well as the manager’s account which is comprised of P11M in
funds and property and petitioner’s "compensation" as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio
Gold because it did not "bind" itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO MINE."18

The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph 5(c)
which prohibits petitioner from withdrawing the advances until termination of the parties’ business
relations. As can be seen, petitioner became bound by its contributions once the transfers were made.
The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise its option
under paragraph 5.

There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal of
advances should not be taken as an indication that it had entered into a partnership with Baguio Gold;
that the stipulation only showed that what the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal
due to an interest of a third party that depends upon it, or the mutual interest of both principal and
agent.19 In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to the
advances made by petitioner who is supposedly the agent and not the principal under the contract.
Thus, it cannot be inferred from the stipulation that the parties’ relation under the 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 the parties
was one of agency and not a partnership. Although the said provision states that "this Agency shall be
irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, 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.

It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favor
of petitioner to contract with third persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former was to manage and operate the
latter’s mine through the parties’ mutual contribution of material resources and industry. The essence
of an agency, even one that is coupled with interest, is the agent’s ability to represent his principal and
bring about business relations between the latter and third persons.20 Where representation for and in
behalf of the principal is merely incidental or necessary for the proper discharge of one’s paramount
undertaking under a contract, the latter may not necessarily be a contract of agency, but some other
agreement depending on the ultimate undertaking of the parties.21
In this case, the totality of the circumstances and the stipulations in the parties’ agreement indubitably
lead to the conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties’
business relations, "the ratio which the MANAGER’S account has to the owner’s account will be
determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims" shall be transferred to petitioner.22 As pointed out by the Court of Tax Appeals, petitioner
was merely entitled to a proportionate return of the mine’s assets upon dissolution of the parties’
business relations. There was nothing in the agreement that would require Baguio Gold to make
payments of the advances to petitioner as would be recognized as an item of obligation or "accounts
payable" for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the
Sto. Niño mine upon termination, a provision that is more consistent with a partnership than a creditor-
debtor relationship. It should be pointed out that in a contract of loan, a person who receives a loan or
money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal
amount of the same kind and quality.23 In this case, however, there was no stipulation for Baguio Gold
to actually repay petitioner the cash and property that it had advanced, but only the return of an
amount pegged at a ratio which the manager’s account had to the owner’s account.

In this connection, we find no contractual basis for the execution of the two compromise agreements in
which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Nino mine. The "Power of Attorney" clearly provides
that petitioner would only be entitled to the return of a proportionate share of the mine assets to be
computed at a ratio that the manager’s account had to the owner’s account. Except to provide a basis
for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to hold itself liable
to petitioner under the compromise agreements, for any amount over and above the proportion agreed
upon in the "Power of Attorney".

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of
millions of pesos to another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific maturity
date for the advances to become due and demandable, and the manner of payment was unclear. All
these point to the inevitable conclusion that the advances were not loans but capital contributions to a
partnership.

The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety of
the parties’ contractual stipulations simply leads to no other conclusion than that petitioner’s
"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 business is prima facie evidence that he is a partner in the business." Petitioner asserts, however,
that no such inference can be drawn against it since its share in the profits of the Sto Niño project was in
the nature of compensation or "wages of an employee", under the exception provided in Article 1769
(4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will
be paid "wages" pursuant to an employer-employee relationship. To begin with, petitioner was the
manager of the project and had put substantial sums into the venture in order to ensure its viability and
profitability. By pegging its compensation to profits, petitioner also stood not to be remunerated in case
the mine had no income. It is hard to believe that petitioner would take the risk of not being paid at all
for its services, if it were truly just an ordinary employee.

Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement actually
constitutes its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an
equal share in the income of the mine if it were just an employee of Baguio Gold.25 It is not surprising
that petitioner was to receive a 50% share in the net profits, considering that the "Power of Attorney"
also provided for an almost equal contribution of the parties to the St. Nino mine. The "compensation"
agreed upon only serves to reinforce the notion that the parties’ relations were indeed of partners and
not employer-employee.

All told, the lower courts did not err in treating petitioner’s advances as investments in a partnership
known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as
the latter was under no unconditional obligation to return the same to the former under the "Power of
Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find no
reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is supported by the evidence on record.26

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions
for income tax purposes partake of the nature of tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed.27 In this
case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio
Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a
valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated
June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is
AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982
income in the amount of P62,811,161.31, with 20% delinquency interest computed from February 10,
1995, which is the due date given for the payment of the deficiency income tax, up to the actual date of
payment.

SO ORDERED.
G.R. 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.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which
they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of
1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights
to his four children, the petitioners, to enable them to build their residences. The company sold the two
lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens
titles issued to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D).
They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the
profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of
P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income
taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership
or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal
Revenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of
the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the
same and divided the profit among themselves.

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.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership.
The petitioners were not engaged in any joint venture by reason of that isolated transaction.

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 co-ownership. 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. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

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 joint 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.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they
would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for
income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit.
Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to
the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-
indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or
expand the inherited properties; they merely continued dedicating the property to the use to which it
had been put by their forebears; they individually reported in their tax returns their corresponding
shares in the income and expenses of the 'hacienda', and they continued for many years the status of
co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to
continue the existing contractual relations with the Central Azucarera de Bais for milling purposes.
Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the
income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961,
cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to
produce profits for themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and
son purchased a lot and building, entrusted the administration of the building to an administrator and
divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140,
where the three Evangelista sisters bought four pieces of real property which they leased to various
tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an
unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated
the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are
not prejudging this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled.
No costs.

SO ORDERED.
G.R. No. L-21906 December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,

vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.

Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.

Ruiz Law Offices for defendant-appellant.

CASTRO, J.:

This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May 21,
1956, all of the Court of First Instance of Davao, in civil case 629. The basic action is for specific
performance, and damages resulting from an alleged breach of contract.

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of
Malalag (now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken thereon
by the authorities concerned. During the Japanese occupation, he filed another fishpond application for
the same area, but because of the conditions then prevailing, it was not acted upon either. On
December 12, 1945 he filed a third fishpond application for the same area, which, after a survey, was
found to contain 178.76 hectares. Upon investigation conducted by a representative of the Bureau of
Forestry, it was discovered that the area applied for was still needed for firewood production. Hence on
May 13, 1946 this third application was disapproved.

Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While this
motion was pending resolution, he was advised by the district forester of Davao City that no further
action would be taken on his motion, unless he filed a new application for the area concerned. So he
filed on May 27, 1947 his fishpond application 1717.

Meanwhile, several applications were submitted by other persons for portions of the area covered by
Casteel's application.

On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land
found inside the area applied for by Casteel; he was later granted fishpond permit F-289-C covering 9.3
hectares certified as available for fishpond purposes by the Bureau of Forestry.

Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land applied
for by Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946, was given due
course on December 9, 1947 with the issuance to him of fishpond permit F-539-C to develop 30 hectares
of land comprising a portion of the area applied for by Casteel, upon certification of the Bureau of
Forestry that the area was likewise available for fishpond purposes. On November 17, 1948 Felipe
Deluao filed his own fishpond application for the area covered by Casteel's application.

Because of the threat poised upon his position by the above applicants who entered upon and spread
themselves within the area, Casteel realized the urgent necessity of expanding his occupation thereof by
constructing dikes and cultivating marketable fishes, in order to prevent old and new squatters from
usurping the land. But lacking financial resources at that time, he sought financial aid from his uncle
Felipe Deluao who then extended loans totalling more or less P27,000 with which to finance the needed
improvements on the fishpond. Hence, a wide productive fishpond was built.

Moreover, upon learning that portions of the area applied for by him were already occupied by rival
applicants, Casteel immediately filed the corresponding protests. Consequently, two administrative
cases ensued involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now Fp. A.
No. 1717), Nicanor Casteel, applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio, applicant-
appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor Casteel,
applicant-protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C, Alejandro
Cacam, Permittees-Respondents."

