FIRST DIVISION [G.R. No. 117847. October 7, 1998] PEOPLE’S AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs.

COURT OF APPEALS and STEFANI SAÑO, respondents. DECISION PANGANIBAN, J.: Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officer’s apparent authority is established and when these contracts are ratified by the corporation. The Case This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670. In a collection case filed by Stefani Saño against People’s Aircargo and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision dated October 26, 1990, the dispositive portion of which reads: “WHEREFORE, in light of all the foregoing, judgment is hereby rendered, ordering [petitioner] to pay [private respondent] the amount of sixty thousand (P60,000.00) pesos representing payment of [private respondent’s] services in preparing the manual of operations and in the conduct of a seminar for [petitioner]. The Counterclaim is hereby dismissed.” Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to the Court of Appeals (CA) which, in its Decision promulgated February 28, 1994, granted his prayer for P400,000, as follows: “WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that [petitioner] is ordered to pay [private respondent] the amount of four hundred thousand pesos (P400,000.00) representing payment of [private respondent’s] services in preparing the manual of operations and in the conduct of a seminar for [petitioner].” As no new ground was raised by petitioner, reconsideration of the abovementioned Decision was denied in the Resolution promulgated on October 28, 1994. The Facts Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City.

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a proposal from private respondent for the preparation of a feasibility study. Private respondent submitted a letterproposal dated October 17, 1986 (“First Contract” hereafter) to Punsalan, which is reproduced hereunder: “Dear Mr. Punsalan: With reference to your request for professional engineering consultancy services for your proposed MIA Warehousing Project may we offer the following outputs and the corresponding rate and terms of agreement: =========================== ========= Project Feasibility Study consisting of Market Study Technical Study Financial Feasibility Study Preparation of pertinent documentation requirements for the application ================================================== === The above services will be provided for a fee of [p]esos 350,000.00 payable according to the following schedule: ============================================ ========= Fifty percent (50%) ………….upon confirmation of the agreement Twenty-five percent (25%)…..15 days after the confirmation of the agreement Twenty-five percent (25%)…..upon submission of the specified outputs The outputs will be completed and submitted within 30 days upon confirmation of the agreement and receipt by us of the first fifty percent payment. --------------------------------------------------------------------------------------------Thank you. Yours truly, (S)STEFANI C. SAÑO (T)STEFANI C. SAÑO Consultant for Industrial Engineering” CONFORME: (S)ANTONIO C. PUNSALAN, JR. (T)ANTONIO C. PUNSALAN, JR. President, PAIRCARGO

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondent’s offer, as another company priced a similar proposal at only P15,000. However, Punsalan preferred private respondent’s services because of the latter’s membership in the task force, which was supervising the transition of the Bureau of Customs from the Marcos government to the Aquino administration. On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter, confirming their agreement as follows: “Dear Mr. Saño: With regard to the services offered by your company in your letter dated 13 October 1986, for the preparation of the necessary study and documentations to support our Application for Authority to Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please be informed that our company is willing to hire your services and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows: P100,000.00 upon signing of the agreement; 150,000.00 on or before October 31, 1986, with the favorable Recommendation of the CBW on our application. 100,000.00 Very truly yours, (S)ANTONIO C. PUNSALAN (T)ANTONIO C. PUNSALAN President CONFORME & RECEIVED from PAIRCARGO, the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00), this 17th day of October, 1986 as 1st installment payment of the service agreement dated October 13, 1986. (S)STEFANI C. SAÑO (T)STEFANI C. SAÑO” Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the balance of the contract price, although not according to the schedule agreed upon. On December 4, 1986, upon Punsalan’s request, private respondent sent petitioner another letter-proposal (“Second Contract” hereafter), which reads: “People’s Air Cargo & Warehousing Co., Inc. upon receipt of the study in final form.

Old MIA Compound, Metro Manila Attention: Mr. ANTONIO PUN[S]ALAN, JR. President Dear Mr. Pun[s]alan: This is to formalize our proposal for consultancy services to your company the scope of which is defined in the attached service description. The total service you have decided to avail xxx would be available upon signing of the conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at the schedule defined as follows (with the balance covered by post-dated cheques): Downpayment upon signing conforme . . . P80,000.00 15 January 1987 30 January 1987 ............. ............. 53,333.00 53,333.00 53,333.00 53,333.00 53,333.00 53,333.00

15 February 1987 . . . . . . . . . . . . . 28 February 1987 . . . . . . . . . . . . . 15 March1987 30 March 1987 ............. .............

With this package, you are assured of the highest service quality as our performance record shows we always deliver no less. Thank you very much. Yours truly, (S)STEFANI C. SAÑO (T)STEFANI C. SAÑO Industrial Engineering Consultant CONFORME: (S)ANTONIO C. PUNSALAN JR. (T)PAIRCARGO CO. INC.” During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the letter, the following notations in pencil: “1. 2. Operations Manual Seminar/workshop for your employees package deal

P400,000 -

50% upon completion of seminar/workshop 50% upon approval by the Commissioner The Manual has already been approved by the Commissioner but payment has not yet been made." The lower left corner of the letter also contained the following notations: “1st letter 2

