G.R. No.

97212 June 30, 1993

BENJAMIN YU, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY
LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-
FU, respondents.

Jose C. Guico for petitioner.

Wilfredo Cortez for private respondents.

FELICIANO, J.:

Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and
export business operated by a registered partnership with the firm name of "Jade Mountain Products
Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984
with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu
Chang, all citizens of the Republic of China (Taiwan), as limited partners. The partnership business
consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma
Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the
Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm shall have secured additional operating funds
from abroad. Benjamin Yu actually managed the operations and finances of the business; he had
overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.

Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co
and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership interest. The partnership now
constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan
Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble quarry
was entered into with the Cruz spouses in February of 1988.2 The actual operations of the business
enterprise continued as before. All the employees of the partnership continued working in the
business, all, save petitioner Benjamin Yu as it turned out.

On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met
private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
bought the business from the original partners and that it was for him to decide whether or not he
was responsible for the obligations of the old partnership, including petitioner's unpaid salaries.
Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
unpaid salaries remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
salaries accruing from November 1984 to October 1988, moral and exemplary damages and
attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was
never hired as an employee by the present or new partnership.4

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had
been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for
unpaid salaries, backwages and attorney's fees.5

On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor
Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC
held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
Jade Mountain business, that the new partnership had not retained petitioner Yu in his original
position as Assistant General Manager, and that there was no law requiring the new partnership to
absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages
should be asserted against the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the proceedings before the Labor
Arbiter.6

Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside
and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or
excess of jurisdiction.

The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership
has a juridical personality separate and distinct from that of each of its members. Such independent
legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's membership.7

Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and
replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a
new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights
under his employment contract as against the new partnership.

In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old partnership
which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and
Emmanuel Zapanta in 1987.

The applicable law in this connection — of which the NLRC seemed quite unaware — is found in the
Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:

Art. 1828. The dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)

Article 1830 of the same Code must also be noted:

 Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the partners;

xxx xxx xxx

(b) by the express will of any partner, who must act in

good faith, when no definite term or particular
undertaking is specified;

xxx xxx xxx

(2) in contravention of the agreement between the

partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;

xxx xxx xxx

(Emphasis supplied)

In the case at bar, just about all of the partners had sold their partnership interests (amounting to
82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not
show what happened to the remaining 18% of the original partnership interest. The acquisition of
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was enough to constitute a new partnership.

The occurrence of events which precipitate the legal consequence of dissolution of a partnership do
not, however, automatically result in the termination of the legal personality of the old partnership.
Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.

In the ordinary course of events, the legal personality of the expiring partnership persists for the
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old partnership was simply continued by the
new partners, without the old partnership undergoing the procedures relating to dissolution and
winding up of its business affairs. In other words, the new partnership simply took over the business
enterprise owned by the preceeding partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets
or most of them and opening a new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to business on the part of the retiring and
the incoming partners. It is not, however, necessary to inquire into such matters.

What is important for present purposes is that, under the above described situation, not only the
retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson,
et al. v. Isabela Saw Mill, et al,8 the Court held that under facts very similar to those in the case at
bar, a withdrawing partner remains liable to a third party creditor of the old partnership.9 The liability
of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar,
is established in Article 1840 of the Civil Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership

are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or to one or more of
the partners and one or more third persons, if the business is continued without
liquidation of the partnership affairs;

(2) When all but one partner retire and assign (or the representative of a deceased
partner assigns) their rights in partnership property to the remaining partner,
who continues the business without liquidation of partnership affairs, either alone or
with others;

(3) When any Partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired
partners or the representative of the deceased partner, but without any assignment
of his right in partnership property;

(4) When all the partners or their representatives assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and remaining partners
continue the business under the provisions of article 1837, second paragraph, No.
2, either alone or with others, and without liquidation of the partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;

The liability of a third person becoming a partner in the partnership continuing the
business, under this article, to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless there is a stipulation to the
contrary.

When the business of a partnership after dissolution is continued under any

conditions set forth in this article the creditors of the retiring or deceased partner or
the representative of the deceased partner, have a prior right to any claim of the
retired partner or the representative of the deceased partner against the person or
partnership continuing the business on account of the retired or deceased partner's
interest in the dissolved partnership or on account of any consideration promised for
such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set assignment
on the ground of fraud.

xxx xxx xxx

 (Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade
Mountain which continued the business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for
unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the
Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would
fall, if only because the facts on record are not detailed with sufficient precision to permit such
determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is
entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment
with the previous partnership, against the new Jade Mountain.

It is at the same time also evident to the Court that the new partnership was entitled to appoint and
hire a new general or assistant general manager to run the affairs of the business enterprise take
over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention
of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or
termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General
Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business
of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became
superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the
rate of one month's pay for each year of service that he had rendered to the old partnership, a
fraction of at least six (6) months being considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ,
we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership
certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble
quarrying, processing and exporting enterprise. His work constituted value-added to the business
itself and therefore, the new partnership similarly benefitted from the labors of Benjamin Yu. It is
worthy of note that the new partnership did not try to suggest that there was any cause consisting of
some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to
terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office of Jade Mountain from Makati to
Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including
the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin
Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new
Jade Mountain may legitimately be required to respond by paying moral damages. This Court,
exercising its discretion and in view of all the circumstances of this case, believes that an indemnity
for moral damages in the amount of P20,000.00 is proper and reasonable.

In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed from
the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain
compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent
Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the
Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new
Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company
Limited to pay to petitioner Benjamin Yu the following amounts:

(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;

(b) separation pay computed at the rate of P4,000.00 monthly pay

multiplied by three (3) years of service or a total of P12,000.00;

(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and

(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.

Costs against private respondents.

SO ORDERED.

[G.R. No. 135813. October 25, 2001]

FERNANDO SANTOS, petitioner, vs. Spouses ARSENIO and NIEVES

REYES, respondents.

DECISION
PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review on Certiorari assailing the November 28, 1997
Decision,[1] as well as the August 17, 1998 and the October 9, 1998 Resolutions,[2] issued by the
Court of Appeals (CA) in CA-GR CV No. 34742. The Assailed Decision disposed as follows:
WHEREFORE, the decision appealed from is AFFIRMED save as for the
counterclaim which is hereby DISMISSED. Costs against [petitioner]. [3]

Resolving respondents Motion for Reconsideration, the August 17, 1998 Resolution ruled as
follows:

WHEREFORE, [respondents] motion for reconsideration is GRANTED. Accordingly,

the courts decision dated November 28, 1997 is hereby MODIFIED in that the
decision appealed from is AFFIRMED in toto, with costs against [petitioner]. [4]

The October 9, 1998 Resolution denied for lack of merit petitioners Motion for
Reconsideration of the August 17, 1998 Resolution.[5]

The Facts

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

Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves

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

In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as

chairman of the Monte Maria Development Corporation (Monte Maria, for brevity),
[6]

sought short-term loans for members of the corporation. [Petitioner] and Gragera
executed an agreement providing funds for Monte Marias members. Under the
agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission
per thousand paid daily to [petitioner] (Exh. A). x x x Nieves kept the books as
representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as
credit investigator.

On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the Article of

Agreement which formalized their earlier verbal arrangement.

[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same
lending business in competition with their partnership[.] Zabat was thereby expelled
from the partnership. The operations with Monte Maria continued.
On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and
damages. [Petitioner] charged [respondents], allegedly in their capacities as
employees of [petitioner], with having misappropriated funds intended for Gragera for
the period July 8, 1986 up to March 31, 1987. Upon Grageras complaint that his
commissions were inadequately remitted, [petitioner] entrusted P200,000.00 to x x x
Nieves to be given to Gragera. x x x Nieves allegedly failed to account for the
amount. [Petitioner] asserted that after examination of the records, he found that of the
total amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was
remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.

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

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

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

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

[Petitioner] further asserted that in Nieves capacity as bookkeeper, she received all
payments from which Nieves deducted Grageras commission. The commission would
then be remitted to Gragera. She likewise determined loan releases.
During the pre-trial, the parties narrowed the issues to the following points: whether
[respondents] were employees or partners of [petitioner], whether [petitioner]
entrusted money to [respondents] for delivery to Gragera, whether the P1,555,068.70
claimed under the complaint was actually remitted to Gragera and whether
[respondents] were entitled to their counterclaim for share in the profits. [7]

Ruling of the Trial Court

In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere
employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner,
not his partner. Petitioner moreover failed to prove that he had entrusted any money to
Nieves. Thus, respondents counterclaim for their share in the partnership and for damages was
granted. The trial court disposed as follows:
39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S.
REYES, the following:
39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S.
REYES in the profits of her joint
venture with the [petitioner].
39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987
until the P3,064,428.00 is fully
paid.
39.2.3. P50,000.00 - As moral damages
39.2.4. P10,000.00 - As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO
REYES, the following:
39.3.1. P2,899,739.50 - The balance of the 15 percent share of the
[respondent] ARSENIO REYES
in the profits of his joint venture
with the [petitioner].
39.3.2. Six (6) percent of - As damages from P2,899,739.50 August 3, 1987
until the P2,899,739.50 is fully
paid.
39.3.3. P25,000.00 - As moral damages
39.3.4. P10,000.00 - As exemplary damages
39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:
39.4.1. P50,000.00 - As attorneys fees; and
39.4.2 The cost of the suit.[8]
 Ruling of the Court of Appeals

On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents
was dismissed. Upon the latters Motion for Reconsideration, however, the trial courts Decision
was reinstated in toto. Subsequently, petitioners own Motion for Reconsideration was denied in
the CA Resolution of October 9, 1998.
The CA ruled that the following circumstances indicated the existence of a partnership
among the parties: (1) it was Nieves who broached to petitioner the idea of starting a money-
lending business and introduced him to Gragera; (2) Arsenio received dividends or profit-shares
covering the period July 15 to August 7, 1986 (Exh. 6); and (3) the partnership contract was
executed after the Agreement with Gragera and petitioner and thus showed the parties intention
to consider it as a transaction of the partnership. In their common venture, petitioner invested
capital while respondents contributed industry or services, with the intention of sharing in the
profits of the business.
The CA disbelieved petitioners claim that Nieves had misappropriated a total of P200,000
which was supposed to be delivered to Gragera to cover unpaid commissions. It was his task to
collect the amounts due, while hers was merely to prepare the daily cash flow reports (Exhs. 15-
15DDDDDDDDDD) to keep track of his collections.
Hence, this Petition.[9]

Issue

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

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

1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase Received by on documents signed by
Nieves Reyes signified receipt of copies of the documents and not of the sums shown
thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit E was a forgery;
4. Finding that Exhibit H [did] not establish receipt by Nieves Reyes of P200,000.00 for
delivery to Gragera;
5. Affirming the dismissal of Santos [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents counterclaim;
7. Denying Santos motion for reconsideration dated September 11, 1998.
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties
relationship was one of partnership or of employer-employee; (2) whether Nieves
misappropriated the sums of money allegedly entrusted to her for delivery to Gragera as his
commissions; and (3) whether respondents were entitled to the partnership profits as determined
by the trial court.

The Courts Ruling

The Petition is partly meritorious.

First Issue:

Business Relationship

Petitioner maintains that he employed the services of respondent spouses in the money-
lending venture with Gragera, with Nieves as bookkeeper and Arsenio as credit
investigator. That Nieves introduced Gragera to Santos did not make her a partner. She was only
a witness to the Agreement between the two. Separate from the partnership between petitioner
and Gragera was that which existed among petitioner, Nieves and Zabat, a partnership that was
dissolved when Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioners contentions and ruled
that the business relationship was one of partnership. We quote from the CA Decision, as
follows:

[Respondents] were industrial partners of [petitioner]. x x x Nieves herself provided

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

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

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

We agree with both courts on this point. By the contract of partnership, two or more persons
bind themselves to contribute money, property or industry to a common fund, with the intention
of dividing the profits among themselves.[12] The Articles of Agreement stipulated that the
signatories shall share the profits of the business in a 70-15-15 manner, with petitioner getting
the lions share.[13] This stipulation clearly proved the establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued
lending money to the members of the Monte Maria Community Development Group, Inc., which
later on changed its business name to Private Association for Community Development, Inc.
(PACDI). Nieves was not merely petitioners employee. She discharged her bookkeeping duties
in accordance with paragraphs 2 and 3 of the Agreement, which states as follows:

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

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

The Second Party named in the Agreement was none other than Nieves Reyes. On the other
hand, Arsenios duties as credit investigator are subsumed under the phrase screening of
prospective borrowers. Because of this Agreement and the disbursement of monthly allowances
and profit shares or dividends (Exh. 6) to Arsenio, we uphold the factual finding of both courts
that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the
fact that it was formalized only after the Memorandum of Agreement had been signed by
petitioner and Gragera. Contrary to petitioners contention, there is no evidence to show that a
different business venture is referred to in this Agreement, which was executed on August 6,
1986, or about a month after the Memorandum had been signed by petitioner and Gragera on
July 14, 1986. The Agreement itself attests to this fact:

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

No Proof of Misappropriation of Grageras Unpaid Commission

Petitioner faults the CA finding that Nieves did not misappropriate money intended for
Grageras commission. According to him, Gragera remitted his daily collection to Nieves. This is
shown by Exhibit B (the Schedule of Daily Payments), which bears her signature under the
words received by. For the period July 1986 to March 1987, Gragera should have earned a total
commission of P4,282,429.30.However, only P3,068,133.20 was received by him. Thus,
petitioner infers that she misappropriated the difference of P1,214,296.10, which represented the
unpaid commissions. Exhibit H is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by
Nieves.[16]
On this point, the CA ruled that Exhibits B, F, E and H did not show that Nieves received
for delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was
supposed to come, and that such exhibits were insufficient proof that she had
embezzled P200,000. Said the CA:

The presentation of Exhibit D vaguely denominated as members ledger does not

clearly establish that Nieves received amounts from Monte Marias members. The
document does not clearly state what amounts the entries thereon represent. More
importantly, Nieves made the entries for the limited period of January 11, 1987 to
February 17, 1987 only while the rest were made by Grageras own staff.

Neither can we give probative value to Exhibit E which allegedly shows

acknowledgment of the remittance of commissions to Verona Gonzales. The
document is a private one and its due execution and authenticity have not been duly
proved as required in [S]ection 20, Rule 132 of the Rules of Court which states:

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

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

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

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

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

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

xxxxxxxxx

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

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

Contrary to [petitioners] assertion, Exhibit H does not unequivocally establish that x x

x Nieves received P200,000.00 as commission for Gragera. As correctly stated by the
court a quo, the document showed a liquidation of P240,000.00 and not P200,000.00.

Accordingly, we find Nieves testimony that after August 20, 1986, all collections
were made by Gragera believable and worthy of credence. Since Gragera guaranteed a
daily 100% payment of the loans, he took charge of the collections. As [petitioners]
representative, Nieves merely prepared the daily cash flow reports (Exh. 15 to 15
DDDDDDDDDD) to enable [petitioner] to keep track of Grageras operations.Gragera
on the other hand devised the schedule of daily payment (Exhs. B and F) to record the
projected gross daily collections.

As aptly observed by the court a quo:

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

These findings are in harmony with the trial courts ruling, which we quote below:
21. Exh. H does not prove that SANTOS gave to NIEVES and the latter
received P200,000.00 for delivery to GRAGERA. Exh. H shows under its sixth
column ADDITIONAL CASH that the additional cash was P240,000.00. If Exh. H
were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not
true. This is so because it is a liquidation of the sum of P240,000.00.