However, despite the finding made in the investigation of the above administrative cases that Casteel
had already introduced improvements on portions of the area applied for by him in the form of dikes,
fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's application on
October 25, 1949, required him to remove all the improvements which he had introduced on the land,
and ordered that the land be leased through public auction. Failing to secure a favorable resolution of
his motion for reconsideration of the Director's order, Casteel appealed to the Secretary of Agriculture
and Natural Resources.

In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our
discussion of the appellant's third assignment of error.

On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor
Casteel as party of the second part, executed a contract — denominated a "contract of service" — the
salient provisions of which are as follows:

That the Party of the First Part in consideration of the mutual covenants and agreements made herein to
the Party of the Second Part, hereby enter into a contract of service, whereby the Party of the First Part
hires and employs the Party of the Second Part on the following terms and conditions, to wit:

That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN
THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders only
his services for the construction and improvements of a fishpond at Barrio Malalag, Municipality of
Padada, Province of Davao, Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that
will be produced from said fishpond;

That the Party of the First Part will be the administrator of the same she having financed the
construction and improvement of said fishpond;

That this contract was the result of a verbal agreement entered into between the Parties sometime in
the month of November, 1947, with all the above-mentioned conditions enumerated; ...

On the same date the above contract was entered into, Inocencia Deluao executed a special power of
attorney in favor of Jesus Donesa, extending to the latter the authority "To represent me in the
administration of the fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines, which
has been applied for fishpond permit by Nicanor Casteel, but rejected by the Bureau of Fisheries, and to
supervise, demand, receive, and collect the value of the fish that is being periodically realized from it...."

On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on
November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the two
administrative cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the application of
Nicanor Casteel over the subject fishpond. However, by letter dated March 15, 1950 sent to the
Secretary of Commerce and Agriculture and Natural Resources (now Secretary of Agriculture and
Natural Resources), Deluao withdrew his petition for reinvestigation.

On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in DANR
Case 353, the dispositive portion of which reads as follows:

In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel
should be, as hereby it is, reinstated and given due course for the area indicated in the sketch drawn at
the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.

On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion stating
as follows:

WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C of
Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to
pay the improvements introduced thereon by said permittees in accordance with the terms and
dispositions contained elsewhere in this decision....

Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the
fishpond, and ejected the latter's representative (encargado), Jesus Donesa, from the premises.

Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and
Nicanor Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of First
Instance of Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who,
they alleged, instigated Casteel to violate his contract), praying inter alia, (a) that Casteel be ordered to
respect and abide by the terms and conditions of said contract and that Inocencia Deluao be allowed to
continue administering the said fishpond and collecting the proceeds from the sale of the fishes caught
from time to time; and (b) that the defendants be ordered to pay jointly and severally to plaintiffs the
sum of P20,000 in damages.

On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction,
praying among other things, that during the pendency of the case and upon their filling the requisite
bond as may be fixed by the court, a preliminary injunction be issued to restrain Casteel from doing the
acts complained of, and that after trial the said injunction be made permanent. The lower court on April
26, 1951 granted the motion, and, two days later, it issued a preliminary mandatory injunction
addressed to Casteel, the dispositive portion of which reads as follows:

POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado y todos usu
abogados, agentes, mandatarios y demas personas que obren en su ayuda, desista de impedir a la
demandante Inocencia R. Deluao que continue administrando personalmente la pesqueria objeto de
esta causa y que la misma continue recibiendo los productos de la venta de los pescados provenientes
de dicha pesqueria, y que, asimismo, se prohibe a dicho demandado Nicanor Casteel a desahuciar
mediante fuerza al encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto de la
demanda de autos.

On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he was
the owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by the
plaintiffs on June 15, 1951, was denied by the lower court in its order of June 26, 1961.

The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952,
denying the material averments of the plaintiffs' complaint. A reply to the defendants' amended answer
was filed by the plaintiffs on January 31, 1952.

The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4, 1951
the plaintiffs opposed his motion.

The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs'
complaint failed to state a claim upon which relief may be granted. The motion, opposed by the
plaintiffs on October 12, 1951, was denied for lack of merit by the lower court in its order of October 22,
1951. The defendants' motion for reconsideration filed on October 31, 1951 suffered the same fate
when it was likewise denied by the lower court in its order of November 12, 1951.

After the issues were joined, the case was set for trial. Then came a series of postponements. The lower
court (Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an order in
open court, reading as follows: .

Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this case is
hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.

This case was filed on April 3, 1951 and under any circumstance this Court will not entertain any other
transfer of hearing of this case and if the parties will not be ready on that day set for hearing, the court
will take the necessary steps for the final determination of this case. (emphasis supplied)

On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued by
the office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First Instance of
Davao, setting the hearing of the case for May 2 and 3, 1956 before Judge Amador Gomez of Branch II.
The defendants, thru counsel, on April 26, 1956 filed a motion for postponement. Acting on this motion,
the lower court (Branch II, presided by Judge Gomez) issued an order dated April 27, 1956, quoted as
follows:

This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The motion is
filed by the counsel for the defendants and has the conformity of the counsel for the plaintiffs.

An examination of the records of this case shows that this case was initiated as early as April 1951 and
that the same has been under advisement of the Honorable Enrique A. Fernandez, Presiding Judge of
Branch No. I, since September 24, 1953, and that various incidents have already been considered and
resolved by Judge Fernandez on various occasions. The last order issued by Judge Fernandez on this case
was issued on March 21, 1956, wherein he definitely states that the Court will not entertain any further
postponement of the hearing of this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and termination of any
incident referring to this case should be referred back to Branch I, so that the same may be disposed of
therein. (emphasis supplied)

A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.

On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge
Fernandez presiding), when informed about the defendants' motion for postponement filed on April 26,
1956, issued an order reiterating its previous order handed down in open court on March 21, 1956 and
directing the plaintiffs to introduce their evidence ex parte, there being no appearance on the part of
the defendants or their counsel. On the basis of the plaintiffs' evidence, a decision was rendered on May
4, 1956 the dispositive portion of which reads as follows:

EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del demandado
Nicanor Casteel:

(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;

(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad (½) del
"fishpond" en cuestion con todas las mejoras existentes dentro de la misma;

(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en concepto de

danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion de esta decision hasta que
entregue la posesion y administracion de la porcion del "fishpond" en conflicto;

(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los pescado
beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda de autos hasta el
completo pago de la obligacion principal;

(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos incurridos por
aquella durante la pendencia de esta causa;

(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de P2,000.00;

(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en cuanto se
refiere al demandado Juan Depra;

(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;

(i) Con las costas contra del demandado, Casteel.

The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack of
knowledge of the order of the court a quo setting the case for trial. The petition, however, was denied
by the lower court in its order of May 21, 1956, the pertinent portion of which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case has been
transferred or not, but to inquire from the presiding Judge, particularly because his motion asking the
transfer of this case was not set for hearing and was not also acted upon.

Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as follows:

Upon petition of the plaintiff without any objection on the part of the defendants, the hearing of this
case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the morning.

This case was filed on April 3, 1951, and under any circumstance this Court will not entertain any other
transfer of the hearing of this case, and if the parties will not be ready on the day set for hearing, the
Court will take necessary steps for the final disposition of this case.

In view of the order above-quoted, the Court will not accede to any transfer of this case and the duty of
Atty. Ruiz is no other than to be present in the Sala of this Court and to call the attention of the same to
the existence of his motion for transfer.

Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken, the same
is hereby denied.

Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to us
for final determination on the ground that it involves only questions of law.