The Ruling of the Court of Appeals To Respondent Court, the pivotal issue of private respondent’s appeal was the enforceability of the Second Contract. It noted that petitioner did not appeal the Decision of the trial court, implying that it had agreed to pay the P60,000 award. If the contract was valid and enforceable, then petitioner should be held liable for the full amount stated therein, not P60,000 as held by the lower court. Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or unenforceable, the CA ruled in favor of its validity and enforceability. According to the Court of Appeals, the evidence on record shows that the president of petitioner-corporation had entered into the First Contract, which was similar to the Second Contract. Thus, petitioner had clothed its president with apparent authority to enter into the disputed agreement. As it had also become the practice of the petitioner-corporation to allow its president to negotiate and execute contracts necessary to secure its license as a customs bonded warehouse without prior board approval, the board itself, by its acts and through acquiescence, practically laid aside the normal requirement of prior express approval. The Second Contract was declared valid and binding on the petitioner, which was held liable to private respondent in the full amount of P400,000. Disagreeing with the CA, petitioner lodged this petition before us. The Issues Instead of alleging reversible errors, petitioner imputes “grave abuse of discretion” to the Court of Appeals, viz.: “I. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation simply because it was entered into by its president[;] “II. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation notwithstanding the lack of any board authority since it was the purported ‘practice’ to allow the president to enter into contracts of said nature (citing one previous instance of a similar contract)[;] and “III. xxx [I]n ruling that the subject letter-agreement for services was a valid contract and not merely simulated." The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its ground for seeking a reversal of the assailed Decision. Although the Rules of Court specify “reversible errors” as grounds for a petition for review under Rule 45, the Court will lay aside for the nonce this procedural lapse and consider the allegations of “grave abuse” as statements of reversible errors of law. Petitioner does not contest its liability; it merely disputes the amount of such accountability. Hence, the resolution of this petition rests on the sole issue of the enforceability and validity of the Second Contract, more specifically: (1) whether the president of the petitioner-corporation had apparent authority to bind


4 Dec. 1986 15 June 1987 with Hinanakit’.”


On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual prepared by private respondent. Petitioner submitted said operations manual to the Bureau of Customs in connection with the former’s application to operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to operate, enabling it to become one of the three public customs bonded warehouses at the international airport. Private respondent also conducted, in the third week of January 1987 in the warehouse of petitioner, a three-day training seminar for the latter’s employees. On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then Commissioner Alex Padilla, a position he held until he became technical assistant to then Commissioner Miriam Defensor-Santiago on March 7, 1988. Meanwhile, Punsalan sold his shares in petitioner-corporation and resigned as its president in 1987. On February 9, 1988, private respondent filed a collection suit against petitioner. He alleged that he had prepared an operations manual for petitioner, conducted a seminar-workshop for its employees and delivered to it a computer program; but that, despite demand, petitioner refused to pay him for his services. Petitioner, in its answer, denied that private respondent had prepared an operations manual and a computer program or conducted a seminar-workshop for its employees. It further alleged that the letter-agreement was signed by Punsalan without authority, “in collusion with [private respondent] in order to unlawfully get some money from [petitioner],” and despite his knowledge that a group of employees of the company had been commissioned by the board of directors to prepare an operations manual. The trial court declared the Second Contract unenforceable or simulated. However, since private respondent had actually prepared the operations manual and conducted a training seminar for petitioner and its employees, the trial court awarded P60,000 to the former, on the ground that no one should be unjustly enriched at the expense of another (Article 2142, Civil Code). The trial court determined the amount “in light of the evidence presented by defendant on the usual charges made by a leading consultancy firm on similar services.”

petitioner to the Second Contract; and (2) whether the said contract was valid and not merely simulated. The Court’s Ruling The petition is not meritorious. First Issue: Apparent Authority of a Corporate President Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president, was not authorized by its board of directors to enter into said contract. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its stockholders and members, “having xxx powers, attributes and properties expressly authorized by law or incident to its existence.” Being a juridical entity, a corporation may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, as provided in Section 23 of the Corporation Code of the Philippines: “SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x.” Under this provision, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: “A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.”

Accordingly, the appellate court ruled in this case that the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was in fact exercised without any objection from its board or shareholders. Petitioner had previously allowed its president to enter into the First Contract with private respondent without a board resolution expressly authorizing him; thus, it had clothed its president with apparent authority to execute the subject contract. Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does not constitute corporate practice, which Webster defines as “frequent or customary action.” It cites Board of Liquidators v. Kalaw, in which the practice of NACOCO allowing its general manager to negotiate and execute contract in its copra trading activities for and on its behalf, without prior board approval, was inferred from sixty contracts – not one, as in the present case -previously entered into by the corporation without such board resolution. Petitioner’s argument is not persuasive. Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus “clothing” its president with the power to bind the corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and major stockholder of petitioner. Testifying on the First Contract, he said: “A: Mr. [Punsalan] told me that he prefer[s] Mr. Saño because Mr. Saño is very influential with the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our project study and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident, so he [gets] his way. Q: And so did the company eventually pay this P350,000.00 to Mr. Saño? A: Yes, sir.” The First Contract was consummated, implemented and paid without a hitch.

Hence, private respondent should not be faulted for believing that Punsalan’s conformity to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo then that the Second Contract was outside the usual powers of the president, petitioner’s ratification of said contract and acceptance of benefits have made it binding, nonetheless. The enforceability of contracts under Article 1403(2) is ratified “by the acceptance of benefits under them” under Article 1405. Inasmuch as a corporate president is often given general supervision and control over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation. In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. Hence, it has been held in other jurisdictions that the president of a corporation possesses the power to enter into a contract for the corporation, when the “conduct on the part of both the president and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and similar actions.” Furthermore, a party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy. Second Issue: Alleged Simulation of the First Contract As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the “badges of fraud” cited by the trial court in declaring said contract either simulated or unenforceable, viz.: “xxx The October 1986 transaction with [private respondent] involved P350,000. The same was embodied in a letter which bore therein not only the conformity of [petitioner’s] then President Punsalan but also drew a letter-confirmation from the

latter for, indeed, he was clothed with authority to enter into the contract after the same was brought to the attention and consideration of [petitioner]. Not only that, a [down payment] was made. In the alleged agreement of December 4, 1986 subject of the present case, the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement drew no letter of confirmation. And no [down payment] and postdated checks were given. Until the filing of the present case in February 1988, no written demand for payment was sent to [petitioner]. [Private respondent’s] claim that he sent one in writing, and one was sent by his counsel who manifested that ‘[h]e was looking for a copy in [his] files’ fails in light of his failure to present any such copy. These and the following considerations, to wit: 1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as purportedly stipulated in the alleged contract) [was given, private respondent] went ahead with the services[;] 2) [There was a delay in the filing of the present suit, more than a year after [private respondent] allegedly completed his services or eight months after the alleged last verbal demand for payment made on Punsalan in June 1987; 3) Does not Punsalan’s writing allegedly in June 1987 on the alleged letteragreement of ‘your employees[,]’ when it should have been ‘our employees’, as he was then still connected with [petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioner’s] authority and must have been done ‘in collusion with plaintiff in order to unlawfully get some money from [petitioner]? 4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing thereon his conformity, how come xxx when Punsalan allegedly visited [private respondent] in his office at the Bureau of Customs, in June 1987, Punsalan ‘brought’ (again?) the letter (with the pencil [notation] at the left bottom portion allegedly already written)? 5) How come xxx [private respondent] did not even keep a copy of the alleged service contract allegedly attached to the letter-agreement? 6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of his name (the letter ‘n’ is inserted before the last letter ‘o’ in Antonio) and of the spelling of his family name (Punsalan, not Punzalan)? 7) Why was not Punsalan impleaded in the case?” The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examination in a petition for review under Rule 45 of the Rules of Court. This rule, however, admits of exceptions, one of which is a conflict between the factual findings of the lower and of the appellate courts as in the case at bar.