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

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

In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70
from the partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his
commissions before remitting his collections. Exhibits B and F are merely computations of what
Gragera should collect for the day; they do not show that Nieves received the amounts stated
therein. Neither is there sufficient proof that she misappropriated P200,000, because Exhibit H
does not indicate that such amount was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is
warranted. Well-entrenched is the basic rule that factual findings of the Court of Appeals
affirming those of the trial court are binding and conclusive on the Supreme Court.[19] Although
there are exceptions to this rule, petitioner has not satisfactorily shown that any of them is
applicable to this issue.

Third Issue:

Accounting of Partnership

Petitioner refuses any liability for respondents claims on the profits of the partnership. He
maintains that both business propositions were flops, as his investments were consumed and
eaten up by the commissions orchestrated to be due Gragera a situation that could not have been
rendered possible without complicity between Nieves and Gragera.
Respondent spouses, on the other hand, postulate that petitioner instituted the action below
to avoid payment of the demands of Nieves, because sometime in March 1987, she signified to
petitioner that it was about time to get her share of the profits which had already accumulated to
some P3 million. Respondents add that while the partnership has not declared dividends or
liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit
totaled P20,429,520 (Exhs. 10 et seq. and 15 et seq.). Based on that income, her 15 percent share
under the joint venture amounts to P3,064,428 (Exh. 10-I-3); and Arsenios, P2,026,000 minus
the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. 6, 6-A to 6-B).
The CA originally held that respondents counterclaim was premature, pending an
accounting of the partnership. However, in its assailed Resolution of August 17, 1998, it
turned volte face. Affirming the trial courts ruling on the counterclaim, it held as follows:

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

The trial courts ruling alluded to above is quoted below:

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

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

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

27.2 The P26,260.50 which ARSENIO received as part of his share in the profits
(Exhs. 6, 6-A and 6-B) should be deducted from his total share. [21]
 After a close examination of respondents exhibits, we find reason to disagree with the
CA. Exhibit 10-I[22] shows that the partnership earned a total income of P20,429,520 for the
period June 13, 1986 until April 19, 1987. This entry is derived from the sum of the amounts
under the following column headings: 2-Day Advance Collection, Service Fee, Notarial Fee,
Application Fee, Net Interest Income and Interest Income on Investment. Such entries represent
the collections of the money-lending business or its gross income.
The total income shown on Exhibit 10-I did not consider the expenses sustained by the
partnership. For instance, it did not factor in the gross loan releases representing the money
loaned to clients. Since the business is money-lending, such releases are comparable with the
inventory or supplies in other business enterprises.
Noticeably missing from the computation of the total income is the deduction of the weekly
allowance disbursed to respondents. Exhibits I et seq. and J et seq.[23] show that Arsenio received
allowances from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500; and
Nieves, from July 12, 1986 to March 27, 1987 in the total amount of P25,600. These allowances
are different from the profit already received by Arsenio. They represent expenses that should
have been deducted from the business profits. The point is that all expenses incurred by the
money-lending enterprise of the parties must first be deducted from the total income in order to
arrive at the net profit of the partnership. The share of each one of them should be based on this
net profit and not from the gross income or total income reflected in Exhibit 10-I, which the two
courts invariably referred to as cash flow sheets.
Similarly, Exhibits 15 et seq.,[24] which are the Daily Cashflow Reports, do not reflect the
business expenses incurred by the parties, because they show only the daily cash
collections. Contrary to the rulings of both the trial and the appellate courts, respondents exhibits
do not reflect the complete financial condition of the money-lending business. The lower courts
obviously labored over a mistaken notion that Exhibit 10-I-1 represented the net profits earned
by the partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares
in the profits but is not liable for the losses), the gross income from all the transactions carried on
by the firm must be added together, and from this sum must be subtracted the expenses or the
losses sustained in the business. Only in the difference representing the net profits does the
industrial partner share. But if, on the contrary, the losses exceed the income, the industrial
partner does not share in the losses.[25]
When the judgment of the CA is premised on a misapprehension of facts or a failure to
notice certain relevant facts that would otherwise justify a different conclusion, as in this
particular issue, a review of its factual findings may be conducted, as an exception to the general
rule applied to the first two issues.[26]
The trial court has the advantage of observing the witnesses while they are testifying, an
opportunity not available to appellate courts. Thus, its assessment of the credibility of witnesses
and their testimonies are accorded great weight, even finality, when supported by substantial
evidence; more so when such assessment is affirmed by the CA. But when the issue involves the
evaluation of exhibits or documents that are attached to the case records, as in the third issue, the
rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect,
examine and evaluate those records, independently of the lower courts. Hence, we deem the
award of the partnership share, as computed by the trial court and adopted by the CA, to be
incomplete and not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997
Decision is AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9,
1998 are REVERSED and SET ASIDE. No costs.
SO ORDERED.

[G.R. No. 127405. September 20, 2001]

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs. COURT OF

APPEALS and NENITA A. ANAY, respondents.

RESOLUTION
YNARES-SANTIAGO, J.:

The inherent powers of a Court to amend and control its processes and orders so as to make
them conformable to law and justice includes the right to reverse itself, especially when in its
honest opinion it has committed an error or mistake in judgment, and that to adhere to its
decision will cause injustice to a party litigant.[1]
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for
Reconsideration of our Decision dated October 4, 2000. They maintain that there was no
partnership bettween petitioner Belo, on the one hand, and respondent Nenita A. Anay, on the
other hand; and that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner
Belo acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed by
respondents own witness, Elizabeth Bantilan, during her cross-examination. Furthermore,
Bantilan testified that it was Peter Lo who was the companys financier. Thus:
Q You mentioned a while ago the name William Belo. Now, what is the role of William Belo with
Geminesse Enterprise?
A William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.
Q What do you mean by guarantor?
A He guarantees the stocks that she owes somebody who is Peter Lo and he acts as guarantor for
us. We can borrow money from him.
Q You mentioned a certain Peter Lo. Who is this Peter Lo?
A Peter Lo is based in Singapore.
Q What is the role of Peter Lo in the Geminesse Enterprise?
A He is the one fixing our orders that open the L/C.
 Q You mean Peter Lo is the financier?
A Yes, he is the financier.
Q And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I correct?
A Yes, sir.[2]
The foregoing was neither refuted nor contradicted by respondents evidence. It should be
recalled that the business relationship created between petitioner Tocao and respondent Anay
was an informal partnership, which was not even recorded with the Securities and Exchange
Commission. As such, it was understandable that Belo, who was after all petitioner Tocaos good
friend and confidante, would occasionally participate in the affairs of the business, although
never in a formal or official capacity.[3] Again, respondents witness, Elizabeth Bantilan,
confirmed that petitioner Belos presence in Geminesse Enterprises meetings was merely as
guarantor of the company and to help petitioner Tocao.[4]
Furthermore, no evidence was presented to show that petitioner Belo participated in the
profits of the business enterprise. Respondent herself professed lack of knowledge that petitioner
Belo received any share in the net income of the partnership.[5] On the other hand, petitioner
Tocao declared that petitioner Belo was not entitled to any share in the profits of Geminesse
Enterprise.[6] With no participation in the profits, petitioner Belo cannot be deemed a partner
since the essence of a partnership is that the partners share in the profits and losses.[7]
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise,
respondent had no cause of action against him and her complaint against him should accordingly
be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad
faith for failing to account for stocks of Geminesse Enterprise amounting to P208,250.00 and
that, accordingly, her claim for damages should be barred to that extent. We do not agree. Given
the circumstances surrounding private respondents sudden ouster from the partnership by
petitioner Tocao, her act of withholding whatever stocks were in her possession and control was
justified, if only to serve as security for her claims against the partnership. However, while we do
not agree that the same renders private respondent in bad faith and should bar her claim for
damages, we find that the said sum of P208,250.00 should be deducted from whatever amount is
finally adjudged in her favor on the basis of the formal account of the partnership affairs to be
submitted to the Regional Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is
PARTIALLY GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS
the complaint, docketed as Civil Case No. 88-509, as against petitioner William T. Belo
only. The sum of P208,250.00 shall be deducted from whatever amount petitioner Marjorie
Tocao shall be held liable to pay respondent after the formal accounting of the partnership
affairs.
SO ORDERED.

G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner,
vs.
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J.: ñé+.£ªwph! 1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which
ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.

As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£

xxx xxx xxx

... on February 22, 1971 Pecson and Moran entered into an agreement whereby both
would contribute P15,000 each for the purpose of printing 95,000 posters (featuring
the delegates to the 1971 Constitutional Convention), with Moran actually
supervising the work; that Pecson would receive a commission of P l,000 a month
starting on April 15, 1971 up to December 15, 1971; that on December 15, 1971, a
liquidation of the accounts in the distribution and printing of the 95,000 posters would
be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that
only a few posters were printed; that on or about May 28, 1971, Moran executed in
favor of Pecson a promissory note in the amount of P20,000 payable in two equal
installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on
or before June 30, 1971), the whole sum becoming due upon default in the payment
of the first installment on the date due, complete with the costs of collection.

Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery
of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged
partnership agreement, the return of his contribution of P10,000.00, payment of his share in the
profits that the partnership would have earned, and, payment of unpaid commission; (2) on the
alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages
and attorney's fees.

After the trial, the Court of First Instance held that: têñ.£îhqw â£

From the evidence presented it is clear in the mind of the court that by virtue of the
partnership agreement entered into by the parties-plaintiff and defendant the plaintiff
did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the
Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the
defendant was able to print 2,000 copies only authorized of which, however, were
sold at P5.00 each. Nothing more was done after this and it can be said that the
venture did not really get off the ground. On the other hand, the plaintiff failed to give
his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract
which right is implied in reciprocal obligations under Article 1385 of the Civil Code
whereunder 'rescission creates the obligation to return the things which were the
object of the contract ...

WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C.

Moran, Jr. to return to plaintiff Mariano E. Pecson the sum of P17,000.00, with
 interest at the legal rate from the filing of the complaint on June 19, 1972, and the
costs of the suit.

For insufficiency of evidence, the counterclaim is hereby dismissed.

From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise
rendered a decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a
new one is hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to
pay plaintiff- appellant Mariano E. Pecson:

(a) Forty-seven thousand five hundred (P47,500) (the amount that could have
accrued to Pecson under their agreement);

(b) Eight thousand (P8,000), (the commission for eight months);

(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's
Project);

(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the
time payment is made)

The petitioner contends that the respondent Court of Appeals decided questions of substance in a
way not in accord with law and with Supreme Court decisions when it committed the following errors:

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER

ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM.

II

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER

ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S
INVESTMENT.

III

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER

ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE.

IV

ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY
RECEIVED BY PECSON FROM MORAN.
V

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE

PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES.

The first question raised in this petition refers to the award of P47,500.00 as the private respondent's
share in the unrealized profits of the partnership. The petitioner contends that the award is highly
speculative. The petitioner maintains that the respondent court did not take into account the great
risks involved in the business undertaking.

We agree with the petitioner that the award of speculative damages has no basis in fact and law.

There is no dispute over the nature of the agreement between the petitioner and the private
respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by
the petitioner to enter into a partnership with him under the following terms and conditions: têñ.£îhqwâ£

1. That the partnership will print colored posters of the delegates to the Constitutional
Convention;

2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;

3. That they will print Ninety Five Thousand (95,000) copies of the said posters;

4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a

month starting April 15, 1971 up to December 15, 1971;

5. That upon the termination of the partnership on December 15, 1971, a liquidation
of the account pertaining to the distribution and printing of the said 95,000 posters
shall be made.

The petitioner on the other hand admitted in his answer the existence of the partnership.

The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786,
Civil Code) and for interests and damages from the time he should have complied with his obligation
(Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil
Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the
appellee because the appellant therein was remiss in his obligations as a partner and as prime
contractor of the construction projects in question. This case was decided on a particular set of facts.
We awarded compensatory damages in the Uy case because there was a finding that the
constructing business is a profitable one and that the UP construction company derived some profits
from its contractors in the construction of roads and bridges despite its deficient capital." Besides,
there was evidence to show that the partnership made some profits during the periods from July 2,
1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two
government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no
evidence whatsoever that the partnership between the petitioner and the private respondent would
have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no
basis for the award of speculative damages in favor of the private respondent.

Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much
more than what was expected of him. In this case, however, there was mutual breach. Private
respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only
P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further
failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only
2,000 copies.

Article 1797 of the Civil Code provides: têñ.£îhqwâ£

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

Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners that
they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100%
profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a
guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing
P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is
obvious. We have to take various factors into account. The failure of the Commission on Elections to
proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt that it would be a losing venture to go on
with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture
have to be considered.

It does not follow however that the private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The
latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each.
The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the
gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount
to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the
private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000
copies, the remaining P6,000.00 should therefore be returned to the private respondent.

Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's
supposed commission has no justifiable basis in law.

Again, we agree with the petitioner.

The partnership agreement stipulated that the petitioner would give the private respondent a monthly
commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the commission. The payment of the
commission could only have been predicated on relatively extravagant profits. The parties could not
have intended the giving of a commission inspite of loss or failure of the venture. Since the venture
was a failure, the private respondent is not entitled to the P8,000.00 commission.

Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in
holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of
investment in a magazine venture.

In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice
of the Veterans" magazine venture, the respondent court ruled that: têñ.£îhqw â£
 xxx xxx xxx

... Moran admittedly signed the promissory note of P20,000 in favor of Pecson.
Moran does not question the due execution of said note. Must Moran therefore pay
the amount of P20,000? The evidence indicates that the P20,000 was assigned by
Moran to cover the following: têñ.£îhqw â£

(a) P 7,000 — the amount of the PNB check given by

Pecson to Moran representing Pecson's investment in
Moran's other project (the publication and printing of
the 'Voice of the Veterans');

(b) P10,000 — to cover the return of Pecson's

contribution in the project of the Posters;

(c) P3,000 — representing Pecson's commission for

three months (April, May, June, 1971).

Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the
Veterans' project, for this project never left the ground) ...

As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be
reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the
record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332).
However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. v. CMS Stock
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify
the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd
and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both the appellant and the appellee.

In this case, there is misapprehension of facts. The evidence of the private respondent himself
shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private respondent expected to receive.

The records show the following exhibits- têñ.£îhqw â£

E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor
of defendant. Defendant admitted the authenticity of this check and of his receipt of
the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for
the purpose of showing plaintiff's capital investment in the printing of the "Voice of
the Veterans" for which he was promised a fixed profit of P8,000. This investment of
P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory
note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp.
20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment thereby proportionately reducing the
promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised
profit), defendant signed and executed the promissory note for P7,000 marked
Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000 partial payment
of the promised profit. The P3,000 balance of the promised profit was made part
 consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is,
therefore, being presented to show the consideration for the P20,000 promissory
note.

F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of
defendant. The authenticity of the check and his receipt of the proceeds thereof were
admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part
consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29,
1972), and it is being presented to show the consideration for the P20,000 note and
the existence and validity of the obligation.

xxx xxx xxx

L-Book entitled "Voice of the Veterans" which is being offered for the purpose of
showing the subject matter of the other partnership agreement and in which plaintiff
invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000
made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P).
As explained in connection with Exhibit E. the P3,000 balance of the promised profit
was later made part consideration of the P20,000 promissory note.

M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit
E. This document is being offered for the purpose of further showing the transaction
as explained in connection with Exhibits E and L.

N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his
capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P).
This is also defendant's Exhibit 4. This document is being offered in support of
plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction
mentioned therein.

xxx xxx xxx

P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being

offered for the purpose of showing the transaction as explained in connection with
Exhibits E, L, M, and N above.