Casteel raises the following issues:

(1) Whether the lower court committed gross abuse of discretion when it ordered reception of the
appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the
appellant of his day in court and of his property without due process of law;

(2) Whether the lower court committed grave abuse of discretion when it denied the verified petition
for relief from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of
Court; and

(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction
against defendant-appellant, and in not dismissing appellees' complaint.

1. The first and second issues must be resolved against the appellant.

The record indisputably shows that in the order given in open court on March 21, 1956, the lower court
set the case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated
that, since the case had been pending since April 3, 1951, it would not entertain any further motion for
transfer of the scheduled hearing.

An order given in open court is presumed received by the parties on the very date and time of
promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March 21, 1956,
given in open court, was a valid notice to the parties, and the notice of hearing dated April 21, 1956 or
one month thereafter, was a superfluity. Moreover, as between the order of March 21, 1956, duly
promulgated by the lower court, thru Judge Fernandez, and the notice of hearing signed by a "special
deputy clerk of court" setting the hearing in another branch of the same court, the former's order was
the one legally binding. This is because the incidents of postponements and adjournments are
controlled by the court and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3, Rule 22)
of the Rules of Court.

Much less had the clerk of court the authority to interfere with the order of the court or to transfer the
cage from one sala to another without authority or order from the court where the case originated and
was being tried. He had neither the duty nor prerogative to re-assign the trial of the case to a different
branch of the same court. His duty as such clerk of court, in so far as the incident in question was
concerned, was simply to prepare the trial calendar. And this duty devolved upon the clerk of court and
not upon the "special deputy clerk of court" who purportedly signed the notice of hearing.

It is of no moment that the motion for postponement had the conformity of the appellees' counsel. The
postponement of hearings does not depend upon agreement of the parties, but upon the court's
discretion.3

The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom had
ever withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably setting
the case for hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven other
counsel of record. This is a well-settled rule in our jurisdiction.4

It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to
appear before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have no
right to presume that their motions for postponement will be granted.5 For indeed, the appellant and
his 12 lawyers cannot pretend ignorance of the recorded fact that since September 24, 1953 until the
trial held on May 2, 1956, the case was under the advisement of Judge Fernandez who presided over
Branch I. There was, therefore, no necessity to "re-assign" the same to Branch II because Judge
Fernandez had exclusive control of said case, unless he was legally inhibited to try the case — and he
was not.

There is truth in the appellant's contention that it is the duty of the clerk of court — not of the Court —
to prepare the trial calendar. But the assignment or reassignment of cases already pending in one sala to
another sala, and the setting of the date of trial after the trial calendar has been prepared, fall within
the exclusive control of the presiding judge.

The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of
court of the Court of First Instance of Davao was located directly below Branch I. If the appellant and his
counsel had exercised due diligence, there was no impediment to their going upstairs to the second
storey of the Court of First Instance building in Davao on May 2, 1956 and checking if the case was
scheduled for hearing in the said sala. The appellant after all admits that on May 2, 1956 his counsel
went to the office of the clerk of court.

The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But
he was properly accorded this right. He was notified in open court on March 21, 1956 that the case was
definitely and intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot argue that,
pursuant to the doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely notice of the denial of
his motion for postponement. In the cited case the motion for postponement was the first one filed by
the defendant; in the case at bar, there had already been a series of postponements. Unlike the case at
bar, the Siochi case was not intransferably set for hearing. Finally, whereas the cited case did not spend
for a long time, the case at bar was only finally and intransferably set for hearing on March 21, 1956 —
after almost five years had elapsed from the filing of the complaint on April 3, 1951.

The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare for
trial is unacceptable because between March 21, 1956 and May 2, 1956, they had one month and ten
days to do so. In effect, the appellant had waived his right to appear at the trial and therefore he cannot
be heard to complain that he has been deprived of his property without due process of law.7 Verily, the
constitutional requirements of due process have been fulfilled in this case: the lower court is a
competent court; it lawfully acquired jurisdiction over the person of the defendant (appellant) and the
subject matter of the action; the defendant (appellant) was given an opportunity to be heard; and
judgment was rendered upon lawful hearing.8

2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex
parte of a writ of preliminary injunction against him, and in not dismissing the appellee's complaint. We
find this contention meritorious.

Apparently, the court a quo relied on exhibit A — the so-called "contract of service" — and the
appellees' contention that it created a contract of co-ownership and partnership between Inocencia
Deluao and the appellant over the fishpond in question.

Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed to
know the law. It must be assumed, conformably to such rule, that the parties entered into the so-called
"contract of service" cognizant of the mandatory and prohibitory laws governing the filing of
applications for fishpond permits. And since they were aware of the said laws, it must likewise be
assumed — in fairness to the parties — that they did not intend to violate them. This view must perforce
negate the appellees' allegation that exhibit A created a contract of co-ownership between the parties
over the disputed fishpond. Were we to admit the establishment of a co-ownership violative of the
prohibitory laws which will hereafter be discussed, we shall be compelled to declare altogether the
nullity of the contract. This would certainly not serve the cause of equity and justice, considering that
rights and obligations have already arisen between the parties. We shall therefore construe the contract
as one of partnership, divided into two parts — namely, a contract of partnership to exploit the fishpond
pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to divide the
fishpond between them after such award. The first is valid, the second illegal.

It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-called
"contract of service" on November 25, 1949, there were two pending applications over the fishpond.
One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural Resources
after it was disallowed by the Director of Fisheries on October 25, 1949. The other was Felipe Deluao's
application over the same area which was likewise rejected by the Director of Fisheries on November
29, 1949, refiled by Deluao and later on withdrawn by him by letter dated March 15, 1950 to the
Secretary of Agriculture and Natural Resources. Clearly, although the fishpond was then in the
possession of Casteel, neither he nor, Felipe Deluao was the holder of a fishpond permit over the area.
But be that as it may, they were not however precluded from exploiting the fishpond pending resolution
of Casteel's appeal or the approval of Deluao's application over the same area — whichever event
happened first. No law, rule or regulation prohibited them from doing so. Thus, rather than let the
fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial intention of the parties was not to form
a co-ownership but to establish a partnership — Inocencia Deluao as capitalist partner and Casteel as
industrial partner — the ultimate undertaking of which was to divide into two equal parts such portion
of the fishpond as might have been developed by the amount extended by the plaintiffs-appellees, with
the further provision that Casteel should reimburse the expenses incurred by the appellees over one-
half of the fishpond that would pertain to him. This can be gleaned, among others, from the letter of
Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit because
you are the ones interested in half of the work we have done so far, besides I did not insist on our being
partners in my fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners
and it so happened that we became partners because I am poor, but in the midst of my poverty it never
occurred to me to be unfair to you. Therefore so that each of us may be secured, let us have a document
prepared to the effect that we are partners in the fishpond that we caused to be made here in
Balasinon, but it does not mean that you will treat me as one of your "Bantay" (caretaker) on wage basis
but not earning wages at all, while the truth is that we are partners. In the event that you are not
amenable to my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I
withdraw all my cases and be left without even a little and you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their
partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although
denominated a "contract of service," was actually the memorandum of their partnership agreement.
That it was not a contract of the services of the appellant, was admitted by the appellees themselves in
their letter10 to Casteel dated December 19, 1949 wherein they stated that they did not employ him in
his (Casteel's) claim but because he used their money in developing and improving the fishpond, his
right must be divided between them. Of course, although exhibit A did not specify any wage or share
appertaining to the appellant as industrial partner, he was so entitled — this being one of the conditions
he specified for the execution of the document of partnership.11

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a
letter,12 dated March 24, 1950, the appellant suggested that they divide the fishpond and the
remaining capital, and offered to pay the Deluaos a yearly installment of P3,000 — presumably as
reimbursement for the expenses of the appellees for the development and improvement of the one-half
that would pertain to the appellant. Two days later, the appellee Felipe Deluao replied,13expressing his
concurrence in the appellant's suggestion and advising the latter to ask for a reconsideration of the
order of the Director of Fisheries disapproving his (appellant's) application, so that if a favorable decision
was secured, then they would divide the area.

Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to
maintain his petition for the reinvestigation of Casteel's application. Thus by letter14 dated March 15,
1950 addressed to the Secretary of Agriculture and Natural Resources, he withdrew his petition on the
alleged ground that he was no longer interested in the area, but stated however that he wanted his
interest to be protected and his capital to be reimbursed by the highest bidder.

The arrangement under the so-called "contract of service" continued until the decisions both dated
September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR Cases
353 and 353-B. This development, by itself, brought about the dissolution of the partnership. Moreover,
subsequent events likewise reveal the intent of both parties to terminate the partnership because each
refused to share the fishpond with the other.

Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership, "...
any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership." The approval of the appellant's fishpond application by the
decisions in DANR Cases 353 and 353-B brought to the fore several provisions of law which made the
continuation of the partnership unlawful and therefore caused its ipso facto dissolution.

Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources.15 To the same effect is Condition No. 3 of the fishpond
permit which states that "The permittee shall not transfer or sublet all or any area herein granted or any
rights acquired therein without the previous consent and approval of this Office." Parenthetically, we
must observe that in DANR Case 353-B, the permit granted to one of the parties therein, Leoncio
Aradillos, was cancelled not solely for the reason that his permit covered a portion of the area included
in the appellant's prior fishpond application, but also because, upon investigation, it was ascertained
thru the admission of Aradillos himself that due to lack of capital, he allowed one Lino Estepa to develop
with the latter's capital the area covered by his fishpond permit F-289-C with the understanding that he
(Aradillos) would be given a share in the produce thereof.16

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of
Agriculture and Commerce, and the violation of this condition shall avoid the contract; Provided, That
assignment, encumbrance, or subletting for purposes of speculation shall not be permitted in any case:
Provided, further, That nothing contained in this section shall be understood or construed to permit the
assignment, encumbrance, or subletting of lands leased under this Act, or under any previous Act, to
persons, corporations, or associations which under this Act, are not authorized to lease public lands.

Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources
issued in August 1937, prohibits a transfer or sublease unless first approved by the Director of Lands and
under such terms and conditions as he may prescribe. Thus, it states:

When a transfer or sub-lease of area and improvement may be allowed. — If the permittee or lessee
had, unless otherwise specifically provided, held the permit or lease and actually operated and made
improvements on the area for at least one year, he/she may request permission to sub-lease or transfer
the area and improvements under certain conditions.

(a) Transfer subject to approval. — A sub-lease or transfer shall only be valid when first approved by the
Director under such terms and conditions as may be prescribed, otherwise it shall be null and void. A
transfer not previously approved or reported shall be considered sufficient cause for the cancellation of
the permit or lease and forfeiture of the bond and for granting the area to a qualified applicant or
bidder, as provided in subsection (r) of Sec. 33 of this Order.

Since the partnership had for its object the division into two equal parts of the fishpond between the
appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged the
unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved by
the approval of his application and the award to him of the fishpond. The approval was an event which
made it unlawful for the business of the partnership to be carried on or for the members to carry it on in
partnership.

The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture
and Natural Resources likewise recognized and/or confirmed their property right to one-half of the
fishpond by virtue of the contract of service, exhibit A. But the untenability of this argument would
readily surface if one were to consider that the Secretary of Agriculture and Natural Resources did not
do so for the simple reason that he does not possess the authority to violate the aforementioned
prohibitory laws nor to exempt anyone from their operation.

However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the
foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership,
succeeding events reveal the intent of both parties to terminate the partnership by refusing to share the
fishpond with the other.

On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to divide
the fishpond so that he could administer his own share, such division to be subject to the approval of
the Secretary of Agriculture and Natural Resources. By letter dated December 29, 1950,18 the appellee
Felipe Deluao demurred to Casteel's proposition because there were allegedly no appropriate grounds
to support the same and, moreover, the conflict over the fishpond had not been finally resolved.

The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the former
expressed his determination to administer the fishpond himself because the decision of the Government
was in his favor and the only reason why administration had been granted to the Deluaos was because
he was indebted to them. In the same letter, the appellant forbade Felipe Deluao from sending the
couple's encargado, Jesus Donesa, to the fishpond. In reply thereto, Felipe Deluao wrote a letter20
dated January 5, 1951 in which he reiterated his refusal to grant the administration of the fishpond to
the appellant, stating as a ground his belief "that only the competent agencies of the government are in
a better position to render any equitable arrangement relative to the present case; hence, any action we
may privately take may not meet the procedure of legal order."

Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not
to share the fishpond with each other — in direct violation of the undertaking for which they have
established their partnership — each must be deemed to have expressly withdrawn from the
partnership, thereby causing its dissolution pursuant to art. 1830(2) of the Civil Code which provides,
inter alia, that dissolution is caused "by the express will of any partner at any time."

In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and
administrative powers with regard to the survey, classification, lease, sale or any other form of
concession or disposition and management of the lands of the public domain, and, more specifically,
with regard to the grant or withholding of licenses, permits, leases and contracts over portions of the
public domain to be utilized as fishponds.21, Thus, we held in Pajo, et al. vs. Ago, et al. (L-15414, June
30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et al.
(L-21167, March 31, 1966), that

... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources) by law
regarding the disposition of public lands such as granting of licenses, permits, leases, and contracts, or
approving, rejecting, reinstating, or cancelling applications, or deciding conflicting applications, are all
executive and administrative in nature. It is a well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts (Coloso v. Board of Accountancy, G.R.
No. L-5750, April 20, 1953). In general, courts have no supervising power over the proceedings and
action of the administrative departments of the government. This is generally true with respect to acts
involving the exercise of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of
fact by an administrative board or official, following a hearing, are binding upon the courts and will not
be disturbed except where the board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of
discretion... (emphasis supplied)

In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the appellant's
fishpond application 1717 and awarded to him the possession of the area in question. In view of the
finality of the Secretary's decision in DANR Cases 353 and 353-B, and considering the absence of any
proof that the said official exceeded his statutory authority, exercised unconstitutional powers, or acted
with arbitrariness and in disregard of his duty, or with grave abuse of discretion, we can do no less than
respect and maintain unfettered his official acts in the premises. It is a salutary rule that the judicial
department should not dictate to the executive department what to do with regard to the
administration and disposition of the public domain which the law has entrusted to its care and
administration. Indeed, courts cannot superimpose their discretion on that of the land department and
compel the latter to do an act which involves the exercise of judgment and discretion.22

Therefore, with the view that we take of this case, and even assuming that the injunction was properly
issued because present all the requisite grounds for its issuance, its continuation, and, worse, its
declaration as permanent, was improper in the face of the knowledge later acquired by the lower court
that it was the appellant's application over the fishpond which was given due course. After the Secretary
of Agriculture and Natural Resources approved the appellant's application, he became to all intents and
purposes the legal permittee of the area with the corresponding right to possess, occupy and enjoy the
same. Consequently, the lower court erred in issuing the preliminary mandatory injunction. We cannot
overemphasize that an injunction should not be granted to take property out of the possession and
control of one party and place it in the hands of another whose title has not been clearly established by
law.23