After judicious deliberation, the Court agrees with the appellate court that the alleged “badges of fraud” mentioned earlier have not affected in any manner the perfection of the Second Contract or proved the alleged simulation thereof. First, the lack of payment (whether down, partial or full payment), even after completion of private respondent’s obligations, imports only a defect in the performance of the contract on the part of petitioner. Second, the delay in the filing of action was not fatal to private respondent’s cause. Despite the lapse of one year after private respondent completed his services or eight months after the alleged last demand for payment in June 1987, the action was still filed within the allowable period, considering that an action based on a written contract prescribes only after ten years from the time the right of action accrues. Third, a misspelling in the contract does not establish vitiation of consent, cause or object of the contract. Fourth, a confirmation letter is not an essential element of a contract; neither is it necessary to perfect one. Fifth, private respondent’s failure to implead the corporate president does not establish collusion between them. Petitioner could have easily filed a third-party claim against Punsalan if it believed that it had recourse against the latter. Lastly, the mere fact that the contract price was six times the alleged going rate does not invalidate it. In short, these “badges” do not establish simulation of said contract. A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable contract. A contract is simulated if the parties do not intend to be bound at all (absolutely simulated), or if the parties conceal their true agreement (relatively simulated). In the case at bar, petitioner received from private respondent a letter-offer containing the terms of the former, including a stipulation of the consideration for the latter’s services. Punsalan’s conformity, as well as the receipt and use of the operations manual, shows petitioner’s consent to or, at the very least, ratification of the contract. To repeat, petitioner even submitted the manual to the Bureau of Customs and allowed private respondent to conduct the seminar for its employees. Private respondent heard no objection from the petitioner, until he claimed payment for the services he had rendered. Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting parties. The circumstances outlined above do not establish any intention to simulate the contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a transaction entered into without authority, has ratified the agreement and is, therefore, bound by it. WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED.

Lyceum of Aparri � 28 March 1972 Lyceum of Tuao, Inc. � 28 March 1972 Lyceum of Camalaniugan � 28 March 1972 Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 101897 March 5, 1993 LYCEUM OF THE PHILIPPINES, INC. petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents. Quisumbing, Torres & Evaangelista Law Offices and Ambrosio Padilla for petitioner. Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents. Froilan Siobal for Western Pangasinan Lyceum. FELICIANO, J.: Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the Philippines, Inc. and has used that name ever since. On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names. Some of the private respondents actively participated in the proceedings before the SEC. These are the following, the dates of their original SEC registration being set out below opposite their respective names: Western Pangasinan Lyceum � 27 October 1950 Lyceum of Cabagan � 31 October 1962 Lyceum of Lallo, Inc. � 26 March 1972 The following private respondents were declared in default for failure to file an answer despite service of summons: Buhi Lyceum; Central Lyceum of Catanduanes; Lyceum of Eastern Mindanao, Inc.; and Lyceum of Southern Philippines Petitioner's original complaint before the SEC had included three (3) other entities: 1. The Lyceum of Malacanay; 2. The Lyceum of Marbel; and 3. The Lyceum of Araullo. The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the Lyceum of Araullo was dismissed when that school motu proprio change its corporate name to "Pamantasan ng Araullo." The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate name and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the geographical location of the campus being the only word which distinguished one from the other corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another name "not similar or identical [with]" the names of previously registered entities. The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2 Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word

"Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that word. On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from each other. 3 Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for reconsideration, without success. Before this Court, petitioner asserts that the Court of Appeals committed the following errors: 1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum. 2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was incorporated earlier than petitioner. 3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in favor of petitioner. 4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the petitioner to the exclusion of others. 5 We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling. The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:

Sec. 18. Corporate name. � No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (Emphasis supplied) The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. 7 We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines. Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English language, the word is also found in Spanish (liceo ) and in French (lycee ). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be (though this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this

word to designate an entity which is organized and operating as an educational institution. It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following terms: . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. 12 The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative: Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has continued for so long a time that it has become of consequence and acquired a good will of considerable value such that its articles and produce have acquired a well-known reputation, and confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448). With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word "Lyceum" has indeed

acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact the evidence tend to convey that the cross-claimant was already using the word "Lyceum" seventeen (17) years prior to the date the appellant started using the same word in its corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the same or similar word like "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay" long before appellant started using the word "Lyceum". The appellant also failed to prove that the word "Lyceum" has become so identified with its educational institution that confusion will surely arise in the minds of the public if the same word were to be used by other educational institutions. In other words, while the appellant may have proved that it had been using the word "Lyceum" for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail. 13 (Emphasis partly in the original and partly supplied) We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution. In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by virtue of its past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other

private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization. We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their own corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other. WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 90580 April 8, 1991 RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN SAW, petitioners, vs. HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43, (Regional Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT CORPORATION, EQUITABLE BANKING CORPORATION, FREEMAN INCORPORATED, SAW CHIAO LIAN, THE REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY SHERIFF ROSALIO G. SIGUA, respondents. Benito O. Ching, Jr. for petitioners. William R. Vetor for Equitable Banking Corp. Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao. CRUZ, J.:p A collection suit with preliminary attachment was filed by Equitable Banking Corporation against Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp. were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian had no authority to contract such loans; and (3) there was collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in securing the loans. The motion to intervene was denied, and the petitioners appealed to the Court of Appeals. Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to and was approved by the lower court. But because it was not complied with, Equitable secured a writ of execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman Management and Development Corp.