Explaining the above-quoted exhibits, respondent Pecson testified that: têñ.£îhqw â£

Q During the pre-trial of this case, Mr. Pecson, the defendant

presented a promissory note in the amount of P14,000.00 which has
been marked as Exhibit 2. Do you know this promissory note?

A Yes, sir.

Q What is this promissory note, in connection with your transaction

with the defendant?

A This promissory note is for the printing of the "Voice of the

Veterans".

Q What is this "Voice of the Veterans", Mr. Pecson?

A It is a book. têñ.£îhqwâ£

(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the

promissory note, Exhibit 2, represent?

A It represents the P6,000.00 cash which I gave to Mr. Moran, as

evidenced by the Philippine National Bank Manager's check and the
P8,000.00 profit assured me by Mr. Moran which I will derive from the
printing of this "Voice of the Veterans" book.

Q You said that the P6,000.00 of this P14,000.00 is covered by, a

Manager's check. I show you Exhibit E, is this the Manager's check
that mentioned?

A Yes, sir.

Q What happened to this promissory note of P14,000.00 which you

said represented P6,000.00 of your investment and P8,000.00
promised profits?

A Latter, Mr. Moran returned to me P3,000.00 which represented

one-half (1/2) of the P6,000.00 capital I gave to him.

Q As a consequence of the return by Mr. Moran of one-half (1/2) of

the P6,000.00 capital you gave to him, what happened to the
promised profit of P8,000.00?

A It was reduced to one-half (1/2) which is P4,000.00.

Q Was there any document executed by Mr. Moran in connection

with the Balance of P3,000.00 of your capital investment and the
P4,000.00 promised profits?

A Yes, sir, he executed a promissory note.

Q I show you a promissory note in the amount of P7,000.00 dated

March 30, 1971 which for purposes of Identification I request the
same to be marked as Exhibit M. . .

Court têñ.£îhqw â£

Mark it as Exhibit M.

Q (continuing) is this the promissory note which you said was

executed by Mr. Moran in connection with your transaction regarding
the printing of the "Voice of the Veterans"?

A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).

 Q What happened to this promissory note executed by Mr. Moran,
Mr. Pecson?

A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by

the promissory note.

Q Was there a receipt issued by you covering this payment of

P4,000.00 in favor of Mr. Moran?

A Yes, sir.

(T.S.N., p. 23, Nov. 29, 1972).

Q You stated that Mr. Moran paid the amount of P4,000.00 on

account of the P7,000.00 covered by the promissory note, Exhibit M.
What does this P4,000.00 covered by Exhibit N represent?

A This P4,000.00 represents the P3,000.00 which he has returned of

my P6,000.00 capital investment and the P1,000.00 represents
partial payment of the P4,000.00 profit that was promised to me by
Mr. Moran.

Q And what happened to the balance of P3,000.00 under the

promissory note, Exhibit M?

A The balance of P3,000.00 and the rest of the profit was applied as
part of the consideration of the promissory note of P20,000.00.

(T.S.N., pp. 23-24, Nov. 29, 1972).

The respondent court erred when it concluded that the project never left the ground because the
project did take place. Only it failed. It was the private respondent himself who presented a copy of
the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error
to state that the project never took place and on this basis decree the return of the private
respondent's investment.

As already mentioned, there are risks in any business venture and the failure of the undertaking
cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best
business judgment, which seems to be true in this case. In view of the foregoing, there is no reason
to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no
valid basis for the grant of the counterclaim.

WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now
Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the
petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND
(P6,000.00) PESOS representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing
one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000)
copies of the posters, with interests at the legal rate on both amounts from the date the complaint
was filed until full payment is made.
SO ORDERED. 1äwphï1.ñët

G.R. No. 100257 June 8, 1992

ATTY. FELIPE C. NAVARRO, petitioner,

vs.
HON. COURT OF APPEALS, DIRECTOR OF LANDS, and MICHAEL AMOS, respondents.

PARAS, J.:

This is a petition for review on certiorari seeking the reversal of the decision * dated March 25, 1991 as well as the resolution dated March
28, 1991 of the respondent Court of Appeals in CA-G.R. CV No. 17476 entitled "Marcelo Yadno, Filmore Laoyan v. Director of Lands and
Michael Amos which affirmed the decision ** dated August 26, 1987 of the Regional Trial Court of Baguio and Benguet in joint trial of Land
Registration Case No. 135 entitled "Marcelo Yadno v. Director of Lands, et al." and Land Registration Case No. 283 entitled "Filmore Laoyan
v. Director of Land, et al." dismissing, among others, the application for registration of certain parcels of land of Yadno and Laoyan.

The facts of this case are as follows:

On the two separate dates of September 10, 1964 and September 17, 1968, applicants Marcelo Yadno (now deceased) and Filmore Laoyan,
respectively, sought to register certain parcels of land (Original Records. Vol. I, pp. 1-4; Vol. III, pp. 1-4). In LRC No. N-135, Marcelo Yadno
seeks to register a parcel of land situated at Barrio Pico. Municipality of La Trinidad, Province of Benguet, which is embraced in survey plan
PSU-204731 approved by the Director of Lands on May 19, 1964. In Land Registration Case No, N-283. Filmore Laoyan applied for the
registration of a parcel of land situated at Sitio Longlong, Barrio Pico. Municipality of La Trinidad. Province of Benguet, embraced in survey
plan PSU-225299 approved by the Director of Lands on July 27. 1966 (Rollo, p. 35).

The notice of initial hearing in LRC No. N-135 was published in the Official Gazette in its issues on April 5 and 12, 1965 (Orig. Records, Vol.
1, p. 55) and posted by Deputy Sheriff Emilio Dacanay in the Municipality of La Trinidad. Benguet, Mt. Province on 7th and 8th day of June,
1965 (Ibid., p. 63). In LRC Case No. 283, the notice of initial hearing was also published in the Official Gazette in its issues an November 25
and December 2, 1968 (Vol. III. p. 26) and posted by the same Deputy Sheriff on December 12, 1968 in the Municipality of La Trinidad,
Baguio City (Ibid., p. 20).

To the aforesaid applications. the Director of Lands and Director of Forestry seasonably filed an opposition on the ground that neither the
applicants nor their predecessor-in-interest possesses sufficient title to acquire ownership in fee simple of the parcels of land applied for: that
they have not been in open, continuous, exclusive and notorious possession and occupation of the lands in question for at least 30 years
immediately preceding the filing of the present application; that these parcels of land are portions of the Public domain belonging to the
Republic of the Philippines not subject to appropriation and that the parcels of land applied for are within the unclassified public forest land
(Orig. Records, Vol. I, pp. 78-79; Vol. III. pp. 40; 46-47). Aside from the opposition filed by the government, private persons also opposed
said applications. In LRC No. N-135, the Heirs of Gaogao Tinuan, Michael Amos, Isabelo Akiapat, Luiz Lorenzo and Corona Vda. de
Jimenez and children registered their opposition to Yadno's application. In LRC No. N-283, on the other hand, Corona Vda. de Jimenez and
Marcelo Yadno also opposed the application of Laoyan.

At the hearing on September 13, 1965 of LRC No. N-135, the Court issued an order of general default with the exception of the Director of
Lands, Reforestation Administration. Michael Amos, Julian Amos and Tiotioen (Orig. Records, Vol. 1. p. 75). An order of general default was
also issued by the same court on March 13, 1969 in LRC No. N-283 with the exception of the Director of Lands, Director of Forestry and the
Reforestation Administration: Michael Amos, Ezra Nabus and Corona Vda. de Jimenez (Ibid., Vol. III, p. 36).

On July 10, 1969, the lower court ordered that LRC No. N-283 and LRC No. N-135 be tried together. (Ibid., p. 76) Consequently, joint trial
then ensued.

In order to establish thirty (30) years of open and continuous possession over the subject property, applicant Filmore Laoyan, among other
things. presented the testimonies of Arsenio Espiritu, Herminio Arenas and the applicant himself Filmore Laoyan.

Filmore Laoyan claimed that the land applied for. consisting of Lots 1 and 3, containing an area of 4 hectares, was first in the possession of
his grandfather in 1918. The possession was then taken over by his father, who paid the land taxes (Exhs. J, J-1 to J-12) and used it for
grazing and planted it with coffee. Then in 1949, he took over from his father and cultivated it. He registered Lots 1 and 3 in his name for tax
purposes (Exhs. G and G-1) and paid the land taxes (Exhs. H and H-1). He fenced the Property and also planted it with coffee and camotes.
Exhibit G is Tax Declaration 7113, describing "lot 1" PSU 225299 as "uncult. agric. land". containing an area of 2.7685 hectares. Exhibit G-1
is Tax Declaration 7112. describing "lot 3" PSU 225299 as "uncult. agric land". containing an area of 2.9719 hectares. Exhibits H and H-1 are
official receipts No. 0919364-65 both dated September 30, 1968. evidencing the payment of the land tax for lots 1 and 2, for the years "1965,
1966, 1967, 1968". Also offered as documentary evidence are Exhibits I and I-1. official receipts evidencing payment of real property tax
covered by Tax Declaration No. 222: Exhibits I-2 to I-8 are also official receipts evidencing payment of real property tax covered by Tax
Declaration Nos. 222 and 500: Exhibits 1-9 to 1-12 are likewise official receipt evidencing, payment of real property tax covered by Tax
Declarations 222. 500 and 906; and Exhibit I-13. is an official receipt evidencing payment of property tax without specification as to which
property the tax was paid: Exhibit J is a Homestead Application. filed with the Bureau of Lands on April 24, 1961, signed by a certain "Belen
B. Espiritu" over a "five (5) hectares" tract of land " . . . covered by my Tree Farm Lease application dated April 10, 1987." There is a
certification in this exhibit tending to show that "I (Filmore Laoyan) granted permission to herein applicant . . . to occupy and improve the land
. . ., which . . . is a portion of the property I inherited from my ancestors." And. finally. there is Exhibit J-3. an official receipt evidencing
payment of "HA Fee." (Rollo, pp, 16-17)

Arsenio G. Espiritu in his testimony also stated that he knows the property being applied for registration because he used to occupy a portion
of the same; that on April 10, 1957. he applied for a tree farm lease with the Bureau of Forestry and a license to cut pine trees which was
granted; that on May 4, 1961, applicant Laoyan informed him that he was encroaching upon his property and likewise confirmed the
testimony of the applicant that there were coffee plants and camote patches in the area which were however destroyed during a big forest
fire in the area in 1967; that he did not pursue his homestead application when he was informed by the applicant about his application for
registration. but nevertheless, was employed by the applicant as the surveyor.

Herminio Arenas merely corroborated the fact that the applicant was in open. adverse, public and in continuous possession of the property
being applied for (Rollo, pp. 12-13).

In the case of Marcelo Yadno, he identified his signature in his application for registration (Exhs. A, A-1, A-2) and in his affidavit dated
January 21, 1958 (Exh. B). which states among other thongs, that he is the owner of "Pico, La Trinidad with an area of 0.0799 square
meters" (TSN, March 7, 1985, pp. 16-22). He also offered a technical description (Exh. B), surveyor's certificate (Exh. C). Treasurer's
Certificate dated September 8, 1964 (Exhs. D, D-1), Survey Plan. PSU 204731 (Exh. B) and Transmittal letter of October 20, 1964 (Exh. E)
(Rollo, p. 16).

On the other hand. oppositor Michael Amos presented the testimonies of Evaristo Tiotioen, Atty. Crisogono Bartolo. Jr., Engineer Edilberto
Quiaoit Matias Camolo, Generoso Javier, Luis Dawayan and the oppositor himself Michael Amos, to support his application for registration.

The testimonial and documentary evidence of Michael Amos showed that Amos, since 1937, by himself and thru his predecessors-in-interest
has been in open, continuous and notorious possession of the land applied for up to the present. The late Tulingan Pulot, and his widow,
Singao Pul-ot, possessed the land applied for, located at Bo. Pico, La Trinidad, Benguet, Mountain Province, since 1932. They declared the
land before the Second World War for tax purposes under Tax Declaration No. 209. Then, Singao Pul-ot, because of old age, relinquished
her rights thereto in favor of Evaristo Tiotioen. Evaristo declared that the spouses occupied the property as early as 1932. After the Second
World War, the property was occupied by Michael Amos, after acquiring the same from him (Tiotioen) who received as consideration for the
transfer "cash" "some seedlings", and also "helped me in my survey."

Evaristo Tiotioen, a former clerk of the Municipal Treasurer's Office of La Trinidad, Benguet testified that during the time the tax receipts were
issued to the Laoyan family, they were paying taxes but on another land and not the one applied for by them (Exhibits "I" to "I-13"), (t.s.n,.
Hearing of March 17, 1983, pp. 17 to 21).

Atty. Crisogono S. Bartolo, Jr. of the Bureau of Lands also stated in his testimony that he had made an inspection of the land in question that
the applications of Marcelo Yadno and Filmore Laoyan overlapped the area surveyed by Michael Amos. He also found out that Michael
Amos has made permanent improvements on the land while applicants Yadno and Laoyan did not introduce any (Exhibits "11" and "12");
(t.s.n., Hearing of February 2, 1584, pp. 6-9).

Engineer Edilberto Quiaoit, a surveyor of the Bureau of Lands testified about the possibility that Yadno and Laoyan only copied the survey
plan of Michael Amos (t.s.n., Hearing of August 18, 1983, pp. 4-7, 9-11). Another witness in the person of Matias Camolo also stated that he
was with the surveyor of Marcelo Yadno when he conducted the survey and they just relied on the existing corners contained in the survey
plan of Michael Amos and Isabelo Akiapat.

It was also noted by the Court during the ocular inspection conducted on the land in question that the applicants Yadno and Laoyan were not
able to show any improvements made by them, whereas, Amos was able to show houses, dirt roads, fences, plants and canals. The
existence of these improvements was also corroborated by Generoso Javier,. a forester of the Bureau of Forestry (Exhibits "1" "2" to "2-C").
Another witness who confirmed the introduction of the improvements on the land by Amos was Luis Dawayan (Rollo, pp. 13-14).

On August 26, 1987, the trial court rendered judgment, the dispositive portion of which reads:

WHEREFORE, IN VIEW OF THE FOREGOING, the Court renders judgment dismissing the applications of Marcelo
Yadno and Filmore Laoyan, and awarding the parcel of land under PSU-198528 to oppositor Michael Amos as the true
and lawful owner and ordering the registration of the same in his name, without prejudice to the deed of quitclaim
executed by Michael Amos in favor of Damian L. Jimenez, and ordering the former to segregate the portion subject
matter of said quitclaim.

SO ORDERED. (Orig. Records, Vol. III. pp. 501-504)

Appeal was interposed by Marcelo Yadno with the Court of Appeals but during the pendency of the appeal Marcelo Yadno died (Rollo, p.
22). The Office of the Solicitor General. on the other hand, was excused from filing the brief for the public oppositors (Ibid., p 15).

On March 25, 1991, the respondent Court of Appeals affirmed the disputed decision of the trial court (Ibid., pp. 10-19).
Subsequently, Atty. Jose Edward Navarro filed a pleading denominated as a notice of substitution and motion for reconsideration. It prayed.
among others, that Atty. Felipe Navarro, the counsel of the late Marcelo Yadno. take the place of Marcelo Yadno as a substitute (Ibid., pp.
20-21).

On May 28. 1991, the Court of Appeals denied said motion for reconsideration.

Hence. this petition.

Petitioner assigns the following errors, to wit:

1. Respondent Court of Appeals erred in holding that: "Applicant Marcelo Yadno did not present any competent
evidence either through his witnesses or documentary to support his application for registration."