However, pursuant to our holding that there was a partnership between the parties for the exploitation
of the fishpond before it was awarded to Casteel, this case should be remanded to the lower court for
the reception of evidence relative to an accounting from November 25, 1949 to September 15, 1950, in
order for the court to determine (a) the profits realized by the partnership, (b) the share (in the profits)
of Casteel as industrial partner, (e) the share (in the profits) of Deluao as capitalist partner, and (d)
whether the amounts totalling about P27,000 advanced by Deluao to Casteel for the development and
improvement of the fishpond have already been liquidated. Besides, since the appellee Inocencia
Deluao continued in possession and enjoyment of the fishpond even after it was awarded to Casteel,
she did so no longer in the concept of a capitalist partner but merely as creditor of the appellant, and
therefore, she must likewise submit in the lower court an accounting of the proceeds of the sales of all
the fishes harvested from the fishpond from September 16, 1950 until Casteel shall have been finally
given the possession and enjoyment of the same. In the event that the appellee Deluao has received
more than her lawful credit of P27,000 (or whatever amounts have been advanced to Casteel), plus 6%
interest thereon per annum, then she should reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1)
dissolving the injunction issued against the appellant, (2) placing the latter back in possession of the
fishpond in litigation, and (3) remanding this case to the court of origin for the reception of evidence
relative to the accounting that the parties must perforce render in the premises, at the termination of
which the court shall render judgment accordingly. The appellant's counterclaim is dismissed. No
pronouncement as to costs.
G.R. NOS. 166299-300 December 13, 2005

AURELIO K. LITONJUA, JR., Petitioner,

vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC.,
LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L REALTY,
(formerly E & L INT’L SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV.
REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., "L" DEV. CORP, LCM
THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP.,
SARATOGA REALTY, INC., ACT THEATER INC. (formerly General Theatrical & Film Exchange, INC.),
AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF PHILIPPINES),
Respondents.

DECISION

GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to
nullify and set aside the Decision of the Court of Appeals (CA) dated March 31, 20041 in consolidated
cases C.A. G.R. Sp. No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07, 2004,2
denying petitioner’s motion for reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are
brothers. The legal dispute between them started when, on December 4, 2002, in the Regional Trial
Court (RTC) at Pasig City, Aurelio filed a suit against his brother Eduardo and herein respondent Robert
T. Yang (Yang) and several corporations for specific performance and accounting. In his complaint,3
docketed as Civil Case No. 69235 and eventually raffled to Branch 68 of the court,4 Aurelio alleged that,
since June 1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon Theater
business which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon
Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and
buildings, among other corporations. Yang is described in the complaint as petitioner’s and Eduardo’s
partner in their Odeon Theater investment.5 The same complaint also contained the following material
averments:

3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the
continuation of their family business and common family funds ….

3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by

Eduardo to his siblings, parents and other relatives. Copy of this memorandum is attached hereto and
made an integral part as Annex "A" and the portion referring to [Aurelio] submarked as Annex "A-1".

3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio’s]
retaining his share in the remaining family businesses (mostly, movie theaters, shipping and land
development) and contributing his industry to the continued operation of these businesses, [Aurelio]
will be given P1 Million or 10% equity in all these businesses and those to be subsequently acquired by
them whichever is greater. . . .

4.01 … from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo had
accumulated in their joint venture/partnership various assets including but not limited to the corporate
defendants and [their] respective assets.

4.02 In addition . . . the joint venture/partnership … had also acquired [various other assets], but
Eduardo caused to be registered in the names of other parties….

xxx xxx xxx

4.04 The substantial assets of most of the corporate defendants consist of real properties …. A list of
some of these real properties is attached hereto and made an integral part as Annex "B".

xxx xxx xxx

5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio]
requested for an accounting and liquidation of his share in the joint venture/partnership [but these
demands for complete accounting and liquidation were not heeded].

xxx xxx xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate
defendants as well as Bobby [Yang], are transferring . . . various real properties of the corporations
belonging to the joint venture/partnership to other parties in fraud of [Aurelio]. In consequence,
[Aurelio] is therefore causing at this time the annotation on the titles of these real properties… a notice
of lis pendens …. (Emphasis in the original; underscoring and words in bracket added.)

For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have been meant for
him by his brother Eduardo, pertinently reads:

10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:

You have now your own life to live after having been married. ….

I am trying my best to mold you the way I work so you can follow the pattern …. You will be the only one
left with the company, among us brothers and I will ask you to stay as I want you to run this office every
time I am away. I want you to run it the way I am trying to run it because I will be all alone and I will
depend entirely to you (sic). My sons will not be ready to help me yet until about maybe 15/20 years
from now. Whatever is left in the corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two will gamble the whole thing
of what I have and what you are entitled to. …. It will be you and me alone on this. If ever I pass away, I
want you to take care of all of this. You keep my share for my two sons are ready take over but give
them the chance to run the company which I have built.

xxx xxx xxx

Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS:
(P100, 000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in
form of stocks which you can keep. This stock I assure you is good and saleable. I will also gladly give you
the share of Wack-Wack …and Valley Golf … because you have been good. The rest will be in stocks from
all the corporations which I repeat, ten percent (10%) equity. 6

On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a joint
ANSWER With Compulsory Counterclaim denying under oath the material allegations of the complaint,
more particularly that portion thereof depicting petitioner and Eduardo as having entered into a
contract of partnership. As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional
matter, alleged that the complaint states no cause of action, since no cause of action may be derived
from the actionable document, i.e., Annex "A-1", being void under the terms of Article 1767 in relation
to Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking Eduardo agreed to
do, if any, under Annex "A-1", are unenforceable under the provisions of the Statute of Frauds.7

For his part, Yang - who was served with summons long after the other defendants submitted their
answer – moved to dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action
and the complaint does not state any.8 Petitioner opposed this motion to dismiss.

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.9 To this motion,
petitioner interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.10

Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order
dated March 5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial on
April 10, 2003.11

In another Omnibus Order of April 2, 2003, the same court denied the motion of Eduardo, et al., for
reconsideration12 and Yang’s motion to dismiss. The following then transpired insofar as Yang is
concerned:

1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of
the April 2, 2003 Omnibus Order and to pursue his failed motion to dismiss13 to its full resolution.

2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2, 2003, but his
motion was denied in an Order of July 4, 2003.14

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition for certiorari under Rule 65
of the Rules of Court, docketed as CA-G.R. SP No. 78774,15 to nullify the separate orders of the trial
court, the first denying his motion to dismiss the basic complaint and, the second, denying his motion
for reconsideration.

Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and
injudicious haste attended the issuance of the trial court’s aforementioned Omnibus Orders dated
March 5, and April 2, 2003, sought relief from the CA via similar recourse. Their petition for certiorari
was docketed as CA G.R. SP No. 76987.

Per its resolution dated October 2, 2003,16 the CA’s 14th Division ordered the consolidation of CA G.R.
SP No. 78774 with CA G.R. SP No. 76987.
Following the submission by the parties of their respective Memoranda of Authorities, the appellate
court came out with the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang,
as lead petitioners therein, disposing as follows:

WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these
consolidated cases annulling, reversing and setting aside the assailed orders of the court a quo dated
March 5, 2003, April 2, 2003 and July 4, 2003 and the complaint filed by private respondent [now
petitioner Aurelio] against all the petitioners [now herein respondents Eduardo, et al.] with the court a
quo is hereby dismissed.

SO ORDERED.17 (Emphasis in the original; words in bracket added.)

Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as
evidenced by the actionable documents, Annex "A" and "A-1" attached to the complaint, and upon
which petitioner solely predicates his right/s allegedly violated by Eduardo, Yang and the corporate
defendants a quo is "void or legally inexistent".

In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally assailed
Resolution of December 7, 2004.18 .

Hence, petitioner’s present recourse, on the contention that the CA erred:

A. When it ruled that there was no partnership created by the actionable document because this was
not a public instrument and immovable properties were contributed to the partnership.

B. When it ruled that the actionable document did not create a demandable right in favor of petitioner.

C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and

D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done was
to support his pleaded cause of action by another legal perspective/argument.

The petition lacks merit.