The Court of Appeals 1 sustained the denial of the petitioners' motion for intervention, holding that "the compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is proper only when one's right is actual, material, direct and immediate and not simply contingent or expectant." It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the trial judge had lost jurisdiction over the case and could no longer issue the writ of execution. The petitioners are now before this Court, contending that: 1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate and not actual, material, direct and immediate prior to the dissolution of the corporation; 2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil Case No. 88-44404 was confined only to the order denying their motion to intervene and did not divest the trial court of its jurisdiction over the whole case. The petitioners base their right to intervene for the protection of their interests as stockholders on Everett v. Asia Banking Corp. 2 where it was held: The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, . . . has its exceptions. (If the corporation [were] under the complete control of the principal defendants, . . . it is obvious that a demand upon the Board of Directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is essentially in personam and, as an action against defendants in their personal capacities, will not prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because it involved an action filed by the minority stockholders where the board of directors refused to bring an action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the creditor bank. Equitable also argues that the subject matter of the intervention falls properly within the original and exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the time the motion for intervention was filed, there was pending between Freeman, Inc. and the petitioners SEC Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with Restraining Order or Preliminary Injunction and Appointment of

Receiver." It also avers in its Comment that the intervention of the petitioners could have only caused delay and prejudice to the principal parties. On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to the denial of their motion for intervention and not to the main case because their personality as party litigants had not been recognized by the trial court. After examining the issues and arguments of the parties, the Court finds that the respondent court committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for intervention. In the case of Magsaysay-Labrador v. Court of Appeals,

corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. On the second assignment of error, the respondent court correctly noted that the notice of appeal was filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ of execution was issued by the lower court on January 30, 1989. The petitioners' appeal could not have concerned the "whole" case (referring to the decision) because the petitioners "did not appeal the decision as indeed they cannot because they are not parties to the case despite their being stockholders of respondent Freeman, Inc." They could only appeal the denial of their motion for intervention as they were never recognized by the trial court as party litigants in the main case. Intervention is "an act or proceeding by which a third person is permitted to become a party to an action or proceeding between other persons, and which results merely in the addition of a new party or parties to an original action, for the purpose of hearing and determining at the same time all conflicting claims which may be made to the subject matter in litigation. 4 It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things, unless otherwise provided for by the statute or Rules of Court, must be in subordination to the main proceeding. 5 It may be laid down as a general rule that an intervenor is limited to the field of litigation open to the original parties. 6 In the case at bar, there is no more principal action to be resolved as a writ of execution had already been issued by the lower court and the claim of Equitable had already been satisfied. The decision of the lower court had already become final and in fact had already been enforced. There is therefore no more principal proceeding in which the petitioners may intervene. As we held in the case of Barangay Matictic v. Elbinias:

we ruled as follows:

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene in the proceedings below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody of the court or an officer thereof." To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in a separate proceeding or not. Both requirements must concur as the first is not more important than the second. The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and interminable. And this is not the policy of the law. The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the

An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal action and not an independent proceedings; and interlocutory proceeding dependent on and subsidiary to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721). With the final dismissal of the original action, the complaint in intervention can no longer be acted upon. In the case of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that: That right of the intervenor should merely be in aid of the right of the original party, like the plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is nothing to aid or fight for. So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further herein petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to allow and admit the petitioner's complaint in intervention. The dismissal of the expropriation case has no less the inherent effect of also dismissing the motion for intervention which is but the unavoidable consequence. The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really lost to them. The denial did not necessarily prejudice them as their rights are being litigated in the case now before the Securities and Exchange Commission and may be fully asserted and protected in that separate proceeding. WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered. Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

sons of Yu Tiong Yee, one of Yutivo’s founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.

x---------------------------------------------------x DECISION GUTIERREZ DAVID, J.: This is a Petition for Review of a Decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit. chanroblespublishingcompany From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. chanroblespublishingcompany On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engaged in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each. chanroblespublishingcompany At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed in 5 equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. chanroblespublishingcompany The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that “after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo.” The withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation. chanroblespublishingcompany After another investigation, the respondent Collector, in a letter to petitioner dated December 18, 1954, redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents’ last demand was in the total sum of P2,215,809.27 detailed as follows: Deficiency 75% Total Sales Tax Surcharge Amount Due

Assessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr. 1947 to 4th Qrtr. 1949 inclusive 1,031,296.60 P773,473.45 P1,804,769.05 Additional Assessment for period from 1st to 4th Qrtr. 1950, inclusive P234,880.13 P176,160.09 P411,040.22 Total amount demanded per letter of December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27 =========== =========== =========== This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first he deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the respondent Collector’s theory that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the present petition for review. chanroblespublishingcompany It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,” the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil., 496, citing I Fletcher Cyclopedia of Corporation, Perm. Ed., pp. 135-136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247; 255 per Sanborn, J.) Another rule is that, when the

corporation is the “mere alter ego or business conduit of a person, it may be disregarded.” (Koppel [Phil.], Inc. vs. Yatco, supra.) chanroblespublishingcompany After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not disputed that GM, as importer, was the one solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade. chanroblespublishingcompany Making the observation from a newspaper clipping (Exh. “T”) that “as early as 1945 it was known that GM was preparing to leave the Philippines and terminate its business of importing vehicles,” the court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation, which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover the newspaper clipping Exh. “T”, was published on March 24, 1947, and merely reported a rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused to confirm the rumor as late as March 24, 1947, almost a year after SM was organized. chanroblespublishingcompany At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S., 250 U.S. 355; Duffin vs. Lucas, 55 F [2d] 786; Budd vs. Commr., 43 F [2d] 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F [2d] 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr., 36 BTA 833; Kerbaugh vs. Commr., 74 F [2d] 749; Maddas vs. Commr., 114 F [2d] 548; Moore

vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 F [2d] 93; Richard vs. Commr., l5 BTA 316; Rea Gano vs. Commr., 19 BTA 518.) (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities; Arroyo vs. Granada, et al., 18 Phil., 484.) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F [2d] 769; Dalone vs. Commr., 100 F [2d] 507). chanroblespublishingcompany In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. “Tax evasion” is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines. On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50% and 100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many years past in the promotion and pursuit of the business purposes for which it was organized. In the third place, sections 184 to 186 of the said Code provide that the sales tax shall be collected “once only on every original sale, barter, exchange . . ., to be paid by the manufacturer, producer or importer.” The use of the word “original” and the express provision that the tax was collectible “once only” evidently has made the provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham. 17 Wall. 496, 596; Gregory vs. Helvering, 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr. 194 F [2d] 380). Any legal means used by the tax payer to reduce taxes are all right (Benny vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr., 2 T. Cl. 531, it was held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was not justified. chanroblespublishingcompany

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1950. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns for less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein were less than what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation and study concluded in 1952 that Yutivo’s sales tax returns were correct — only to reverse himself after another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate. chanroblespublishingcompany On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could have been easily passed off to the consumer, especially since the period covered by the assessment was a “seller’s market” due to the post-war scarcity up to late 1948, and the imposition of controls in late 1949. chanroblespublishingcompany It is true that the arrastre charges constitute expenses of Yutivo and its noninclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F [2] 978, cited in Merten’s Sec. 55.11 p. 21.) The amount involved, moreover is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charge in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.) chanroblespublishingcompany We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders

of Yutivo headed by Yu Khe Thai. At the time of its incorporation, 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo’s founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Albino Sycip who are co-founders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the subscription. chanroblespublishingcompany The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares, employing the persons named or “charged” with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and constituted the majority of the board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo’s. Moreover, these persons were related to each other as brothers or first cousins. There was every reason for them to agree in order to protect their common interest in Yutivo and SM. chanroblespublishingcompany The issued capital stock of SM was increased by additional subscriptions made by various persons, but except Ng Sam Bak and David Sycip, “payments” thereof were effected by merely debiting or charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash from Yutivo. Again, in this instance, the “payments” were effected by the mere unilateral act of Yutivo. Yutivo, by virtue of its control over the individual accounts of the persons charged, would necessarily exercise preferential rights and control, directly or indirectly, over the shares, it being the party which really undertook to pay or underwrite payment thereof. chanroblespublishingcompany The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide, Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former. chanroblespublishingcompany True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate relatives, either to their respective

spouses and children or sometimes brothers or sisters. Yutivo’s shares in SM were transferred to immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong, Yu Khe Jin and Yu Eng Poh (all of the Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and interest in the two corporations. chanroblespublishingcompany SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo’s president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations could be directed towards common ends. chanroblespublishingcompany Another aspect relative to Yutivo’s control over SM operations relates to its cash transactions. All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation thereto, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo’s books. The payments for and charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter would advanced all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo’s corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information received from Yutivo. chanroblespublishingcompany All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, and subject to withdrawal only by Yutivo. SM’s resources being under Yutivo’s control, the former’s operations and existence became dependent upon the latter. chanroblespublishingcompany

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo. chanroblespublishingcompany Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo- Manila as their “Head-Office” or “Home Office” as shown by their letter of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is obvious from the fact that all cash collections of the SM’s branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or stationery of Yutivo. chanroblespublishingcompany The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre charges paid for the “operation of receiving, conveying, and loading or unloading” of imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo’s expenses in importing goods and not SM’s. But since those charges were made against SM, it plainly appears that Yutivo has sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the former. chanroblespublishingcompany Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees were recorded as “Reserve for Bonus” and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo officers and employees. chanroblespublishingcompany Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. Thus the increases in the capital stock were made in advances or “Guarantee” payments by Yutivo and credited in favor of SM. The

funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, politics, expenditures and obligations of the latter. chanroblespublishingcompany Southern Motors being but a mere instrumentality or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo. chanroblespublishingcompany Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the earliest on October 1 as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the Collector on November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous Collector counter-manding the assessment of November 7, 1950 was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a warrant of distraint and levy has been issued on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and subsisting. chanroblespublishingcompany Anent the deficiency sales tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was assessed well within the prescribed five-year period. chanroblespublishingcompany Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of Executive Order No. 401-A and under section 79(c) of the Revised Administrative Code, he has “direct control, direction

and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law to the contrary notwithstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in the public interest.” chanroblespublishingcompany It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription. “Estoppel has been employed to prevent the application of the statute of limitations against the government in certain instances in which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently involve dissolved corporations. If no waiver has been given, the cases usually show some conduct directed to a postponement of collection, such, for example, as some variety of request to apply an over assessment. The taxpayer has ‘benefited’ and ‘is not in a position to contest’ his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has received the ‘benefit’ of being saved from the inconvenience, if not hardship of immediate collection. chanroblespublishingcompany “Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel.” (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.) chanroblespublishingcompany It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — requiring the approval of the Secretary of Finance and the Board of Tax Appeals in cases involving an original assessment of more than P5,000 - refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to withdraw totally an assessment be subject to such review. chanroblespublishingcompany We find merit, however, in petitioner’s contention that the Court of Tax Appeals erred in the imposition of the 50% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present. chanroblespublishingcompany

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax “in case a false or fraudulent return is willfully made.” Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return. chanroblespublishingcompany The case of Court Holding Co. vs. Commissioner of Internal Revenue (August 9, 1943, 2 T.C. 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of this husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband who directed the company’s business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got together for the execution of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have to be paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves “payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding corporate stock.” The building, which as above stated was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously agreed upon between the corporation and the Fines. chanroblespublishingcompany The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate stock with the corporate property. The commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation’s property was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharged of 25% for delinquency, plus an additional surcharge as fraud penalties. chanroblespublishingcompany The U.S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner

of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to void a tax does not necessarily establish fraud; that it is a settled principles that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption of that method is not subject to censure; and that in taking a position with respect to a question of law, the substance of which was disclosed by the statement indorsed on its return, it may not be said that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax Appeals: chanroblespublishingcompany “The respondent’s answer alleges that the petitioner’s failure to report as income the taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded that the sale of the petitioner’s property was in substance a sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a tax payer may diminish his liability by any means which the law permits. United States vs. Isham, 17 Wall. 496; Gregory vs. Helvering, supra; Chisholm vs. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by the statement endorsed on its return. We can not say, under the record before us, that position was taken fraudulently. The determination of the fraud penalties is reversed.” chanroblespublishingcompany When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM. Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty. chanroblespublishingcompany We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (secs. 184-