2. Respondent Court of Appeals erred in admitting the opposition of respondent Michael Amos filed on July 11, 1966.

3. Respondent Court of Appeals erred in holding that: "Applicant Marcelo Yadno failed to establish that he was in actual
and physical possession of the land applied for by him for more than 30 years, and have introduced permanent
improvements thereon to be able to comply with the provisions of Act 496 and R.A. 1942 amending Sec. 48 (h) and (c)
of C.A. 141."

4. Respondent Court of Appeals erred in denying the application of Marcelo Yadno and awarding title to the land to
oppositor Michael Amos who was never an applicant to any of the lands in Baguio and Benguet and consequently
erred in not confirming title to applicant Marcelo Yadno, his kinsmen. And the tribe pursuant to law as embodied in the
contract of legal services in lieu for attorney's fees of Atty. Felipe C. Navarro as admitted by the respondent Court of
Appeals in its November 2. 1989 resolution.

The immediate issue in this case is whether or not Atty. Felipe C. Navarro, the petitioner, is the proper party to represent Marcelo Yadno the
deceased.

Petitioner. Atty. Felipe Navarro, as invoking the contract of legal services he entered with has former client Marcelo Yadno and others as his
authority to take the place of Yadno in case of the latter's death. Hence, when the supervening event of death came during the pendency of
Yadno's appeal to the Court of Appeals, petitioner Navarro simply filed a notice of substitution and a motion for reconsideration rolled into
one and upon receipt of an adverse decision, he is now before this Court pursuing the case in lieu of the late Marcelo Yadno.

Private respondent counters that the "contract of legal services" could not have transmitted any right to Atty. Navarro to succeed the late
Marcelo Yadno considering that the alleged document is neither a substitution of heirs nor transmittal of rights on the land in litigation in the
case at bar. He avers that the title of the contract itself states that it is a contract for legal services and its contents which states ". . . our
rights shall only be transmitted to our heirs . . ." meaning the legal heirs could not have possibly made Atty. Navarro as heir of Marcelo
Yadno.

The contention of the private respondent is well taken.

Section 17, Rule 3 of the Rules of Court sets the rule on substitution of parties in case of death of any of the parties. Under the Rule it is the
court that is called upon after notice of a party's death and the claim is not thereby extinguished to order upon proper notice the legal
representative of the deceased to appear within a period of thirty (30) days or such time as it may grant.

Section 16 of Rule 3 provides:

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such
death . . . and to give the name and residence of the executor, administrator, guardian or other legal representative of
the deceased.

In the case at bar. petitioner Navarro did not give any explanation why he failed to give the name and residence of the executor,
administrator or guardian of the deceased, if there was any, and in their absence at least the name and residence of the heirs of Yadno who
shall take the place of the deceased (Evangelista v. Soriano, No. L-4625, 92 Phil. 190 [1952]).

Clearly, priority is given to the legal representative of the deceased, that is, the executor or administrator of his estate. It is only in cases of
unreasonable delay in the appointment of an executor or administrator, or in cases where the heirs resort to an extrajudicial settlement of the
estate. that the court may adopt the alternative of allowing the heirs of the deceased to he substituted for the deceased (Liwas v. Court of
Appeals, G.R. No. L-45809. December 12, 1986, 146 SCRA 171).

Petitioner Navarro took the short cut route of making himself the legal representative of Yadno on the basis of the contract of legal services.
This mode resorted to by Navarro is clearly without any legal basis. Even at this point in time, the record is bereft of any evidence that would
grant herein petitioner Navarro any authority to represent the late Marcelo Yadno. In the same vein, there is also no showing of any evidence
granted to herein counsel Jose Edward Navarro to file and prosecute the case and any other incidental cases for and in behalf of Yadno's
heirs.

On the basis of the foregoing alone the petition should be dismissed.

And even assuming that Atty. Navarro may represent Yadno, the petition itself is bereft of merit.

It must be emphasized that it is the burden of the applicant to prove its positive averments, not for the Government or the private oppositors
to establish a negative proposition insofar as the applicant's specific lots are concerned (Gutierrez Hermanos v. C.A., G.R. Nos. 54472-77,
September 28, 1989, 178 SCRA 37). Applying this rule to the instant case, the conclusions reached by the court a quo and respondent Court
of Appeals that the petitioner through his predecessors-in-interest has not been in open, continuous, exclusive and notorious possession of
the subject land under a bona fide claim of ownership are binding on this Court. Indeed the jurisdiction of this Court in cases brought to it
from the Court of Appeals is limited to reviewing and revising errors of law imputed to the latter, its findings of facts being conclusive
generally. (Andres V. Manufacturer Hanover and Trust Corp., G.R. No. 82670, September 15, 1989, 117 SCRA 618; Lauron v. CA G.R. No.
62021, April 6, 1990, 184 SCRA 215).

Prescinding therefrom, this Court finds no reason to disturb the conclusion of the Court of Appeals when it ruled that:

The exhibits presented by the late Marcelo Yadno, to wit: application for registration (Exh. A), technical description
(Exh. B), surveyor's certificate (Exh. C), Treasurer's Certificate (Exh. D, Survey Plan. PSU 204731 (Exh. E) and
Transmittal Letter dated October 20. 1964 (Exh F) and their submarkings are part of the case records and of
themselves do not prove that he had been in open, continuous and notorious possession of the property for thirty (30)
years. He did not even offer a tracing cloth plan, the primary purpose of which is to fix the exact location and definitive
Identity of the land, as shown in the survey plan and technical description. He has not offered evidence that he has
declared the land for tax purposes in his name. and/or that he had paid the land taxes thereon.

This Court has ruled that although tax receipts are not incontrovertible evidence of ownership, they constitute at least proof that the holder
had a claim of title over the property (Director of Lands v. Reyes, G.R. No. L-27594, November 28, 1975, 68 SCRA 177; Director of Lands v.
Santiago, G.R. No. L-41278, April 15, 1988, 160 SCRA 186).

In the case of Filmore Laoyan, the findings of the respondent appellate court is also noteworthy:

The testimony of Laoyan that he inherited Lots 1 and 3 from his father, who, in turn, also inherited it from his father is
not borne out in Exhibits I to I-12. The land described are covered by Tax Declaration Nos. 222, 500 and 906, while
Lots 1 and 3 are covered by Exhs. G and G-1, "New" Tax Declaration Nos. 7112 and 7113, which begun only in 1965,
or after these cases were filed in court. Tiotioen, a clerk of the Municipal Treasurer's Office of La Trinidad, Benguet,
testified that Exhibits I to I-13 were in payment of another land which is different from and not Lots 1 and 3. Like Yadno,
Laoyan did not also present a tracing cloth plan of the property sought to be registered, which would pinpoint the exact
location and definitive identity of the land as shown in the survey plan and technical description. Indeed, Felicitacion
Roxas, of the Commission on the Settlement of Land Problems. Department of Justice, stationed in Baguio City, and
formerly Legal Officer IV of the Bureau of Lands, Baguio City, testified that she, together with the applicants and the
District Land officer. Bureau of Lands, conducted several ocular inspections of the lands applied for, and found that
both appellants have not introduced permanent improvements on the lands in question.

That applicant Laoyan has paid the corresponding taxes starting in the year 1965 is of no moment because the important thing to consider is
the compliance of his predecessors-in-interest with the 30-year period which he failed to substantiate.

Inevitably, the applicants (Yadno and Laoyan) have failed to submit convincing proof of their predecessors-in-interest actual, peaceful and
adverse possession in the concept of owner of the lots in question during the period required by law. This is especially true in view of the
basic presumption that lands of whatever classification belong to the State and evidence of a land grant must be "well-nigh incontrovertible"
(Santiago v. Delos Santos, G.R. No. L-20241, November 22, 1974, 61 SCRA 146; Director of Lands v. Reyes, G.R. No. L-27594, supra).

On the other hand, this convincing proof of compliance with the 30-year period has been met by herein private respondent Michael Amos.
The decision of the Court of Appeals on this point is hereby quoted to wit:

The evidence presented by oppositor-appellee Michael Amos consisting of his testimony and that of Evaristo Tiotioen,
Atty. Crisogono Bartolo, Jr. and Engr. Edilberto Quiaoit, as well as Exhibits 1 to 16 established that Michael Amos,
since 1937, by himself and thru his predecessor-in-interest have been in open, continuous and notorious possession of
the land applied for up to the present.

The late Tulinga Pul-ot, and his widow Signao Pul-ot, possessed the land applied for located at Bo. Pico, La Trinidad,
Benguet, Mountain Province, since 1932. They declared the land before the Second World War for tax purposes under
Tax Declaration No. 209. Then, Signao Pul-ot, because of old age, relinquished her rights thereto in favor of Evaristo
Tiotioen. Evaristo declared that the spouses occupied the property as early as 1932. After the Second World War, the
property was occupied by Michael Amos after acquiring the same form him (Tiotioen) who received as consideration for
the transfer "cash", "some seedlings", and also "helped me in my survey." That Amos has made permanent
improvements on the land, is borne out by testimony of Atty. Crisogono S. Bartolo, Jr., of the Bureau of Lands,
 corroborated by Generoso Javier, a forester of the Bureau of Forestry (Exhs. 1, 2, 2-A, 2-B and 2-C), and by Luis
Dawayan. (Rollo, p. 18)

The foregoing being conclusions of fact of the Court of Appeals, this Court finds them to be final and binding (Lauron v. CA, supra). It is not
the function of this Court to re-examine all over again the oral and documentary evidence submitted by the parties unless the findings of facts
of the Court of Appeals is not supported by the evidence on record or the judgment is based on misapprehension of facts (Remalante v.
Tibe, et al., G.R. No. L-59514, February 25, 1988, 158 SCRA 138) which is not so in the case at bar.

PREMISES CONSIDERED, the decision appealed from is AFFIRMED.

SO ORDERED.

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.

OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

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

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

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

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

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

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

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

Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeñas says:

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

sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,

en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

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

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*

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

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

Co-owership distinguished from partnership.—We find that the case at bar is

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

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who

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

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

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

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

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

SO ORDERED.

G.R. Nos. L-24020-21 July 29, 1968

FLORENCIO REYES and ANGEL REYES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX APPEALS, respondents.

Jose W. Diokno and Domingo Sandoval for petitioners.

Office of the Solicitor General for respondents.

FERNANDO, J.:

Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment
subsequently reduced to P37,528.00. This assessment sought to be reconsidered unsuccessfully
was the subject of an appeal to respondent Court of Tax Appeals. Thereafter, another assessment
was made against petitioners, this time for back income taxes plus surcharge and compromise in the
total sum of P25,973.75, covering the years 1955 and 1956. There being a failure on their part to
have such assessments reconsidered, the matter was likewise taken to the respondent Court of Tax
Appeals. The two cases1 involving as they did identical issues and ultimately traceable to facts
similar in character were heard jointly with only one decision being rendered.

In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954
was reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due
"from the partnership formed" by petitioners.2 The reduction was due to the elimination of surcharge,
the failure to file the income tax return being accepted as due to petitioners honest belief that no
such liability was incurred as well as the compromise penalties for such failure to file.3 A
reconsideration of the aforesaid decision was sought and denied by respondent Court of Tax
Appeals. Hence this petition for review.

The facts as found by respondent Court of Tax Appeals, which being supported by substantial
evidence, must be respected4 follow: "On October 31, 1950, petitioners, father and son, purchased a
lot and building, known as the Gibbs Building, situated at 671 Dasmariñas Street, Manila, for
P835,000.00, of which they paid the sum of P375,000.00, leaving a balance of P460,000.00,
representing the mortgage obligation of the vendors with the China Banking Corporation, which
mortgage obligations were assumed by the vendees. The initial payment of P375,000.00 was shared
equally by petitioners. At the time of the purchase, the building was leased to various tenants, whose
rights under the lease contracts with the original owners, the purchasers, petitioners herein, agreed
to respect. The administration of the building was entrusted to an administrator who collected the
rents; kept its books and records and rendered statements of accounts to the owners; negotiated
leases; made necessary repairs and disbursed payments, whenever necessary, after approval by
the owners; and performed such other functions necessary for the conservation and preservation of
the building. Petitioners divided equally the income of operation and maintenance. The gross income
from rentals of the building amounted to about P90,000.00 annually."5

From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of
the National Internal Revenue Code, the first of which imposes an income tax on corporations
"organized in, or existing under the laws of the Philippines, no matter how created or organized but
not including duly registered general co-partnerships (companias colectivas), ...,"6 a term, which
according to the second provision cited, includes partnerships "no matter how created or organized,
...,"7 and applying the leading case of Evangelista v. Collector of Internal Revenue,8 sustained the
action of respondent Commissioner of Internal Revenue, but reduced the tax liability of petitioners,
as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar. Consequently they allege that the reliance by respondent Court of Tax Appeals was
1äw phï1.ñët

unwarranted and the decision should be set aside. If their interpretation of the authoritative doctrine
therein set forth commands assent, then clearly what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter. A perusal of the Evangelista decision is
therefore unavoidable.

As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether
petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act
No. 466, otherwise known as the National Internal Revenue Code, ..."9 After referring to another
section of the National Internal Revenue Code, which explicitly provides that the term corporation
"includes partnerships" and then to Article 1767 of the Civil Code of the Philippines, defining what a
contract of partnership is, the opinion goes on to state that "the essential elements of a partnership
are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and
(b) intent to divide the profits among the contracting parties. The first element is undoubtedly present
in the case at bar, for, admittedly, petitioners have agreed to and did, contribute money and property
to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide the same
among themselves, ..."10

In support of the above conclusion, reference was made to the following circumstances, namely, the
common fund being created purposely not something already found in existence, the investment of
the same not merely in one transaction but in a series of transactions; the lots thus acquired not
being devoted to residential purposes or to other personal uses of petitioners in that case; such
properties having been under the management of one person with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and contracts and to endorse notes and checks;
the above conditions having existed for more than 10 years since the acquisition of the above
properties; and no testimony having been introduced as to the purpose "in creating the set up
already adverted to, or on the causes for its continued existence."11 The conclusion that emerged
had all the imprint of inevitability. Thus: "Although, taken singly, they might not suffice to establish
the intent necessary to constitute a partnership, the collective effect of these circumstances is such
as to leave no room for doubt on the existence of said intent in petitioners herein."12

It may be said that there could be a differentiation made between the circumstances above detailed
and those existing in the present case. It does not suffice though to preclude the applicability of the
Evangelista decision. Petitioners could harp on these being only one transaction. They could stress
that an affidavit of one of them found in the Bureau of Internal Revenue records would indicate that
their intention was to house in the building acquired by them the respective enterprises, coupled with
a plan of effecting a division in 10 years. It is a little surprising then that while the purchase was
made on October 31, 1950 and their brief as petitioners filed on October 20, 1965, almost 15 years
later, there was no allegation that such division as between them was in fact made. Moreover, the
facts as found and as submitted in the brief made clear that the building in question continued to be
leased by other parties with petitioners dividing "equally the income ... after deducting the expenses
of operation and maintenance ..."13 Differences of such slight significance do not call for a different
ruling.

It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of
an authoritative decision; it recognized its binding character. There is clearly no merit to the second
error assigned by petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a partnership subject to income tax as a corporation under
the National Internal Revenue Code is likewise untenable. In their discussion in their brief of this
alleged error, stress is laid on their being co-owners and not partners. Such an allegation was
likewise made in the Evangelista case.