Petitioner’s demand, as defined in the petitory portion of his complaint in the trial court, is for delivery
or payment to him, as Eduardo’s and Yang’s partner, of his partnership/joint venture share, after an
accounting has been duly conducted of what he deems to be partnership/joint venture property.19

A partnership exists when two or more persons agree to place their money, effects, labor, and skill in
lawful commerce or business, with the understanding that there shall be a proportionate sharing of the
profits and losses between them.20 A contract of partnership is defined by the Civil Code as one where
two or more persons bound themselves to contribute money, property, or industry to a common fund
with the intention of dividing the profits among themselves.21 A joint venture, on the other hand, is
hardly distinguishable from, and may be likened to, a partnership since their elements are similar, i.e.,
community of interests in the business and sharing of profits and losses. Being a form of partnership, a
joint venture is generally governed by the law on partnership.22
The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and
respondent Eduardo are partners in the theatre, shipping and realty business, as one claims but which
the other denies. And the issue bearing on the first assigned error relates to the question of what legal
provision is applicable under the premises, petitioner seeking, as it were, to enforce the actionable
document - Annex "A-1" - which he depicts in his complaint to be the contract of partnership/joint
venture between himself and Eduardo. Clearly, then, a look at the legal provisions determinative of the
existence, or defining the formal requisites, of a partnership is indicated. Foremost of these are the
following provisions of the Civil Code:

Art. 1771. A partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission.

Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.

Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As
an unsigned document, there can be no quibbling that Annex "A-1" does not meet the public
instrumentation requirements exacted under Article 1771 of the Civil Code. Moreover, being unsigned
and doubtless referring to a partnership involving more than P3,000.00 in money or property, Annex "A-
1" cannot be presented for notarization, let alone registered with the Securities and Exchange
Commission (SEC), as called for under the Article 1772 of the Code. And inasmuch as the inventory
requirement under the succeeding Article 1773 goes into the matter of validity when immovable
property is contributed to the partnership, the next logical point of inquiry turns on the nature of
petitioner’s contribution, if any, to the supposed partnership.

The CA, addressing the foregoing query, correctly stated that petitioner’s contribution consisted of
immovables and real rights. Wrote that court:

A further examination of the allegations in the complaint would show that [petitioner’s] contribution to
the so-called "partnership/joint venture" was his supposed share in the family business that is consisting
of movie theaters, shipping and land development under paragraph 3.02 of the complaint. In other
words, his contribution as a partner in the alleged partnership/joint venture consisted of immovable
properties and real rights. ….23

Significantly enough, petitioner matter-of-factly concurred with the appellate court’s observation that,
prescinding from what he himself alleged in his basic complaint, his contribution to the partnership
consisted of his share in the Litonjua family businesses which owned variable immovable properties.
Petitioner’s assertion in his motion for reconsideration24 of the CA’s decision, that "what was to be
contributed to the business [of the partnership] was [petitioner’s] industry and his share in the family
[theatre and land development] business" leaves no room for speculation as to what petitioner
contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code
applies as long real property or real rights are initially brought into the partnership. In short, it is really of
no moment which of the partners, or, in this case, who between petitioner and his brother Eduardo,
contributed immovables. In context, the more important consideration is that real property was
contributed, in which case an inventory of the contributed property duly signed by the parties should be
attached to the public instrument, else there is legally no partnership to speak of.

Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in
question were not contributed, but were acquired after the formation of the supposed partnership.
Needless to stress, the Court cannot accord cogency to this specious argument. For, as earlier stated,
petitioner himself admitted contributing his share in the supposed shipping, movie theatres and realty
development family businesses which already owned immovables even before Annex "A-1" was
allegedly executed.

Considering thus the value and nature of petitioner’s alleged contribution to the purported partnership,
the Court, even if so disposed, cannot plausibly extend Annex "A-1" the legal effects that petitioner so
desires and pleads to be given. Annex "A-1", in fine, cannot support the existence of the partnership
sued upon and sought to be enforced. The legal and factual milieu of the case calls for this disposition. A
partnership may be constituted in any form, save when immovable property or real rights are
contributed thereto or when the partnership has a capital of at least ₱3,000.00, in which case a public
instrument shall be necessary.25 And if only to stress what has repeatedly been articulated, an
inventory to be signed by the parties and attached to the public instrument is also indispensable to the
validity of the partnership whenever immovable property is contributed to it.

Given the foregoing perspective, what the appellate court wrote in its assailed Decision26 about the
probative value and legal effect of Annex "A-1" commends itself for concurrence:

Considering that the allegations in the complaint showed that [petitioner] contributed immovable
properties to the alleged partnership, the "Memorandum" (Annex "A" of the complaint) which purports
to establish the said "partnership/joint venture" is NOT a public instrument and there was NO inventory
of the immovable property duly signed by the parties. As such, the said "Memorandum" … is null and
void for purposes of establishing the existence of a valid contract of partnership. Indeed, because of the
failure to comply with the essential formalities of a valid contract, the purported "partnership/joint
venture" is legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally
inexistent contract cannot be the source of any contractual or legal right. Accordingly, the allegations in
the complaint, including the actionable document attached thereto, clearly demonstrates that
[petitioner] has NO valid contractual or legal right which could be violated by the [individual
respondents] herein. As a consequence, [petitioner’s] complaint does NOT state a valid cause of action
because NOT all the essential elements of a cause of action are present. (Underscoring and words in
bracket added.)

Likewise well-taken are the following complementary excerpts from the CA’s equally assailed Resolution
of December 7, 200427 denying petitioner’s motion for reconsideration:

Further, We conclude that despite glaring defects in the allegations in the complaint as well as the
actionable document attached thereto (Rollo, p. 191), the [trial] court did not appreciate and apply the
legal provisions which were brought to its attention by herein [respondents] in the their pleadings. In
our evaluation of [petitioner’s] complaint, the latter alleged inter alia to have contributed immovable
properties to the alleged partnership but the actionable document is not a public document and there
was no inventory of immovable properties signed by the parties. Both the allegations in the complaint
and the actionable documents considered, it is crystal clear that [petitioner] has no valid or legal right
which could be violated by [respondents]. (Words in bracket added.)

Under the second assigned error, it is petitioner’s posture that Annex "A-1", assuming its inefficacy or
nullity as a partnership document, nevertheless created demandable rights in his favor. As petitioner
succinctly puts it in this petition:

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an
actionable contract even though it may not be a partnership. This actionable contract is what is known
as an innominate contract (Civil Code, Article 1307).

44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create
rights and obligations of the parties and which rights and obligations may be enforceable and
demandable. Just because the relationship created by the agreement cannot be specifically labeled or
pigeonholed into a category of nominate contract does not mean it is void or unenforceable.

Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA
after he experienced a reversal of fortune thereat - as an afterthought. The appellate court, however,
cannot really be faulted for not yielding to petitioner’s dubious stratagem of altering his theory of joint
venture/partnership to an innominate contract. For, at bottom, the appellate court’s certiorari
jurisdiction was circumscribed by what was alleged to have been the order/s issued by the trial court in
grave abuse of discretion. As respondent Yang pointedly observed,28 since the parties’ basic position
had been well-defined, that of petitioner being that the actionable document established a
partnership/joint venture, it is on those positions that the appellate court exercised its certiorari
jurisdiction. Petitioner’s act of changing his original theory is an impermissible practice and constitutes,
as the CA aptly declared, an admission of the untenability of such theory in the first place.

[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended
that the actionable instrument may be considered an innominate contract. xxx Verily, this now changes
[petitioner’s] theory of the case which is not only prohibited by the Rules but also is an implied
admission that the very theory he himself … has adopted, filed and prosecuted before the respondent
court is erroneous.

Be that as it may . …. We hold that this new theory contravenes [petitioner’s] theory of the actionable
document being a partnership document. If anything, it is so obvious we do have to test the sufficiency
of the cause of action on the basis of partnership law xxx.29 (Emphasis in the original; Words in bracket
added).