186, Tax Code) impose a tax on original sales measured by “gross selling price” or “gross value in money.” These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184-186 of the Tax Code provides: chanroblespublishingcompany “‘Gross selling price’ or ‘gross value in money’ of the articles sold, bartered, exchanged, or transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item.” General Circular No. 440 of the same Bureau reads: “Amount intended to cover the tax must be billed as a separate item so as not to pay a tax on the tax. — On sales made after the third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the invoices in order that the reduction thereof from the gross selling price may be allowed in the computation of the merchants’ percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amount intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed.” (Cited in Dalupan, Nat. Int. Rev. Code, Annoted, Vol. II, pp. 52-53.) chanroblespublishingcompany Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the “gross selling price” as the measure of the tax. Since Yutivo has previously billed the sales tax separately in its sales invoices to SM. General Circulars Nos. 431 and 440 should be deemed to have been complied with. Respondent Collector’s method of computation, as opined by Judge Nable in the decision complained of — chanroblespublishingcompany “Is unfair, because (it is) practically imposing a tax on a tax already paid. Besides, the adoption of the procedure would in certain cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges; by adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law.” chanroblespublishingcompany If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440, the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for the late payment and for fraud, would amount only to P820,549.91 as shown in the following computation:

Gross Sales Sales Taxes Due Total Gross Rates of Vehicles and Computed Selling Price of Sales Exclusive of under Gen. Cir. Charged to Tax Sales Tax Nos. 431 & 400 the Public 5% P11,912,219.57 P595,610.98 P12,507,830.55 7% 909,559.50 63,669.16 973,228.66 10% 2,618,695.28 261,896.53 2,880,564.81 15% 3,602,397.65 540,359.65 4,142,757.30 20% 267,150.50 53,430.10 320,580.60 30% 837,146.97 251,144.09 1,088,291.06 50% 74,244.30 37,122.16 111,366.46 75% 8,000.00 6,000.00 14,000.00 TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44 Less Taxes Paid by Yutivo: 988,655.76 Deficiency tax still due: P820,549.91 This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges. Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that “Any two judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate any decision thereof.” It is on record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an expression of his general or “private sentiment” on the particular issue, for he concurred in the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack or concurrence of two judges, the case was submitted for decision to the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said court shall be decided within 30 days after submission thereof. “If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision may file with said Court a notice of his intention to appeal to the Supreme

Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section.” The case having been brought before us on appeal, the question raised by petitioner has become purely academic. chanroblespublishingcompany IN VIEW OF THE FOREGOING, the Decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment. So ordered without costs. chanroblespublishingcompany Bengzon, Labrador, Concepcion, chanroblespublishingcompany Padilla, J., took no part. Reyes, Barrera and Paredes, JJ., concur.

SECOND DIVISION [G.R. No. 126554. May 31, 2000] ARB CONSTRUCTION CO., INC., and MARK MOLINA, petitioners, vs. COURT OF APPEALS, TBS SECURITY AND INVESTIGATION AGENCY represented by CECILIA R. BACLAY, respondents. DECISION BELLOSILLO, J.: ARB CONSTRUCTION CO., INC. (ARBC) and MARK MOLINA, Vice President for Operations of ARBC, in this consolidated petition, assail the Decision of the Court of Appeals in CA-G.R. SP Nos. 36330 and 36489 as well as the orders of the trial court dated 9 September 1994 and 9 December 1994 granting private respondent TBS Security and Investigation Agency’s Motion for Leave to File Amended and Supplemental Complaint and denying petitioner Mark Molina's Motion to Dismiss, respectively. On 15 August 1993 TBS Security and Investigation Agency (TBSS) entered into two (2) Service Contracts with ARBC wherein TBSS agreed to provide and post security guards in the five (5) establishments being maintained by ARBC. Clause 10 of the Service Contracts provides 10. This contract shall be effective for a period of one (1) year commencing from 15th August 1993 and shall be considered automatically renewed for the same period unless otherwise a written notice of termination shall have been given by one party to the other party thirty (30) days in advance. In a letter dated 23 February 1994 ARBC informed TBSS of its desire to terminate the Service Contracts effective thirty (30) days after receipt of the letter. Also, in a letter dated 22 March 1994, ARBC through its Vice President for Operations, Mark Molina, informed TBSS that it was replacing its security guards with those of Global Security Investigation Agency (GSIA). In response to both letters, TBSS informed ARBC that the latter could not preterminate the Service Contracts nor could it post security guards from GSIA as it would run counter to the provisions of their Service Contracts. On 23 March 1994 Molina wrote TBSS conceding that indeed the "security contract dated 15 August 1993 stipulates that the duration of the service shall be for a period of one year, ending on 15 August 1994 x x x and could not be preterminated until then." Nevertheless, Molina decreased the security guards to only one (1) allegedly pursuant to Clause 2 of the Service Contracts which provides -