This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was
correctly rejected by the Court of Tax Appeals."14 Then came the explanation why: "To begin with,
the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the
entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24
of said Code exempts from the aforementioned tax "duly registered general partnerships", which
constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.
Again, pursuant to said section 84(b), the term "corporation" includes, among others, "joint accounts,
(cuentas en participacion)" and "associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. In fact, as
above stated, "duly registered general copartnerships" — which are possessed of the
aforementioned personality - have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation"."15 The opinion went on to summarize the matter aptly: "For
purposes of the tax on corporations, our National Internal Revenue Code, include these
partnerships — with the exception only of duly registered general co-partnerships within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations."16

In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the
matter incorrectly. There is no warrant for the assertion that it failed to apply the settled law to
uncontroverted facts. Its decision cannot be successfully assailed. Moreover, an observation made
in Alhambra Cigar & Cigarette Manufacturing Co. v. Commissioner of Internal Revenue,17 is well-
worth recalling. Thus: "Nor as a matter of principle is it advisable for this Court to set aside the
conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of
its functions, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless, as did not happen here, there has been
an abuse or improvident exercise of its authority."

WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the
sums of P37,128.00 as income tax due from the partnership formed by herein petitioners for the
years 1951 to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days from the date this
decision becomes final, plus the corresponding surcharge and interest in case of delinquency," is
affirmed. With costs against petitioners.

G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and
Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real
estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance
with the respondent's assessment for the same in the total amount of P6,878.34, which is
hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs
against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq.
m. including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive rents;
to issue receipts therefor; in default of such payment, to bring suits against the defaulting
tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit
all notes and checks for them;

7. That after having bought the above-mentioned real properties the petitioners had the
same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
 9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and P6,157.09

compromise

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

 TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in question, with costs against
the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.

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

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations or
insurance companies, but does not include duly registered general copartnerships.
(compañias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

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

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

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

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

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

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

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.

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

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no opinion — tends
to increase the similarity between the nature of their venture and that corporations, and is, therefore,
an additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is
created by an agreement, a declaration of trust, a statute, or otherwise. It includes a
voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name known) which
is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63;
emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized,

whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with the following schedule: . . .
 The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how
created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.

[G.R. No. 1256. October 23, 1903. ]

VICENTE W. PASTOR, Plaintiff-Appellant, v. MANUEL GASPAR, ET AL., Defendants-Appellees.

Alfredo Chicote for Appellant.

F . Ortigas and Hartigan, Marple & Solignac for Appellees.

SYLLABUS

1. PARTNERSHIP; LOAN. — An agreement under which one of the parties advances to the other a sum of
money to be repaid within a certain time, secured by a pledge of vessels owned and operated by the
borrower, with the stipulation that the liability for the return of the money is not personal to the borrower
but limited to the security given by the pledge of the vessels, and a further stipulation that the profits and
losses arising from the operation of the vessels are to be shared by all the parties to the agreement,
constitutes a contract of loan and does not produce a partnership relation between the parties to the
agreement.

2. OBLIGATION WITH A TERM; FOR WHOSE BENEFIT. — Article 1127 of the Civil Code establishes a
presumption, not a rule, that the period allowed for the performance of the obligation is for the benefit of
both parties, but when the evidence discloses that the period was established for the benefit of the debtor
he need not wait for the expiration of the term, but may discharge the debt at will.

3. EVIDENCE; PAROL TESTIMONY TO VARY WRITTEN INSTRUMENT — Where it appears that the agreement
between contracting parties has been reduced to writing in an instrument free from all intrinsic ambiguity, it
is not error to exclude parol testimony as to the contemporaneous opinion of the parties with respect to the
legal effect of the writing, or intended to prove other terms not included therein.

4. ID.; HEARSAY. — Statements contained in a letter are not admissible as evidence, unless they are
competent as part of the res gestae or as admissions, or under some other general rule of evidence
constituting an exception to the exclusion of hearsay.
 5. ID.; INCOMPETENCY. — It is not error-to exclude parol testimony of the opinion of the witness as to the
construction of the pleadings or documents already in evidence.

6. ID.; CUMULATIVE EVIDENCE. — It is not error to refuse to allow a party to show by a second witness
what he has already been allowed to show without objection by a former witness.

7. ID.; IRRELEVANCY. — A question tending to elicit from a witness, not testifying as an expert, a statement
as to what course he would have pursued under certain circumstances presented hypothetically to him is
properly excluded as irrelevant.

8. PRACTICE; FINDINGS. — The trial court should make findings upon every issue of fact presented by the
pleadings, but a failure to do so does not necessarily require a reversal if the facts found are sufficient to
support the judgment.

Per COOPER, J., concurring: chanrob1e s virtual 1aw lib rary

9. BILL OF EXCEPTIONS; MOTION FOB A NEW TRIAL; PREVIEW OF EVIDENCE. — In the absence of a motion
for a new trial in conformity with the provisions of section 497, paragraph 3, of the Code of Civil Procedure,
and an exception to the denial of the same by the trial court, the Supreme Court can not review the
evidence, and it is useless to include it in the bill of exceptions.

10. PARTNERSHIP, WHAT CONSTITUTES. — An agreement under which the parties undertake that money
advanced by the one shall be used by the other in the operation of certain vessels and that they are to be
entitled "in like proportion to the profits . . . realized from the exploitation of said vessels," and that losses
and other expenses incident to the operation of the vessels are to be shared by each party "in proportion to
his investment" constitutes a partnership as between the parties, notwithstanding the fact that the vessels
were pledged as security for the money advanced, and which was designated as a loan.

DECISION

WILLARD, J. :

There was no motion for a new trial in this case.

From the facts admitted by the pleadings and those found by the court, it appears that in November, 1900,
there existed in Manila a partnership composed of Macario Nicasio and the defendant Gaspar under the
name "Nicasio & Gaspar." It owned the steam launch Luisa, and its only business was that relating to this
launch.

Desiring to increase this business, on the 24th day of -November, 1900, a contract was made between the
firm of Nicasio & Gaspar on the one side, and on the other side the plaintiff, the defendants Eguia, Iboleon,
and Monserrat, and one Hermoso. This contract recites that Nicasio & Gaspar, by a writing of the same date,
have enlarged the business of their partnership; have bought six lorchas, which are named, and that,
needing money with which to pay for the lorchas and the necessary repairs thereon, the parties of the
second part have furnished them 28,000 pesos as a loan, the amount furnished by each being named. The
firm of Nicasio & Gaspar then acknowledges the receipt of these amounts. The fifth clause of the contract is
as follows:
jgc:chan roble s.com.p h

"Fifth. The partnership of Nicasio & Gaspar undertakes to return to the said Eguia, Monserrat, Iboleon,
Pastor, and Hermoso the said total sum of 28,000 pesos within the period of ten years from the date of this
instrument, and to guarantee the fulfillment of said payment they pledge to said parties the said lorchas
Pepay, Lola, Consuelo, India, Niceta, and Castellana, in the sums respectively which said parties have
furnished for the purchase and repair of said vessels, as before stated, ceding and assigning to said parties,
in like proportions, the profits and gains which may be realized from the exploitation of said vessels; the
said vessels to be the property of said Eguia, Monserrat, Iboleon, Pastor, and Hermoso, and of the parties of
the first part, proportionate with the sums which the said parties have invested in said vessels; the
management of said vessels during the time in which said debt remains unpaid to remain with the
partnership of Nicasio & Gaspar, with the understanding that whatever may be the result of the business of
said vessels, neither the said partnership nor the parties of the first part shall become responsible for the
payment of said debt, except in so far as the said vessels shall respond therefor, and in no event shall they
respond therefor with any other property; injuries to and all losses of said lorchas to be shared by all the
parties hereto, as well as crews’ expenses and other outlays necessary for the preservation of said vessels,
in the proportion which corresponds to each party hereto according, to his investment; the parties of the
first part binding themselves not to encumber or pledge said vessels while said debt remains unsatisfied to
the parties of the second part."cralaw virt ua1aw li bra ry

It was provided in the seventh clause that the launch Luisa was not included in this contract.

It is alleged in the complaint, and not denied by the answer, that the contract thus entered into on
November 24, 1900, was in July, 1901, dissolved and terminated, and the lorchas sold by mutual consent.

The cause of action set forth in the complaint is that there was actually a partnership between the parties to
the contract of November 24, and that the consent of the agent of the plaintiff to its dissolution and the sale
of the lorchas was obtained by fraud of the defendants. The prayer of the complaint is that this dissolution of
the partnership and the sale of the lorchas be declared null, and that the plaintiff be restored to his rights
therein, and if this can not be done that he recover of the defendants damages in the sum of 42,500 pesos.

1. The plaintiff, who was defeated in the court below and who has appealed, claims that the contract of
November 24, 1900, created a partnership between the parties to it.

While all of the court are of the opinion that the judgment should be affirmed, we are not agreed as to the
proper construction to be put upon this document. The opinion of the writer is that held by the court below,
viz, that upon the face of the contract the plaintiff was a creditor and not a partner. The contract is not
clearly drawn, but the following seem to indicate that the transaction was rather a loan than a contract of
partnership: (1) In the beginning it is twice stated positively that Nicasio & Gaspar are the only partners and
the only persons interested in the partnership of Nicasio & Gaspar. These statements the plaintiff assented
to when he signed the document. (2) In the second paragraph, and again in the fourth, it is stated, also,
distinctly and positively, that the money has been furnished as a loan. (3) In the fifth paragraph,
hereinbefore quoted, Nicasio & Gaspar bind themselves to repay the amount, something that they would not
be bound to do were the contract one of partnership. (4) In the same paragraph Nicasio & Gaspar create in
favor of the plaintiff and his associates a right of pledge over the lorchas, a thing inconsistent with the idea
of partnership. This paragraph should not be construed as transferring the ownership of the lorchas
themselves to the second parties. Although the words "las cuales" would grammatically refer to the
preceding word "embarcaciones," yet such a construction would be inconsistent with what has been before
stated in the same paragraph as to the pledge. (5) By the same paragraph Nicasio & Gaspar are to be
considered consignees only as long as they do not pay the debt. This indicates that they had a right to pay
it. (6) By the last clause of this paragraph they bind themselves not to alienate the lorchas until they had
paid the debt, indicating clearly that by paying the debt they could do so, a thing inconsistent with the idea
of a partnership. (7) By the seventh paragraph of this contract it is stated that the launch Luisa is not
included in the contract.

The claim of the plaintiff that by this document he became a partner in the firm of Nicasio & Gaspar can not
in any event be sustained. That firm was engaged in business with the launch Luisa. With this the plaintiff
and his associates had nothing to do.

It appears, also, from this contract that when Nicasio & Gaspar enlarged their business they could devote
themselves not only to the launch Luisa and the six lorchas in question but also to other craft. With such
other business the plaintiff would have nothing to do. The most that he can claim is not that he was a
partner in the firm of Nicasio & Gaspar, but that he and his associates, in connection with that firm, had
formed another partnership to manage these lorchas. The fact that the plaintiff was to share in the profits
and losses of the business and that Nicasio & Gaspar should answer for the payment of the debt only with
the lorchas, and not with their own property, indicates that the plaintiff was a partner. But these provisions
are not conclusive. This is a suit between the parties to the contract. The rights of third persons are not
concerned. Whether the plaintiff would be a partner as to such third persons is not to be determined. As
between themselves the parties could make any contract that pleased them, provided that it was not illegal
(art. 1255, Civil Code). They could, in making this contract, if they chose, take some provision from the law
of partnership and others from the law of loans. Loans with a right to receive a part of the profits in lieu of
interest are not uncommon. As between the parties, such a contract is not one of partnership.
The question on this branch of the case is whether the contract on its face creates a partnership or not. The
court finds that the plaintiff believed that he could not be a partner because he was a Spanish subject. There
can therefore be no doubt as to his intention in signing this contract. He did not believe that on its face it
made him a partner. If he had so believed, he would not have signed it. If he was willing to sign a contract
which on its face made him a partner, he and his associates would have joined with Nicasio & Gaspar in the
amended articles of partnership which they signed on this very day, and this second document would have
been entirely unnecessary. The inference from these facts is so strong that it can not be overcome by the
fact that in subsequent dealings the parties called themselves partners. The plaintiff undoubtedly wished to
secure, as far as he could, the rights of a partner without making himself one.

The contract, in the opinion of the writer, was that Nicasio & Gaspar should take the money of the other
parties to the contract, manage the business as they saw fit, pay the investors their share of the profits as
long as the Business continued, and not to sell the lorchas until they had been so repaid. Anything more
than this would have made the investors partners according to the instrument itself, the one thing which
they were seeking to avoid. It may be added that, in a similar contract which the plaintiff made with Nicasio
in April, 1900, he in 1902 considered himself a creditor and made a demand on Nicasio for the payment of
the debt.

It is claimed by the plaintiff that even if the transaction was a loan, it could not be terminated without his
consent until the expiration of the period of ten years. Article 1127 of the Civil Code does not say that the
period allowed for the performance of an obligation is for the benefit of the creditor as well as the debtor. It
says that it shall be so presumed unless the contrary appeals. In this case the contrary does appear in the
two clauses hereinbefore cited under (5) and (6). Upon paying the loan at the end of ten years, they would
have had the undoubted right to mortgage or sell the lorchas, and then by the mere act of payment would
have ceased to be consignees thereof. No declaration of that kind in the contract was at all necessary. These
rights would result as a matter of law The insertion of these clauses can only be explained on the theory that
the period was for the benefit of the debtors alone, and that they would be at liberty at any time, even
before the expiration of ten years, to sell the property provided they repaid the loan.

2. It is further claimed by the plaintiff that, even if the contract itself did not make them partners, there was
a verbal agreement that they should be partners. The court refused to allow him to answer certain questions
relating to this matter. His exception is stated as follows in the bill of exceptions: "The plaintiff in his first
testimony attempted to set forth the verbal agreements by virtue of which he was in reality a partner in the
firm of Nicasio & Gaspar. The court ruled this evidence out for the reason that the name of the plaintiff does
not appear in the articles of partnership of Nicasio & Gaspar. The plaintiff excepted-to the ruling." cralaw vi rtua 1aw lib rary

There are several reasons why the court was correct in its ruling.

(1) Although the offer was to show that he was a partner in the firm of Nicasio & Gaspar — something not
claimed in the complaint — it is probable that the purpose was to show a contract of partnership between
Nicasio and Gaspar on the one hand and the plaintiff and his associates on the other. The statements at the
trial indicate this. The bill of exceptions does not show what verbal agreements the plaintiff would have
testified to if he had been allowed to do so. But in his brief in this court he says: jgc:chanrob les.com. ph

"(b) That the firm was organized verbally on said date for a period of ten years; (c) that the rights and
obligations of the partners were set forth in document No. 945 of the said date, although it may be stated in
said document that the contract in reference was a contract of pledge." cralaw vi rtua1aw l ibra ry

If, as thus appears, all the rights and obligations which were verbally agreed to were afterwards embodied
in a written instrument which was offered in evidence, the plaintiff has not been prejudiced by not being
allowed to testify that these agreements were first made verbally. All of them having been included in the
written document, he could testify to nothing more. If all the agreements as to the rights and obligations of
the parties were embodied in the written contract, the additional verbal agreement that they should be
partners would be but their opinion as to the nature of the said written contract and would add nothing to
it.

(2) The parties made a verbal agreement which they afterwards reduced to writing. Section 285 of the Code
of Civil Procedure prohibits any parol evidence as to other terms not contained in the writing. Under this
section, even if there had been agreements other than those contained in the instrument and inconsistent
therewith, the plaintiff could not testify to them. The plaintiff claims that this section does not prohibit
evidence as to the surrounding circumstances. This is true, and the plaintiff was at the trial allowed to testify
that he bought the lorchas himself in Iloilo; that he was paid $500 for so doing; that $20,000 was borrowed
from the Banco Espanol-Filipino for the purpose of paying for them; and as to other details. There was no
intrinsic ambiguity in the contract which required explanation. When a written contract is vague and
indefinite, it can be explained by showing what the surrounding circumstances were (sec. 289), but not by
showing by parol what the prior agreement in fact was.