But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected innominate contract,
petitioner’s complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot
be over-emphasized that petitioner points to Eduardo as the author of Annex "A-1". Withal, even on this
consideration alone, petitioner’s claim against Yang is doomed from the very start.
As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded as vesting
petitioner with a right to demand from respondent Eduardo the observance of a determinate conduct,
reads:

xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I
want you to run this office everytime I am away. I want you to run it the way I am trying to run it
because I will be alone and I will depend entirely to you, My sons will not be ready to help me yet until
about maybe 15/20 years from now. Whatever is left in the corporation, I will make sure that you get
ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. (Underscoring
added)

It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if
he indeed wrote Annex "A-1", is a promise which is not to be performed within one year from "contract"
execution on June 22, 1973. Accordingly, the agreement embodied in Annex "A-1" is covered by the
Statute of Frauds and ergo unenforceable for non-compliance therewith.30 By force of the statute of
frauds, an agreement that by its terms is not to be performed within a year from the making thereof
shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing
and subscribed by the party charged. Corollarily, no action can be proved unless the requirement
exacted by the statute of frauds is complied with.31

Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family
businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated
amount or the equity component of the promise was intended to go to a common fund would be to
read something not written in Annex "A-1". Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more contracting minds mutually agreeing to
contribute money, property or industry to a common fund with the intention of dividing the profits
between or among themselves.32

In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance
anchored on an actionable document of partnership which is legally inexistent or void or, at best,
unenforceable does not state a cause of action as against respondent Eduardo and the corporate
defendants. And if no of action can successfully be maintained against respondent Eduardo because no
valid partnership existed between him and petitioner, the Court cannot see its way clear on how the
same action could plausibly prosper against Yang. Surely, Yang could not have become a partner in, or
could not have had any form of business relationship with, an inexistent partnership.

As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to
him as his partner. In fact, attendant circumstances would indicate the contrary. Consider:

1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was "for
the continuation of their family business and common family funds which were theretofore being mainly
managed by Eduardo." 33 But Yang denies kinship with the Litonjua family and petitioner has not
disputed the disclaimer.

2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with
Eduardo and what his share in the businesses will be. No allegation is made whatsoever about what
Yang contributed, if any, let alone his proportional share in the profits. But such allegation cannot,
however, be made because, as aptly observed by the CA, the actionable document did not contain such
provision, let alone mention the name of Yang. How, indeed, could a person be considered a partner
when the document purporting to establish the partnership contract did not even mention his name.

3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business partners in the
[respondent] corporations," while "Bobby is his and Eduardo’s partner in their Odeon Theater
investment’ (par. 2.03). This means that the partnership between petitioner and Eduardo came first;
Yang became their partner in their Odeon Theater investment thereafter. Several paragraphs later,
however, petitioner would contradict himself by alleging that his "investment and that of Eduardo and
Yang in the Odeon theater business has expanded through a reinvestment of profit income and direct
investments in several corporation including but not limited to [six] corporate respondents" This simply
means that the "Odeon Theatre business" came before the corporate respondents. Significantly enough,
petitioner refers to the corporate respondents as "progeny" of the Odeon Theatre business.34

Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence
he sourced his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured
and formulated the legal situation in the following wise:

[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a "partner" of [Eduardo]

and the [petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits
and direct investments in several corporations, thus:

xxx xxx xxx

Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with petitioner and the
…respondent. However, there was NO allegation in the complaint which directly alleged how the
supposed contractual relation was created between [petitioner] and …Yang. More importantly,
however, the foregoing ruling of this Court that the purported partnership between [Eduardo] is void
and legally inexistent directly affects said claim against …Yang. Since [petitioner] is trying to establish his
claim against … Yang by linking him to the legally inexistent partnership . . . such attempt had become
futile because there was NOTHING that would contractually connect [petitioner] and … Yang. To
establish a valid cause of action, the complaint should have a statement of fact upon which to connect
[respondent] Yang to the alleged partnership between [petitioner] and respondent [Eduardo], including
their alleged investment in the Odeon Theater. A statement of facts on those matters is pivotal to the
complaint as they would constitute the ultimate facts necessary to establish the elements of a cause of
action against … Yang. 35

Pressing its point, the CA later stated in its resolution denying petitioner’s motion for reconsideration
the following:

xxx Whatever the complaint calls it, it is the actionable document attached to the complaint that is
controlling. Suffice it to state, We have not ignored the actionable document … As a matter of fact, We
emphasized in our decision … that insofar as [Yang] is concerned, he is not even mentioned in the said
actionable document. We are therefore puzzled how a person not mentioned in a document purporting
to establish a partnership could be considered a partner.36 (Words in bracket ours).

The last issue raised by petitioner, referring to whether or not he changed his theory of the case, as
peremptorily determined by the CA, has been discussed at length earlier and need not detain us long.
Suffice it to say that after the CA has ruled that the alleged partnership is inexistent, petitioner took a
different tack. Thus, from a joint venture/partnership theory which he adopted and consistently pursued
in his complaint, petitioner embraced the innominate contract theory. Illustrative of this shift is
petitioner’s statement in par. #8 of his motion for reconsideration of the CA’s decision combined with
what he said in par. # 43 of this petition, as follows:

8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal
matter. What is determinative for purposes of sufficiency of the complainant’s allegations, is whether
the actionable document bears out an actionable contract – be it a partnership, a joint venture or
whatever or some innominate contract … It may be noted that one kind of innominate contract is what
is known as du ut facias (I give that you may do).37

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an
actionable contract even though it may not be a partnership. This actionable contract is what is known
as an innominate contract (Civil Code, Article 1307).38

Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due
process; hence, the proscription against a party shifting from one theory at the trial court to a new and
different theory in the appellate court.39 On the same rationale, an issue which was neither averred in
the complaint cannot be raised for the first time on appeal.40 It is not difficult, therefore, to agree with
the CA when it made short shrift of petitioner’s innominate contract theory on the basis of the foregoing
basic reasons.

Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case of
changing theories but of supporting his pleaded cause of action – that of the existence of a partnership -
by another legal perspective/argument, strikes the Court as a strained attempt to rationalize an
untenable position. Paragraph 12 of his motion for reconsideration of the CA’s decision virtually
relegates partnership as a fall-back theory. Two paragraphs later, in the same notion, petitioner faults
the appellate court for reading, with myopic eyes, the actionable document solely as establishing a
partnership/joint venture. Verily, the cited paragraphs are a study of a party hedging on whether or not
to pursue the original cause of action or altogether abandoning the same, thus:

12. Incidentally, assuming that the actionable document created a partnership between [respondent]
Eduardo, Sr. and [petitioner], no immovables were contributed to this partnership. xxx

14. All told, the Decision takes off from a false premise that the actionable document attached to the
complaint does not establish a contractual relationship between [petitioner] and … Eduardo, Sr. and
Roberto T Yang simply because his document does not create a partnership or a joint venture. This is … a
myopic reading of the actionable document.

Per the Court’s own count, petitioner used in his complaint the mixed words "joint venture/partnership"
nineteen (19) times and the term "partner" four (4) times. He made reference to the "law of joint
venture/partnership [being applicable] to the business relationship … between [him], Eduardo and
Bobby [Yang]" and to his "rights in all specific properties of their joint venture/partnership". Given this
consideration, petitioner’s right of action against respondents Eduardo and Yang doubtless pivots on the
existence of the partnership between the three of them, as purportedly evidenced by the undated and
unsigned Annex "A-1". A void Annex "A-1", as an actionable document of partnership, would strip
petitioner of a cause of action under the premises. A complaint for delivery and accounting of
partnership property based on such void or legally non-existent actionable document is dismissible for
failure to state of action. So, in gist, said the Court of Appeals. The Court agrees.

WHEREFORE, the instant petition is DENIED and the impugned Decision and Resolution of the Court of
Appeals AFFIRMED.