2. The AGENCY shall adopt a guarding system and post guards in accordance thereof, in the premises of the client throughout the whole 24 hours daily, using variable shifts of the guards at such hours as may be designated by the CLIENT or AGENCY. As required by the CLIENT, the security guards to be assigned by the AGENCY shall consist initially of the following x x x subject to be increased or decreased by the CLIENT at its sole discretion depending on the security situation or the exigency of the service, by giving the AGENCY at least SEVEN (7) days prior notice. Thus on 28 March 1994 TBSS filed a Complaint for Preliminary Injunction against ARBC and GSIA praying A. Forthwith and Ex-parte, that a Temporary Restraining Order be issued declaring the status quo and directing the Defendants or any person(s) acting in their behalf from performing acts of replacing the Plaintiff’s security guards from other agencies; B. After due hearing that a Writ of Preliminary Injunction, in like tenor, be issued upon posting of such bond as the Honorable Court may require; C. After due hearing, that judgment be rendered 1. Declaring the two (2) contracts for Security Services between Plaintiff and ARBC to be subsisting until August 15, 1994; 2. Ordering Defendant GLOBAL to refrain from taking over the security services of ARBC and to withdraw its guards from the premises of ARBC, if they have been posted earlier; 3. Ordering ARBC to pay Plaintiff attorney’s fees in the amount of P50,000.00 x x x In Answer, ARBC claimed that it decreased the number of security guards being posted at its establishments to only one (1) as the security guards assigned by TBSS were found to be grossly negligent and inefficient, citing the following incidents 8. On February 6, 1994, a Mitsubishi roadgrader of herein defendant was stripped of parts amounting to P58,642.00; 9. On February 25, 1994, a concrete vibrator and mercury light assembly were stolen from the construction site of the Multipurpose Hall beside the swimming pool of herein defendant which is worth P2,800.00 x x x x In conclusion, it prayed that the complaint against it be dismissed for lack of merit. On 16 May 1994 TBSS filed a Motion for Leave to File Attached Amended and Supplemental Complaint. TBSS submitted that it now desired to pursue a case for Sum of Money and Damages instead of the one previously filed for Preliminary Injunction. It maintained that the Amended and Supplemental Complaint would not

substantially alter its cause of action as both the original and amended complaint were based on the same set of facts. In addition to the allegations in its original complaint, TBSS alleged in its Amended and Supplemental Complaint that ARBC illegally deducted from the payroll the amounts of P15,500.00 and P2,800.00 representing the value of one (1) unit concrete vibrator and cassette recorder, respectively. It further argued that ARBC withheld additional amounts from its payroll as payment for the parts of the grader that were stolen. TBSS maintained that ARBC had an outstanding obligation of P472,080.46. Corollarily, TBSS prayed for moral damages of P500,000.00, exemplary damages of P200.000.00 and attorney's fees of P50,000.00. On 2 May 1994 the trial court issued a temporary restraining order but due to the exigency of the situation TBSS decided to withdraw its security contingent from ARBC's premises on 13 May 1994. ARBC opposed the Motion for Leave to File Amended and Supplemental Complaint contending that the cause of action had been substantially altered. On 9 September 1994 the RTC of Makati, Br. 59, granted the motion of TBSS to file the Amended and Supplemental Complaint rationalizing thus Should the court find the allegations in the pleadings to be inadequate, the Court should allow the party to file proper amendments in accordance with the mandate of the Rules of Court that amendments to pleadings are favored and should be liberally allowed, particularly in the early stages of the law suit, so that the actual merit of the controversy may be speedily determined without regard to technicalities and in the most expeditious and inexpensive manner x x x x ARBC filed a Motion for Reconsideration but on 3 November 1994 the motion was denied. Meanwhile, Mark Molina filed a Motion to Dismiss the Amended and Supplemental Complaint on the ground that it did not state a cause of action insofar as he was concerned. But on 9 December 1994 the trial court denied the motion to dismiss and directed Molina instead to file his answer within ten (10) days from receipt of the order. On 30 January 1995 ARBC filed a Petition with the Court of Appeals alleging that the trial court committed grave abuse of discretion in issuing the Orders of 9 September 1994 and 3 November 1994. On 15 February 1995 Molina likewise filed a Petition before the Court of Appeals similarly attributing grave abuse of discretion to the trial court in issuing the order of 9 December 1994. Parenthetically, upon motion of TBSS, the petition of Mark Molina in CA-G.R. SP No. 36484 was consolidated with the petition of ARBC in CA-G.R. SP No. 36330.

On 16 August 1996 the Court of Appeals rendered a Decision denying both petitions of ARBC and Molina. On 3 October 1996 petitioners’ Motion for Reconsideration was denied. Hence, this petition. In their consolidated Petition before this Court, petitioners first submit that THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT HAD THE RIGHT TO CHANGE ITS CAUSE OF ACTION IN VIEW OF A CHANGE IN THE SITUATION OF THE PARTIES AFTER THE FILING OF THE ORIGINAL COMPLAINT. In support of this assigned error petitioners insist that x x x (T)here was not only a substantial change in private respondent’s cause of action but there was even an alteration in the theory of the case x x x (W)hile in the original complaint the only thing alleged and is being prayed for is for petitioner ARB (ARBC) to be enjoined from replacing the security guards of private respondent x x x and for the two contracts x x x to be enforced until August 15, 1994 and for petitioner ARB (ARBC) to be ordered to pay x x x attorney’s fees, what is alleged and is being prayed for in the amended and supplemental complaint is for both petitioners to be ordered to pay P171,853.80 (for unpaid services) x x x and P300,226.66 (for lost income) x x x plus moral and exemplary damages and attorney’s fees. Obviously, petitioner ARB (ARBC) is being required to answer for a liability or legal obligation under the amended and supplemental complaint wholly different from that stated in the original complaint such as but not limited to the amount of P171,852.80 which was never mentioned in the original contract. Under these circumstances, a different cause of action was introduced by the amendment. Also, there was a change in the theory of the case. Whereas in the original contract what is sought for by private respondent is the enforcement of the two (2) contracts which is what is known in legal parlance as specific performance, in the amended and supplemental complaint what is sought for is x x x a rescission of the contracts with damages x x x x We cannot subscribe to the contention of petitioners that the Amended and Supplemental Complaint substantially changed TBSS' cause of action nor was there any alteration in the theory of the case. As correctly observed by the Court of Appeals, "the amendatory allegations are mere amplifications of the cause of action for damages x x x x An amendment will not be considered as stating a new cause of action if the facts alleged in the amended complaint show substantially the same wrong with respect to the same transaction, or if what are alleged refer to the same matter but are more fully and differently stated, or where averments which were implied are made in expressed terms, and the subject of the controversy or the liability sought to be enforced remains the same." The original as well as amended and supplemental complaints readily disclose that the averments contained therein are almost identical. In the original complaint, TBSS prays, among others, that the two (2) Service Contracts be declared as