3. The court refused to receive in evidence a letter written by Hermoso to the plaintiff, and the latter
excepted. There was no error in this ruling. The plaintiff could not prove the facts stated in this letter in this
way. He should have called Hermoso or other persons as witnesses to do so, and given the defendants the
right to cross-examine them. (Sec. 381, Code of Civil Procedure.)

4. The following exception appears in the record: jgc:c han robles. com.ph

"During the examination of Lino Eguia, he was asked by the plaintiff to state, either by means of the
document or the answer to the complaint, who was intrusted with the purchase of the lorchas. The court
ruled out the question and the plaintiff excepted." cralaw vi rt ua1aw lib ra ry

This ruling was correct for two reasons: (1) The documents themselves showed the facts. (2) The plaintiff
had already testified without objection that he bought the lorchas in Iloilo by direction of Nicasio & Gaspar.
The refusal to allow this witness to testify, on a matter as to which there was no dispute, could not have
prejudiced the plaintiff.

5. Nicasio was asked if the capital in Nicasio & Gaspar which stood in his name was all his own. This
question was ruled out and the plaintiff excepted. If the question referred to the original contract of
partnership, and the plaintiff desired to show that he had contributed money thereto, he could not have
been prejudiced by the ruling because the witness had already testified that it was contributed in fact by the
plaintiff. This fact also appeared during the trial from the document No. 325 of April 26, 1900, between the
witness and the plaintiff. If he wished to show that a part of the capital standing in the name of Nicasio, in
the amended articles of partnership, was furnished by the plaintiff and others, he was not prejudiced by the
ruling, for this all appeared from the contract of November 24, 1900, so many times referred to. If he
desired to show that Nicasio had borrowed a part o~ his capital from some person not connected with this
suit, the question was immaterial and was properly excluded. In such a case it would be no concern of the
plaintiff whose money this was.

6. The following exception appears in the record: jgc:c han robles. com.ph

"During the examination of the witness Joaquin Salvador, he was asked on cross-examination by plaintiff to
state if he, as attorney in fact of the partner Hermoso in the meetings of the partners preliminary to the sale
of the lorchas, would have consented to the dissolution of the partnership had he known that the
partnership would be immediately reorganized with the same lorchas and the same partners with the
exception of Nicasio, Hermoso, and Pastor. The court ruled the question out and the plaintiff excepted." cra law virt ua1aw lib ra ry

This ruling was correct. What Salvador would have done was of no importance. The plaintiff’s agent was
allowed to testify that he would not have given the plaintiff’s consent if he had known that the defendants
intended to continue the business.

7. The assignment of error as to the bills of Warner, Barnes and Co. is not sustained by the bill of
exceptions. It is stated therein (fol. 25) that these documents were admitted.

8. The question as to whether the power of attorney given by the plaintiff to Nicasio was sufficient to
authorize the latter to consent for the plaintiff to the cancellation of the contract was not raised by any
exception at the trial and is not the subject of any assignment of error in this court.

9. The claim of the plaintiff, as has been said before, was (1) that he was a partner, and (2) that the
cancellation of the agreement of partnership had been procured by fraud. The judge made a finding upon
the first claim, but not upon the second; although the finding that he made-was sufficient to determine the
case before him, yet he should have found upon all the issues presented by the pleadings. But this omission
does not require a reversal of the judgment. If the court below was right in the construction of the
document, it of course does not, for the decision would then contain facts sufficient to justify the judgment.
But even if it were not, the same thing would result. It is a fact clearly admitted by the pleadings, and
therefore not required to be stated in the decision, that this contract of November 24, 1900, was canceled
and the arrangement, whatever it was, dissolved. To this dissolution the plaintiff through his agent
consented. This is alleged in the complaint, although it is there stated that such consent was obtained by
fraud. The facts admitted in the pleadings and stated in the decision showing, therefore, that the plaintiff
had surrendered his rights, and there being no finding that such surrender was obtained by fraud, the
defendants are, on such admissions and findings, entitled to judgment. We reach this conclusion the more
willingly because a majority of the court is of the opinion that the evidence in the case was not sufficient to
show any fraud on the part of the defendants.

The judgment is affirmed, with the costs of this instance against the Appellant. Judgment will be entered
accordingly twenty days after the filing of this decision.

G.R. No. L-2484 April 11, 1906

JOHN FORTIS,Plaintiff-Appellee, vs. GUTIERREZ

HERMANOS,Defendants-Appellants.

Hartigan, Rohde and Gutierrez, for appellants.

W. A. Kincaid, for appellee.

WILLARD, J.:

Plaintiff, an employee of defendants during the years 1900, 1901,

and 1902, brought this action to recover a balance due him as
salary for the year 1902. He alleged that he was entitled, as salary,
to 5 per cent of the net profits of the business of the defendants for
said year. The complaint also contained a cause of action for the
sum of 600 pesos, money expended by plaintiff for the defendants
during the year 1903. The court below, in its judgment, found that
the contract had been made as claimed by the plaintiff; that 5 per
cent of the net profits of the business for the year 1902 amounted
to 26,378.68 pesos, Mexican currency; that the plaintiff had
received on account of such salary 12,811.75 pesos, Mexican
currency, and ordered judgment against the defendants for the sum
13,566.93 pesos, Mexican currency, with interest thereon from
December 31, 1904. The court also ordered judgment against the
defendants for the 600 pesos mentioned in the complaint, and
intereat thereon. The total judgment rendered against the
defendants in favor of the plaintiff, reduced to Philippine currency,
amounted to P13,025.40. The defendants moved for a new trial,
which was denied, and they have brought the case here by bill of
exceptions. chanroblesvi rtual awlib rary cha nrob les vi rtua l law lib rary

(1) The evidence is sufifcient to support the finding of the court

below to the effect that the plaintiff worked for the defendants
during the year 1902 under a contract by which he was to receive
as compensation 5 per cent of the net profits of the business. The
contract was made on the part of the defendants by Miguel Alonzo
Gutierrez. By the provisions of the articles of partnership he was
made one of the managers of the company, with full power to
transact all of the business thereof. As such manager he had
authority to make a contract of employment with the plaintiff. chanroble svi rtualawl ib rary chan rob les vi rtual law lib rary

(2) Before answering in the court below, the defendants presented a

motion that the complaint be made more definite and certain. This
motion was denied. To the order denying it the defendants
excepted, and they have assigned as error such ruling of the court
below. There is nothing in the record to show that the defendants
were in any way prejudiced by this ruling of the court below. If it
were error it was error without prejudice, and not ground for
reversal. (Sec. 503, Code of Civil Procedure.) chanroble s virtual law l ibra ry

(3) It is claimed by the appellants that the contract alleged in the

complaint made the plaintiff a copartner of the defendants in the
business which they were carrying on. This contention can not bo
sustained. It was a mere contract of employnent. The plaintiff had
no voice nor vote in the management of the affairs of the company.
The fact that the compensation received by him was to be
determined with reference to the profits made by the defendants in
their business did not in any sense make by a partner therein. The
articles of partnership between the defendants provided that the
profits should be divided among the partners named in a certain
proportion. The contract made between the plaintiff and the then
manager of the defendant partnership did not in any way vary or
modify this provision of the articles of partnership. The profits of the
business could not be determined until all of the expenses had been
paid. A part of the expenses to be paid for the year 1902 was the
salary of the plaintiff. That salary had to be deducted before the net
profits of the business, which were to be divided among the
partners, could be ascertained. It was undoubtedly necessary in
order to determine what the salary of the plaintiff was, to determine
what the profits of the business were, after paying all of the
expenses except his, but that determination was not the final
determination of the net profits of the business. It was made for the
purpose of fixing the basis upon which his compensation should be
determined. chanroblesv irt ualawli bra ry chan robles v irt ual law l ibra ry

(4) It was no necessary that the contract between the plaintiff and
the defendants should be made in writing. (Thunga Chui vs. Que
Bentec, 1 1 Off. Gaz., 818, October 8, 1903.) chanrobles vi rtua l law lib rary

(5) It appearred that Miguel Alonzo Gutierrez, with whom the

plaintiff had made the contract, had died prior to the trial of the
action, and the defendants claim that by reasons of the provisions
of section 383, paragraph 7, of the Code of Civil Procedure, plaintiff
could not be a witness at the trial. That paragraph provides that
parties to an action against an executor or aministrator upon a
claim or demand against the estate of a deceased person can not
testify as to any matter of fact occurring before the death of such
deceased person. This action was not brought against the
administrator of Miguel Alonzo, nor was it brought upon a claim
against his estate. It was brought against a partnership which was
in existence at the time of the trial of the action, and which was
juridical person. The fact that Miguel Alonzo had been a partner in
this company, and that his interest therein might be affected by the
result of this suit, is not sufficient to bring the case within the
provisions of the section above cited. chanroblesv irt ualawli bra ry chan robles v irt ual law l ibra ry

(6) The plaintiff was allowed to testify against the objection and
exception of the defendants, that he had been paid as salary for the
year 1900 a part of the profits of the business. This evidence was
competent for the purpose of corroborating the testimony of the
plaintiff as to the existence of the contract set out in the
complaint.chanroble svirtualawl ibra ry chan roble s virtual law l ibra ry

(7) The plaintiff was allowed to testify as to the contents of a certain

letter written by Miguel Glutierrez, one of the partners in the
defendant company, to Miguel Alonzo Gutierrez, another partner,
which letter was read to plaintiff by Miguel Alonzo. It is not
necessary to inquire whether the court committed an error in
admitting this evidence. The case already made by the plaintiff was
in itself sufficient to prove the contract without reference to this
letter. The error, if any there were, was not prejudicial, and is not
ground for revesal. (Sec. 503, Code of Civil Procedure.) chan robles vi rt ual law li bra ry
(8) For the purpose of proving what the profits of the defendants
were for the year 1902, the plaintiff presented in evidence the
ledger of defendants, which contained an entry made on the 31st of
December, 1902, as follows:

Perdidas y Ganancias ...................................... a Varios Ps.

527,573.66 Utilidades liquidas obtenidas durante el ano y que
abonamos conforme a la proporcion que hemos establecido segun el
convenio de sociedad.

The defendant presented as a witness on, the subject of profits

Miguel Gutierrez, one of the defendants, who testiffied, among other
things, that there were no profits during the year 1902, but, on the
contrary, that the company suffered considerable loss during that
year. We do not think the evidence of this witnees sufficiently
definite and certain to overcome the positive evidence furnished by
the books of the defendants themselves. chanroblesv irt ualawli bra rycha nrob les vi rtual law lib rary

(9) In reference to the cause of action relating to the 600 pesos, it

appears that the plaintiff left the employ of the defendants on the
19th of Macrh, 1903; that at their request he went to Hongkong,
and was there for about two months looking after the business of
the defendants in the matter of the repair of a certain steamship.
The appellants in their brief say that the plaintiff is entitled to no
compensation for his services thus rendered, because by the
provisions of article 1711 of the Civil Code, in the absence of an
agreement to the contrary, the contract of agency is supposed to be
gratuitous. That article i not applicable to this case, because the
amount of 600 pesos not claimed as compensation for services but
as a reimbursment for money expended by the plaintiff in the
business of the defendants. The article of the code that is applicable
is article 1728. chanroblesvi rt ualawlib ra ry chan ro bles virtual law lib rary

The judgment of the court below is affirmed, with the costs, of this
instance against the appellants. After the expiration of twenty days
from the date of this decision let final judgment be entered herein,
and ten days thereafter let the case be remanded to the lower court
for execution. So ordered. chanrob

G.R. No. L-35840 March 31, 1933

FRANCISCO BASTIDA, plaintiff-appellee,
vs.
MENZI & Co., INC., J.M. MENZI and P.C. SCHLOBOHM, defendants.
MENZI & CO., appellant.

Romualdez Brothers and Harvey and O'Brien for appellant.

Jose M. Casal, Alberto Barretto and Gibbs and McDonough for appellee.

VICKERS, J.:

This is an appeal by Menzi & Co., Inc., one of the defendants, from a decision of the Court of First
Instance of Manila. The case was tried on the amended complaint dated May 26, 1928 and
defendants' amended answer thereto of September 1, 1928. For the sake of clearness, we shall
incorporate herein the principal allegations of the parties.

FIRST CAUSE OF ACTION

Plaintiff alleged:

That the defendant J.M. Menzi, together with his wife and daughter, owns ninety-nine per cent (99%)
of the capital stock of the defendant Menzi & Co., Inc., that the plaintiff has been informed and
therefore believes that the defendant J.M. Menzi, his wife and daughter, together with the defendant
P.C. Schlobohm and one Juan Seiboth, constitute the board of directors of the defendant, Menzi &
Co., Inc.;

II

That on April 27, 1922, the defendant Menzi & Co., Inc. through its president and general manager,
J.M. Menzi, under the authority of the board of directors, entered into a contract with the plaintiff to
engage in the business of exploiting prepared fertilizers, as evidenced by the contract marked
Exhibit A, attached to the original complaint as a part thereof, and likewise made a part of the
amended complaint, as if it were here copied verbatim;

III

That in pursuance of said contract, plaintiff and defendant Menzi & Co., Inc., began to manufacture
prepared fertilizers, the former superintending the work of actual preparation, and the latter, through
defendants J.M. Menzi and P. C. Schlobohm, managing the business and opening an account
entitled "FERTILIZERS" on the books of the defendant Menzi & Co., Inc., where all the accounts of
the partnership business were supposed to be kept; the plaintiff had no participation in the making of
these entries, which were wholly in the defendants' charge, under whose orders every entry was
made;

IV

That according to paragraph 7 of the contract Exhibit A, the defendant Menzi & Co., Inc., was
obliged to render annual balance sheets to be plaintiff upon the 30th day of June of each year; that
the plaintiff had no intervention in the preparation of these yearly balances, nor was he permitted to
have any access to the books of account; and when the balance sheets were shown him, he,
believing in good faith that they contained the true statement of the partnership business, and relying
upon the good faith of the defendants, Menzi & Co., Inc., J.M. Menzi, and P.C. Schlobohm, accepted
and signed them, the last balance sheet having been rendered in the year 1926;

That by reason of the foregoing facts and especially those set forth in the preceding paragraph, the
plaintiff was kept in ignorance of the defendants' acts relating to the management of the partnership
funds, and the keeping of accounts, until he was informed and so believes and alleges, that the
defendants had conspired to conceal from him the true status of the business, and to his damage
and prejudice made false entries in the books of account and in the yearly balance sheets, the exact
nature and amount of which it is impossible to ascertain, even after the examination of the books of
the business, due to the defendants' refusal to furnish all the books and data required for the
purpose, and the constant obstacles they have placed in the way of the examination of the books of
account and vouchers;

VI

That when the plaintiff received the information mentioned in the preceding paragraph, he
demanded that the defendants permit him to examine the books and vouchers of the business,
which were in their possession, in order to ascertain the truth of the alleged false entries in the books
and balance sheets submitted for his approval, but the defendants refused, and did not consent to
the examination until after the original complaint was filed in this case; but up to this time they have
refused to furnish all the books, data, and vouchers necessary for a complete and accurate
examination of all the partnership's accounts; and

VII

That as a result of the partial examination of the books of account of the business, the plaintiff has,
through his accountants, discovered that the defendants, conspiring and confederating together,
presented to the plaintiff during the period covered by the partnership contract false and incorrect
accounts,

(a) For having included therein undue interest;

(b) For having entered, as a charge to fertilizers, salaries and wages which should have
been paid and were in fact paid by the defendant Menzi & Co., Inc.;

(c) For having collected from the partnership the income tax which should have been paid for
its own account by Menzi & Co., Inc.;

(d) For having collected, to the damage and prejudice of the plaintiff, commissions on the
purchase of materials for the manufacture of fertilizers;

(e) For having appropriated, to the damage and prejudice of the plaintiff, the profits obtained
from the sale of fertilizers belonging to the partnership and bought with its own funds; and

(f) For having appropriated to themselves all rebates for freight insurance, taxes, etc., upon
materials for fertilizer bought abroad, no entries of said rebates having been made on the
books to the credit of the partnership.
Upon the strength of the facts set out in this first cause of action, the plaintiff prays the court:

1. To prohibit the defendants, each and every one of them, from destroying and concealing
the books and papers of the partnership constituted between the defendant Menzi & Co.,
Inc., and the plaintiff;

2. To summon each and every defendant to appear and give a true account of all facts
relating to the partnership between the plaintiff and the defendant Menzi & Co., Inc., and of
each and every act and transaction connected with the business of said partnership from the
beginning to April 27, 1927, and a true statement of all merchandise of whatever description,
purchased for said partnership, and of all the expenditures and sale of every kind, together
with the true amount thereof, besides the sums received by the partnership from every
source together with their exact nature, and a true and complete account of the vouchers for
all sums paid by the partnership, and of the salaries paid to its employees;

3. To declare null and void the yearly balances submitted by the defendants to the plaintiff
from 1922 to 1926, both inclusive;

4. To order the defendants to give a true statement of all receipts and disbursements of the
partnership during the period of its existence, besides granting the plaintiff any other remedy
that the court may deem just and equitable.