Cost against the petitioner.

SO ORDERED.
G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms of a
contract turn out to be financially disadvantageous to them will not relieve them of their obligations
therein. The lack of an inventory of real property will not ipso facto release the contracting partners
from their respective obligations to each other arising from acts executed in accordance with their
agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of
Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The
assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-
21208, which disposed as follows:

WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the
plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are
likewise ordered dismissed. No pronouncement as to costs. 3

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement"
with Respondent Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to
the contract, they executed a Deed of Sale covering the said parcel of land in favor of respondent, who
then had it registered in his name. By mortgaging the property, respondent obtained from Equitable
Bank a loan of P40,000 which, under the Joint Venture Agreement, was to be used for the development
of the subdivision. 4 All three of them also agreed to share the proceeds from the sale of the subdivided
lots.

The project did not push through, and the land was subsequently foreclosed by the bank.

According to petitioners, the project failed because of "respondent's lack of funds or means and skills."
They add that respondent used the loan not for the development of the subdivision, but in furtherance
of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the Agreement. With the
said amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu
City Council's approval of the subdivision project which he advertised in a local newspaper. He also
caused the construction of roads, curbs and gutters. Likewise, he entered into a contract with an
engineering firm for the building of sixty low-cost housing units and actually even set up a model house
on one of the subdivision lots. He did all of these for a total expense of P85,000.

Respondent claimed that the subdivision project failed, however, because petitioners and their relatives
had separately caused the annotations of adverse claims on the title to the land, which eventually
scared away prospective buyers. Despite his requests, petitioners refused to cause the clearing of the
claims, thereby forcing him to give up on the project. 5

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were
however acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was
later dismissed by the trial court in an Order dated September 6, 1982. On appeal, however, the
appellate court remanded the case for further proceedings. Thereafter, the RTC issued its assailed
Decision, which, as earlier stated, was affirmed by the CA.

Hence, this Petition. 6

Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a
partnership for the development of the subdivision. Thus, they must bear the loss suffered by the
partnership in the same proportion as their share in the profits stipulated in the contract. Disagreeing
with the trial court's pronouncement that losses as well as profits in a joint venture should be
distributed equally, 7 the CA invoked Article 1797 of the Civil Code which provides:

Art. 1797 — The losses and profits shall be distributed in conformity with the agreement. If only the
share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.

The CA elucidated further:

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital.

The Issue

Petitioners impute to the Court of Appeals the following error:

. . . [The] Court of Appeals erred in concluding that the transaction

. . . between the petitioners and respondent was that of a joint venture/partnership, ignoring outright
the provision of Article 1769, and other related provisions of the Civil Code of the Philippines. 8

The Court's Ruling

The Petition is bereft of merit.

Main Issue:

Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate court's finding of
a partnership, were void.

In the same breath, however, they assert that under those very same contracts, respondent is liable for
his failure to implement the project. Because the agreement entitled them to receive 60 percent of the
proceeds from the sale of the subdivision lots, they pray that respondent pay them damages equivalent
to 60 percent of the value of the property. 9

The pertinent portions of the Joint Venture Agreement read as follows:

KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by
and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and
MISS EMETERIA BARING, . . . the SECOND PARTY:

WITNESSETH:

That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at Lapu-
Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of 17,009
square meters, to be sub-divided by the FIRST PARTY;

Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND (P20,000.00)
Pesos, Philippine Currency upon the execution of this contract for the property entrusted by the
SECOND PARTY, for sub-division projects and development purposes;

NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the
respective parties hereto do hereby stipulate and agree as follows:

ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969, in the amount
of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency,
for 1,700 square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST
PARTY, but the SECOND PARTY did not actually receive the payment.

SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations and this
particular amount will serve as an advance payment from the FIRST PARTY for the property mentioned
to be sub-divided and to be deducted from the sales.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal
amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the
sub-division project is terminated and ready for sale to any interested parties, and the amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by
the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales after the
development of the sub-division project.

FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the SECOND
PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or whatever income
deriving from the sales will be divided equally according to the . . . percentage [agreed upon] by both
parties.

SIXTH: That the intended sub-division project of the property involved will start the work and all
improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall [be]
decided by both parties.

SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned
provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the
SECOND PARTY, will be paid in full to the FIRST PARTY, including all necessary improvements spent by
the FIRST PARTY, and-the FIRST PARTY will be given a grace period to turnover the property mentioned
above.

That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and
voluntarily for the uses and purposes therein stated. 10

A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership
pursuant to Article 1767 of the Civil Code, which provides:

Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.

Under the above-quoted Agreement, petitioners would contribute property to the partnership in the
form of land which was to be developed into a subdivision; while respondent would give, in addition to
his industry, the amount needed for general expenses and other costs. Furthermore, the income from
the said project would be divided according to the stipulated percentage. Clearly, the contract
manifested the intention of the parties to form a partnership. 11

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to
the land to facilitate its use in the name of the respondent. On the other hand, respondent caused the
subject land to be mortgaged, the proceeds of which were used for the survey and the subdivision of the
land. As noted earlier, he developed the roads, the curbs and the gutters of the subdivision and entered
into a contract to construct low-cost housing units on the property.

Respondent's actions clearly belie petitioners' contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property,
but also industry.

Petitioners Bound by

Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law.

It is undisputed that petitioners are educated and are thus presumed to have understood the terms of
the contract they voluntarily signed. If it was not in consonance with their expectations, they should
have objected to it and insisted on the provisions they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their acts, and the
fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations. They cannot now disavow the relationship formed from such
agreement due to their supposed misunderstanding of its terms.

Alleged Nullity of the

Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which
provides:

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.

They contend that since the parties did not make, sign or attach to the public instrument an inventory of
the real property contributed, the partnership is void.

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo
M. Tolentino states that under the aforecited provision which is a complement of Article 1771, 12 "The
execution of a public instrument would be useless if there is no inventory of the property contributed,
because without its designation and description, they cannot be subject to inscription in the Registry of
Property, and their contribution cannot prejudice third persons. This will result in fraud to those who
contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may
consist. Thus, the contract is declared void by the law when no such inventory is made." The case at bar
does not involve third parties who may be prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath deny
the contract and in another recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts will not tolerate, much less
approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture
Agreement an ordinary contract from which the parties' rights and obligations to each other may be
inferred and enforced.
Partnership Agreement Not the Result

of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil
Code, because it is the direct result of an earlier illegal contract, which was for the sale of the land
without valid consideration.

This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale
was the expectation of profits from the subdivision project. Its first stipulation states that petitioners did
not actually receive payment for the parcel of land sold to respondent. Consideration, more properly
denominated as cause, can take different forms, such as the prestation or promise of a thing or service
by another. 15

In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in
the expectation of profits from the subdivision project, for which the land was intended to be used. As
explained by the trial court, "the land was in effect given to the partnership as [petitioner's]
participation therein. . . . There was therefore a consideration for the sale, the [petitioners] acting in the
expectation that, should the venture come into fruition, they [would] get sixty percent of the net
profits."

Liability of the Parties

Claiming that rerpondent was solely responsible for the failure of the subdivision project, petitioners
maintain that he should be made to pay damages equivalent to 60 percent of the value of the property,
which was their share in the profits under the Joint Venture Agreement.

We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of the
failure of the project. 16 But it also ruled that neither was respondent responsible therefor. 17 In
imputing the blame solely to him, petitioners failed to give any reason why we should disregard the
factual findings of the appellate court relieving him of fault. Verily, factual issues cannot be resolved in a
petition for review under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that
their Petition constitutes one of the exceptions to this doctrine. 18 Accordingly, we find no reversible
error in the CA's ruling that petitioners are not entitled to damages.

WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs against
petitioners.

SO ORDERED