subsisting until 15 August 1994 and that petitioners be made to pay P50,000.00 as attorney’s fees. Significantly, in its penultimate paragraph, TBSS prays "for such other reliefs that are considered just and equitable under the premises." This is a "catch-all" phrase which definitely covers the amplifications and additional averments contained in the Amended and Supplemental Complaint. Due to events supervening after the filing of the original complaint, it became incumbent upon TBSS to amend its original complaint. One of the supervening events was the withholding by petitioner ARBC of some amounts intended for the payroll of TBSS due to pilferage or losses which allegedly occurred due to the negligence and inefficiency of TBSS' security guards. Plainly, this withholding of the payroll was only an offshoot of the pretermination of the two (2) Service Contracts on the part of ARBC. Significantly, the pretermination of the Service Contracts was already alleged in the original complaint. In fact it was one, if not the most basic, issue discussed therein. Since the withholding of the payroll was only an offshoot of the issue on the pretermination of the contract, we can safely conclude that the allegation on the withholding of the payroll in the Amended and Supplemental Complaint was only an amplification of an issue that was already included and discussed in the original complaint. It was therefore error on the part of petitioners to conclude that private respondent changed its cause of action in the Amended and Supplemental Complaint. Neither could they say that they were being made to answer for a liability or legal obligation that was wholly different from that stated in the original complaint. Grave abuse of discretion therefore could not be imputed to the trial court for admitting the Amended and Supplemental Complaint of private respondent TBSS. It also follows that the appellate court could not be faulted for putting its stamp of approval on the order of the trial court admitting the same. Petitioners also argue, as their second assigned error, that THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGATIONS IN THE AMENDED AND SUPPLEMENTAL COMPLAINT WERE SUFFICIENT TO HOLD PETITIONER MOLINA LIABLE TO PRIVATE RESPONDENT IN HIS PERSONAL CAPACITY. In support of their contention petitioners submit x x x (W)hen x x x Molina allegedly applied P171,853.80 payable to private respondent to the losses suffered by petitioner ARB (ARBC) due to the negligence and indifference of the private respondent’s security guards and when petitioner Molina replaced the said security guards x x x Molina was not acting in his personal capacity but x x x as officer of petitioner ARB (ARBC). Since petitioner Molina did not so act in his personal capacity but only in his official capacity as officer of petitioner ARB (ARBC) then petitioner Molina cannot be held personally liable for the alleged liability of petitioner ARB (ARBC) x x x x

In affirming the order of the trial court denying petitioner Molina’s Motion to Dismiss, the appellate court ruled Similarly, We find no error committed by respondent Judge in denying the motion to dismiss. In paragraphs 5, 17, 18 of the amended and supplemental complaint, it is alleged: 5. But fate would have it that defendant ARBC would subsequently breach the aforesaid contracts by surreptitiously preterminating the same and as precursor thereto, defendant ARBC, through defendant Mark Molina, would impute against plaintiff pretended and fabricated violations and baselessly blame plaintiff for alleged losses of company properties by just deducting the values thereof from plaintiff’s billings without even complying with the procedure agreed upon in the contracts x x x x It may be pertinent to state that all these accusations and imputations, albeit false and concocted, were made by defendant Mark P. Molina x x x x 17. Such unsalutary breach of contract by defendant ARBC through defendant Mark Molina has resulted to plaintiff’s damage and prejudice by way of lost income consisting of the unexpired portion of the contract, i.e., up to August 15, 1994, entailing a total amount of P300, 266.66 x x x x The above allegations, particularly the subparagraph, "It may be pertinent to state that all these accusations and imputations, albeit false and concocted, were made by defendant Mark P. Molina," are sufficient statement of a cause of action against petitioner Mark Molina in his personal capacity. In this regard, we agree with petitioners. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Prescinding from the foregoing, the general rule is that officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. Article 31 of the Corporation Code is in point Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict

with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons x x x x On the basis hereof, petitioner Molina could not be held jointly and severally liable for any obligation which petitioner ARBC may be held accountable for, absent any proof of bad faith or malice on his part. Corollarily, it is also incorrect on the part of the Court of Appeals to conclude that there was a sufficient cause of action against Molina as to make him personally liable for his actuations as Vice President for Operations of ARBC. A cursory reading of the records of the instant case would reveal that Molina did not summarily withhold certain amounts from the payroll of TBSS. Instead, he enumerated instances which in his view were enough bases to do so. Finally, petitioners contend that THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT DID NOT GRAVELY ABUSE ITS DISCRETION IN GRANTING PRIVATE RESPONDENT’S MOTION FOR LEAVE TO FILE AMENDED AND SUPPLEMENTAL COMPLAINT AND IN DENYING PETITIONER MOLINA’S MOTION TO DISMISS. In support hereof, petitioners submit that x x x (T)he trial court admitted the amended and supplemental complaint which substantially changed the cause of action and theory of the case of the private respondent. Therefore, there is (sic) abuse of discretion on the part of the trial court contrary to the ruling of the Court of Appeals that there is none. As already discussed, the Amended and Supplemental Complaint did not substantially alter the cause of action and theory of the case. Consequently, the trial court and the appellate court could not be charged with grave abuse of discretion in admitting the same. WHEREFORE, the PETITION is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 36489 affirming the 9 December 1994 Order of the Regional Trial Court-Br. 59, Makati City, which denied the Motion to Dismiss of petitioner Mark Molina is REVERSED and SET ASIDE. However, the assailed Decision of the appellate court in CA-G.R. SP No. 36330 affirming the 9 September 1994 Order of the Regional Trial Court-Br. 59, Makati City, granting TBS Security and Investigation Agency's Motion for Leave to File Amended and Supplemental Complaint is likewise AFFIRMED. The case is remanded to the trial court for further proceedings. No costs. SO ORDERED.

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