EXHIBIT A

CONTRATO

que se celebra entre los Sres. Menzi y Compañia, de Manila, como Primera Parte, y D.
Francisco Bastada, tambien de Manila, como Segunda Parte, bajo las siguientes

CONDICIONES

1.ª El objeto de este contrato es la explotacion del negocio de Abonos o Fertilizantes

Preparados, para diversas aplicaciones agricolas;

2.ª La duracion de este contrato sera de cinco años, a contrar desde la fecha de su firma;

3.ª La Primera Parte se compromete a facilitar la ayuda financiera necesaria para el

negocio;

4.ª La Segunda Parte se compromete a poner su entero tiempo y toda su experiencia a la

disposicion del negocio;

5.ª La Segunda Parte no podra, directa o indirectamente, dedicarse por si sola ni en

sociedad con otras personas, o de manera alguna que no sea con la Primera Parte, al
negecio de Abonos, simples o preparados, o de materia alguna que se aplique comunmente
a la fertilizacion de suelos y plantas, durante la vigencia de este contrato, a menos que
obtenga autorizacion expresa de la Primera Parte para ello;

6.ª La Primera Parte no podra dedicarse, por si sola ni en sociedad o combinacion con otras
personas o entidades, ni de otro modo que en sociedad con la Segunda Parte, al negocio de
Abonos o Fertilizantes preparados, ya sean ellos importados, ya preparados en las Islas
 Fllipinas; tampoco podra dedicarse a la venta o negocio de materias o productos que tengan
aplicacion como fertilizantes, o que se usen en la composicion de fertilizantes o abonos, si
ellos son productos de suelo de la manufactura filipinos, pudiendo sin embargo vender o
negociar en materim fertilizantes simples importados de los Estados Unidos o del Extranjero;

7.ª La Primera Parte se obliga a ceder y a hacer efectivo a la Segunda Parte el 35 por ciento
(treinta y cinco por ciento) de las utilidades netas del negocio de abonos, liquidables el 30 de
junio de cada año;

8.ª La Primera Parte facilitara la Segunda, mensualmente, la cantidad de P300 (trescientos

pesos), a cuenta de su parte de beneficios.

9.ª Durante el año 1923 la Parte concedera a la Segunda permiso para que este se ausente
de Filipinas por un periodo de tiempo que no exceda de un año, sin menoscabo para
derechos de la Segunda Parte con arreglo a este contrato.

En testimonio de lo cual firmamos el presente en la Ciudad de Manila, I. F., a veintisiete de

abril de 1922.

MENZI & CO., INC.

Por (Fdo.) J. MENZI
General Manager
Primera Parte

(Fdo.) F. BASTIDA
Segunda Parte

MENZI & CO., INC.

(Fdo.) MAX KAEGI
Acting Secretary

Defendants denied all the allegations of the amended complaint, except the formal allegations as to
the parties, and as a special defense to the first cause of action alleged:

1. That the defendant corporation, Menzi & Co., Inc., has been engaged in the general
merchandise business in the Philippine Islands since its organization in October, 1921,
including the importation and sale of all kinds of goods, wares, and merchandise, and
especially simple fertilizer and fertilizer ingredients, and as a part of that business, it has
been engaged since its organization in the manufacture and sale of prepared fertilizers for
agricultural purposes, and has used for that purpose trade-marks belonging to it;

2. That on or about November, 1921, the defendant, Menzi & CO., Inc., made and entered
into an employment agreement with the plaintiff, who represented that he had had much
experience in the mixing of fertilizers, to superintend the mixing of the ingredients in the
manufacture of prepared fertilizers in its fertilizer department and to obtain orders for such
prepared fertilizers subject to its approval, for a compensation of 50 per cent of the net profits
which it might derive from the sale of the fertilizers prepared by him, and that said Francisco
Bastida worked under said agreement until April 27, 1922, and received the compensation
agreed upon for his services; that on the said 27th of April, 1922, the said Menzi & Co., Inc.,
and the said Francisco Bastida made and entered into the written agreement, which is
marked Exhibit A, and made a part of the amended complaint in this case, whereby they
mutually agreed that the employment of the said Francisco Bastida by the said Menzi & Co.,
Inc., in the capacity stated, should be for a definite period of five years from that date and
under the other terms and conditions stated therein, but with the understanding and
agreement that the said Francisco Bastida should receive as compensation for his said
services only 35 per cent of the net profits derived from the sale of the fertilizers prepared by
him during the period of the contract instead of 50 per cent of such profits, as provided in his
former agreement; that the said Francisco Bastida was found to be incompetent to do
anything in relation to its said fertilizer business with the exception of over-seeing the mixing
of the ingredients in the manufacture of the same, and on or about the month of December,
1922, the defendant, Menzi & Inc., in order to make said business successful, was obliged to
and actually did assume the full management and direction of said business;

3. That the accounts of the business of the said fertilizer department of Menzi & Co., Inc.,
were duly kept in the regular books of its general business, in the ordinary course thereof, up
to June 30, 1923, and that after that time and during the remainder of the period of said
agreement, for the purpose of convenience in determining the amount of compensation due
to the plaintiff under his agreement, separate books of account for its said fertilizer business
were duly, kept in the name of 'Menzi & Co., Inc., Fertilizer', and used exclusively for that
purpose and it was mutually agreed between the said Francisco Bastida and the said Menzi
& Co., Inc., that the yearly balances for the determination of the net profits of said business
due to the said plaintiff as compensation for his services under said agreement would be
made as of December 31st, instead of June 30th, of each year, during the period of said
agreement; that the accounts of the business of its said fertilizer department, as recorded in
its said books, and the vouchers and records supporting the same, for each year of said
business have been duly audited by Messrs. White, Page & Co., certified public accountants,
of Manila, who, shortly after the close of business at the end of each year up to and including
the year 1926, have prepared therefrom a manufacturing and profit and loss account and
balance sheet, showing the status of said business and the share of the net profits pertaining
to the plaintiff as his compensation under said agreement; that after the said manufacturing
and profit and the loss account and balance sheet for each year of the business of its said
fertilizer department up to and including the year 1926, had been prepared by the said
auditors and certified by them, they were shown to and examined by the plaintiff, and duly
accepted, and approved by him, with full knowledge of their contents, and as evidence of
such approval, he signed his name on each of them, as shown on the copies of said
manufacturing and profit and loss account and balance sheet for each year up to and
including the year 1926, which are attached to the record of this case, and which are hereby
referred to and made a part of this amended answer, and in accordance therewith, the said
plaintiff has actually received the portion of the net profits of its said business for those years
pertaining to him for his services under said agreement; that at no time during the course of
said fertilizer business and the liquidation thereof has the plaintiff been in any way denied
access to the books and records pertaining thereto, but on the contrary, said books and
records have been subject to his inspection and examination at any time during business
hours, and even since the commencement of this action, the plaintiff and his accountants,
Messrs. Haskins & Sells, of Manila, have been going over and examining said books and
records for months and the defendant, Menzi & Co. Inc., through its officers, have turned
over to said plaintiff and his accountant the books and records of said business and even
furnished them suitable accommodations in its own office to examine the same;

4. That prior to the termination of the said agreement, Exhibit A, the defendant, Menzi & Co.,
Inc., duly notified the plaintiff that it would not under any conditions renew his said agreement
or continue his said employment with it after its expiration, and after the termination of said
agreement of April 27, 1927, the said Menzi & Co., Inc., had the certified public accountants,
White, Page & Co., audit the accounts of the business of its said fertilizer department for the
four months of 1927 covered by plaintiff's agreement and prepare a manufacturing and profit
 and loss account and balance sheet of said business showing the status of said business at
the termination of said agreement, a copy of which was shown to and explained to the
plaintiff; that at that time there were accounts receivable to be collected for business covered
by said agreement of over P100,000, and there was guano, ashes, fine tobacco and other
fertilizer ingredients on hand of over P75,000, which had to be disposed of by Menzi & Co.,
Inc., or valued by the parties, before the net profits of said business for the period of the
agreement could be determined; that Menzi & Co., Inc., offered to take the face value of said
accounts and the cost value of the other properties for the purpose of determining the profits
of said business for that period, and to pay to the plaintiff at that time his proportion of such
profits on that basis, which the plaintiff refused to accept, and being disgruntled because the
said Menzi & Co., Inc., would not continue him in its service, the said plaintiff commenced
this action, including therein not only Menzi & Co. Inc., but also it managers J.M. Menzi and
P.C. Schlobohm, wherein he knowingly make various false and malicious allegations against
the defendants; that since that time the said Menzi & Co., Inc., has been collecting the
accounts receivable and disposing of the stocks on hand, and there is still on hand old stock
of approximately P25,000, which it has been unable to dispose of up to this time; that as
soon as possible a final liquidation and amounting of the net profits of the business covered
by said agreement for the last four months thereof will be made and the share thereof
appertaining to the plaintiff will be paid to him; that the plaintiff has been informed from time
to time as to the status of the disposition of such properties, and he and his auditors have
fully examined the books and records of said business in relation thereto.

SECOND CAUSE OF ACTION

As a second cause of action plaintiff alleged:

I. That the plaintiff hereby reproduces paragraphs I, II, III, IV, and V of the first cause of
action.

II. That the examination made by the plaintiff's auditors of some of the books of the
partnership that were furnished by the defendants disclosed the fact that said defendants
had charged to "purchases" of the business, undue interest, the amount of which the plaintiff
is unable to determine, as he has never had at his disposal the books and vouchers
necessary for that purpose, and especially, owning to the fact that the partnership constituted
between the plaintiff and the defendant Menzi & Co., Inc., never kept its own cash book, but
that its funds were maliciously included in the private funds of the defendant entity, neither
was there a separate BANK ACCOUNT of the partnership, such account being included in
the defendant's bank account.

III. That from the examination of the partnership books as aforesaid, the plaintiff estimates
that the partnership between himself and the defendant Menzi & Co., Inc., has been
defrauded by the defendants by way of interest in an amount of approximately P184,432.51,
of which 35 per cent, or P64,551.38, belongs to the plaintiff exclusively.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants jointly and
severally to pay him the sum of P64,551.38, or any amount which may finally appear to be due and
owing from the defendants to the plaintiff upon this ground, with legal interest from the filing of the
original complaint until payment.

Defendants alleged:
 1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

2. That under the contract of employment, Exhibit A, of the amended complaint, the
defendant, Menzi & Co., Inc., only undertook and agreed to facilitate financial aid in carrying
on the said fertilizer business, as it had been doing before the plaintiff was employed under
the said agreement; that the said defendant, Menzi & Co., Inc., in the course of the said
business of its fertilizer department, opened letters of credit through the banks of Manila,
accepted and paid drafts drawn upon it under said letters of credit, and obtained loans and
advances of moneys for the purchase of materials to be used in mixing and manufacturing its
fertilizers and in paying the expenses of said business; that such drafts and loans naturally
provided for interest at the banking rate from the dates thereof until paid, as is the case in all,
such business enterprises, and that such payments of interest as were actually made on
such drafts, loans and advances during the period of the said employment agreement
constituted legitimate expenses of said business under said agreement.

THIRD CAUSE OF ACTION

As third cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That under the terms of the contract Exhibit A, neither the defendants J.M. Menzi and P.C.
Schlobohm, nor the defendant Menzi & Co., Inc., had a right to collect for itself or themselves
any amount whatsoever by way of salary for services rendered to the partnership between
the plaintiff and the defendant, inasmuch as such services were compensated with the 65%
of the net profits of the business constituting their share.

III. That the plaintiff has, on his on account and with his own money, paid all the employees
he has placed in the service of the partnership, having expended for their account, during the
period of the contract, over P88,000, without ever having made any claim upon the
defendants for this sum because it was included in the compensation of 35 per cent which he
was to receive in accordance with the contract Exhibit A.

IV. That the defendants J.M. Menzi and P.C. Schlobohm, not satisfied with collecting undue
and excessive salaries for themselves, have made the partnership, or the fertilizer business,
pay the salaries of a number of the employees of the defendant Menzi & Co., Inc.

V. That under this item of undue salaries the defendants have appropriated P43,920 of the
partnership funds, of which 35 per cent, or P15,372 belongs exclusively to the plaintiff.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants to pay jointly and
severally to the plaintiff the amount of P15,372, with legal interest from the date of the filing of the
original complaint until the date of payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4 of the
special defense the first cause of action in this amended answer;
 2. That the defendant, Menzi & Co., Inc., through its manager, exclusively managed and
conducted its said fertilizer business, in which the plaintiff was to receive 35 percent of the
net profits as compensation for this services, as hereinbefore alleged, from on or about
January 1, 1923, when its other departments had special experienced Europeans in charge
thereof, who received not only salaries but also a percentage of the net profits of such
departments; that its said fertilizer business, after its manager took charge of it, became very
successful, and owing to the large volume of business transacted, said business required
great deal of time and attention, and actually consumed at least one-half of the time of the
manager and certain employees of Menzi & Co., Inc., in carrying it on; that the said Menzi &
Co., furnished office space, stationery and other incidentals, for said business, and had its
employees perform the duties of cashiers, accountants, clerks, messengers, etc., for the
same, and for that reason the said Menzi & Co., Inc., charged each year, from and after
1922, as expenses of said business, which pertained to the fertilizer department, as certain
amount as salaries and wages to cover the proportional part of the overhead expenses of
Menzi & Co., Inc.; that the same method is followed in each of the several departments of
the business of Menzi & Co., Inc., that each and every year from and after 1922, a just
proportion of said overhead expenses were charged to said fertilizer departments and
entered on the books thereof, with the knowledge and consent of the plaintiff, and included in
the auditors' reports, which were examined, accepted and approved by him, and he is now
estopped from saying that such expenses were not legitimate and just expenses of said
business.

FOURTH CAUSE OF ACTION

As fourth cause of action, the plaintiff alleged:

I. That he hereby reproduces paragraph I, II, III, IV, and V of the first cause of action.

II. That the defendant Menzi & Co., Inc., through the defendant J. M. Menzi and P. C.
Schlobohm, has paid, with the funds of the partnership between the defendant entity and the
plaintiff, the income tax due from said defendant entity for the fertilizer business, thereby
defrauding the partnership in the amount of P10,361.72 of which 35 per cent belongs
exclusively to the plaintiff, amounting to P3,626.60.

III. That the plaintiff has, during the period of the contract, paid with his own money the
income tax corresponding to his share which consists in 35 per cent of the profits of the
fertilizer business, expending about P5,000 without ever having made any claim for
reimbursement against the partnership, inasmuch as it has always been understood among
the partners that each of them would pay his own income tax.

Wherefore, the plaintiff prays the court to order the defendants jointly and severally to pay the
plaintiff the sum of P3,362.60, with legal interest from the date of the filing of the original complaint
until its payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

2. That under the Income Tax Law Menzi & Co., Inc., was obliged to and did make return to
the Government of the Philippine Islands each year during the period of the agreement,
Exhibit A, of the income of its whole business, including its fertilizer department; that the
 proportional share of such income taxes found to be due on the business of the fertilizer
department was charged as a proper and legitimate expense of that department, in the same
manner as was done in the other departments of its business; that inasmuch as the
agreement with the plaintiff was an employment agreement, he was required to make his
own return under the Income Tax Law and to pay his own income taxes, instead of having
them paid at the source, as might be done under the law, so that he would be entitled to the
personal exemptions allowed by the law; that the income taxes paid by the said Menzi & Co.,
Inc., pertaining to the business, were duly entered on the books of that department, and
included in the auditors' reports hereinbefore referred to, which reports were examined,
accepted and approved by the plaintiff, with full knowledge of their contents, and he is now
estopped from saying that such taxes are not a legitimate expense of said business.

FIFTH CAUSE OF ACTION

As fifth cause of action, plaintiff alleged:

I. That hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That the plaintiff has discovered that the defendants Menzi & Co., Inc., had been
receiving, during the period of the contract Exhibit A, from foreign firms selling fertilizing
material, a secret commission equivalent to 5 per cent of the total value of the purchases of
fertilizing material made by the partnership constituted between the plaintiff and the
defendant Menzi Co., Inc., and that said 5 per cent commission was not entered by the
defendants in the books of the business, to the credit and benefit of the partnership
constituted between the plaintiff and the defendant, but to the credit of the defendant Menzi
Co., Inc., which appropriated it to itself.

III. That the exact amount, or even the approximate amount of the fraud thus suffered by the
plaintiff cannot be determined, because the entries referring to these items do not appear in
the partnership books, although the plaintiff believes and alleges that they do appear in the
private books of the defendant Menzi & Co., Inc., which the latter has refused to furnish,
notwithstanding the demands made therefore by the auditors and the lawyers of the plaintiff.

IV. That taking as basis the amount of the purchases of some fertilizing material made by the
partnership during the first four years of the contract Exhibit A, the plaintiff estimates that this
5 per cent commission collected by the defendant Menzi Co., Inc., to the damage and
prejudice of the plaintiff, amounts to P127,375.77 of which 35 per cent belongs exclusively to
the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants to pay jointly and severally to the
plaintiff the amount of P44,581.52, or the exact amount owed upon this ground, after both parties
have adduced their evidence upon the point.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraph 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

2. That the defendant, Menzi & Co., Inc., did have during the period of said agreement,
Exhibit A, and has now what is called a "Propaganda Agency Agreement" which the
Deutsches Kalesyndikat, G.M.B., of Berlin, which is a manufacturer of potash, by virtue of
which said Menzi & Co., Inc., was to receive for its propaganda work in advertising and
 bringing about sales of its potash a commission of 5 per cent on all orders of potash received
by it from the Philippine Islands; that during the period of said agreement, Exhibit A, orders
were sent to said concern for potash, through C. Andre & Co., of Hamburg, as the agent of
the said Menzi & Co., Inc., upon which the said Menzi & Co., Inc., received a 5 per cent
commission, amounting in all to P2,222.32 for the propaganda work which it did for said firm
in the Philippine Islands; that said commissioners were not in any sense discounts on the
purchase price of said potash, and have no relation to the fertilizer business of which the
plaintiff was to receive a share of the net profits for his services, and consequently were not
credited to that department;

3. That in going over the books of Menzi Co., Inc., it has been found that there are only two
items of commissions, which were received from the United Supply Co., of San Francisco, in
the total of sum $66.51, which through oversight, were not credited on the books of the
fertilizer department of Menzi & Co., Inc., but due allowance has now been given to the
department for such item.

SIXTH CAUSE OF ACTION

As sixth cause of action, plaintiff alleged:

I. That hereby reproduces paragraphs I, II, III, IV and V, of the first cause of action.

II. That the defendant Menzi Co., Inc., in collusion with and through the defendants J.M.
Menzi and P.C. Schlobohm and their assistants, has tampered with the books of the
business making fictitious transfers in favor of the defendant Menzi & Co., Inc., of
merchandise belonging to the partnership, purchased with the latter's money, and deposited
in its warehouses, and then sold by Menzi & Co., Inc., to third persons, thereby appropriating
to itself the profits obtained from such resale.

III. That it is impossible to ascertain the amount of the fraud suffered by the plaintiff in this
respect as the real amount obtained from such sales can only be ascertained from the
examination of the private books of the defendant entity, which the latter has refused to
permit notwithstanding the demand made for the purpose by the auditors and the lawyers of
the plaintiff, and no basis of computation can be established, even approximately, to
ascertain the extent of the fraud sustained by the plaintiff in this respect, by merely
examining the partnership books.

Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to
make a sworn statement as to all the profits received from the sale to third persons of the fertilizers
pertaining to the partnership, and the profits they have appropriated, ordering them jointly and
severally to pay 35 per cent of the net amount, with legal interest from the filing of the original
complaint until the payment thereof.

Defendant alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer:

2. That under the express terms of the employment agreement, Exhibit A, the defendant,
Menzi & Co., Inc., had the right to import into the Philippine Islands in the course of its
fertilizer business and sell fro its exclusive account and benefit simple fertilizer ingredients;
that the only materials imported by it and sold during the period of said agreement were
 simple fertilizer ingredients, which had nothing whatever to do with the business of mixed
fertilizers, of which the plaintiff was to receive a share of the net profits as a part of his
compensation.

SEVENTH CAUSE OF ACTION

As seventh cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That during the existence of the contract Exhibit A, the defendant Menzi & Co., Inc., for the
account of the partnership constituted between itself and the plaintiff, and with the latter's
money, purchased from a several foreign firms various simple fertilizing material for the use
of the partnership.

III. That in the paid invoices for such purchases there are charged, besides the cost price of
the merchandise, other amounts for freight, insurance, duty, etc., some of which were not
entirely thus spent and were later credited by the selling firms to the defendant Menzi & Co.,
Inc.

IV. That said defendant Menzi & Co., Inc., through and in collusion with the defendants J.M.
Menzi and P.C. Schlobohm upon receipt of the credit notes remitted by the selling firms of
fertilizing material, for rebates upon freight, insurance, duty, etc., charged in the invoice but
not all expended, did not enter them upon the books to the credit of the partnership
constituted between the defendant and the plaintiff, but entered or had them entered to the
credit on Menzi & Co., Inc., thereby defrauding the plaintiff of 35 per cent of the value of such
reductions.

V. That the total amount, or even the approximate amount of this fraud cannot be
ascertained without an examination of the private books of Menzi & Co., Inc., which the latter
has refused to permit notwithstanding the demand to this effect made upon them by the
auditors and the lawyers of the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to
make a sworn statement as to the total amount of such rebates, and to sentence the defendants to
pay the plaintiff jointly and severally 35 per cent of the net amount.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer:

2. That during the period of said employment agreement, Exhibit A, the defendant, Menzi &
Co., Inc., received from its agent, C. Andre & Co., of Hamburg, certain credits pertaining to
the fertilizer business in the profits of which the plaintiff was interested, by way of refunds of
German Export Taxes, in the total sum of P1,402.54; that all of department as received, but it
has just recently been discovered that through error an additional sum of P216.22 was
credited to said department, which does not pertain to said business in the profits of which
the plaintiff is interested.

EIGHT CAUSE OF ACTION

A eighth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV and V of the first cause of action.

II. That on or about April 21, 1927, that is, before the expiration of the contract Exhibit A of
the complaint, the defendant Menzi & Co., Inc., acting as manager of the fertilizer business
constituted between said defendant and the plaintiff, entered into a contract with the
Compañia General de Tabacos de Filipinas for the sale of said entity of three thousand tons
of fertilizers of the trade mark "Corona No. 1", at the rate of P111 per ton, f. o. b. Bais,
Oriental Negros, to be delivered, as they were delivered, according to information received
by the plaintiff, during the months of November and December, 1927, and January,
February, March, and April, 1928.

III. That both the contract mentioned above and the benefits derived therefrom, which the
plaintiff estimates at P90,000, Philippine currency, belongs to the fertilizer business
constituted between the plaintiff and the defendant, of which 35 per cent, or P31,500,
belongs to said plaintiff.

IV. That notwithstanding the expiration of the partnership contract Exhibit A, on April 27,
1927, the defendants have not rendered a true accounting of the profits obtained by the
business during the last four months thereof, as the purposed balance submitted to the
plaintiff was incorrect with regard to the inventory of merchandise, transportation equipment,
and the value of the trade marks, for which reason such proposed balance did not represent
the true status of the business of the partnership on April 30, 1927.

V. That the proposed balance submitted to the plaintiff with reference to the partnership
operations during the last four months of its existence, was likewise incorrect, inasmuch as it
did not include the profit realized or to be realized from the contract entered into with the
Compañia General de Tabacos de Filipinas, notwithstanding the fact that this contract was
negotiated during the existence of the partnership, and while the defendant Menzi & Co.,
Inc., was the manager thereof.

VI. That the defendant entity now contends that the contract entered into with the Compañia
General de Tabacos de Filipinas belongs to it exclusively, and refuses to give the plaintiff his
share consisting in 35 per cent of the profits produced thereby.

Wherefore, the plaintiff prays the honorable court to order the defendants to render a true and
detailed account of the business during the last four months of the existence of the partnership, i. e.,
from January 1, 1927 to April 27, 1927, and to sentence them likewise to pay the plaintiff 35 per cent
of the net profits.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

2. That the said order for 3,000 tons of mixed fertilizer, received by Menzi & Co., Inc., from
the Compañia General de Tabacos Filipinas on April 21, 1927, was taken by it in the regular
course of its fertilizer business, and was to be manufactured and delivered in December,
1927, and up to April, 1928; that the employment agreement of the plaintiff expired by its
own terms on April 27, 1927, and he has not been in any way in the service of the defendant,
Menzi & Co., Inc., since that time, and he cannot possibly have any interest in the fertilizers
 manufactured and delivered by the said Menzi & Co., Inc., after the expiration of his contract
for any service rendered to it.

NINTH CAUSE OF ACTION

As ninth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That during the period of the contract Exhibit A, the partnership constituted thereby
registered in the Bureau of Commerce and Industry the trade marks "CORONA NO. 1",
CORONA NO. 2", "ARADO", and "HOZ", the plaintiff and the defendant having by their
efforts succeeded in making them favorably known in the market.

III. That the plaintiff and the defendant, laboring jointly, have succeeded in making the
fertilizing business a prosperous concern to such an extent that the profits obtained from the
business during the five years it has existed, amount to approximately P1,000,000, Philippine
currency.

IV. That the value of the good will and the trade marks of a business of this nature amounts
to at least P1,000,000, of which sum 35 per cent belongs to the plaintiff, or, P350,000.

V. That at the time of the expiration of the contract Exhibit A, the defendant entity,
notwithstanding and in spite of the plaintiff's insistent opposition, has assumed the charge of
liquidating the fertilizing business, without having rendered a monthly account of the state of
the liquidation, as required by law, thereby causing the plaintiff damages.

VI. That the damages sustained by the plaintiff, as well as the amount of his share in the
remaining property of the plaintiff, and may only be truly and correctly ascertained by
compelling the defendants J. M. Menzi and P. C. Schlobohm to declare under oath and
explain to the court in detail the sums obtained from the sale of the remaining merchandise,
after the expiration of the partnership contract.

VII. That after the contract Exhibit A had expired, the defendant continued to use for its own
benefit the good-will and trade marks belonging to the partnership, as well as its
transportation equipment and other machinery, thereby indicating its intention to retain such
good-will, trade marks, transportation equipment and machinery, for the manufacture of
fertilizers, by virtue of which the defendant is bound to pay the plaintiff 35 per cent of the
value of said property.

VIII. That the true value of the transportation equipment and machinery employed in the
preparation of the fertilizers amounts of P20,000, 35 per cent of which amount to P7,000.

IX. That the plaintiff has repeatedly demanded that the defendant entity render a true and
detailed account of the state of the liquidation of the partnership business, but said
defendants has ignored such demands, so that the plaintiff does not, and this date, know
whether the liquidation of the business has been finished, or what the status of it is at
present.

Wherefore, the plaintiff prays the Honorable Court:

 1. To order the defendants J.M. Menzi and P.C. Schlobohm to render a true and detailed
account of the status of business in liquidation, that is, from April 28, 1927, until it is finished,
ordering all the defendants to pay the plaintiff jointly and severally 35 per cent of the net
amount.

2. To order the defendants to pay the plaintiff jointly and severally the amount of P350,000,
which is 35 per cent of the value of the goodwill and the trade marks of the fertilizer
business;

3. To order the defendants to pay the plaintiff jointly and severally the amount of P7,000
which is 35 per cent of the value of the transportation equipment and machinery of the
business; and

4. To order the defendants to pay the costs of this trial, and further, to grant any other
remedy that this Honorable Court may deem just and equitable.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

2. That the good-will, if any, of said fertilizer business of the defendant, Menzi & Co., Inc.,
pertains exclusively to it, and the plaintiff can have no interest therein of any nature under his
said employment agreement; that the trade-marks mentioned by the plaintiff in his amended
complaint, as a part of such good-will, belonged to and have been used by the said Menzi &
Co., Inc., in its fertilizer business from and since its organization, and the plaintiff can have
no rights to or interest therein under his said employment agreement; that the transportation
equipment pertains to the fertilizer department of Menzi & Co., Inc., and whenever it has
been used by the said Menzi & Co., Inc., in its own business, due and reasonable
compensation for its use has been allowed to said business; that the machinery pertaining to
the said fertilizer business was destroyed by fire in October, 1926, and the value thereof in
the sum of P20,000 was collected from the Insurance Company, and the plaintiff has been
given credit for 35 per cent of that amount; that the present machinery used by Menzi & Co.,
Inc., was constructed by it, and the costs thereof was not charged to the fertilizer
department, and the plaintiff has no right to have it taken into consideration in arriving at the
net profits due to him under his said employment agreement.

The dispositive part of the decision of the trial court is as follows:

Wherefore, let judgment be entered:

(a) Holding that the contract entered into by the parties, evidenced by Exhibit A, as a contract
of general regular commercial partnership, wherein Menzi & Co., Inc., was the capitalist, and
the plaintiff, the industrial partner;

(b) Holding the plaintiff, by the mere fact of having signed and approved the balance sheets,
Exhibits C to C-8, is not estopped from questioning the statements of the accounts therein
contained;
 (c) Ordering Menzi & Co., Inc., upon the second ground of action, to pay the plaintiff the sum
of P 60,385.67 with legal interest from the date of the filing of the original complaint until
paid;

(d) Dismissing the third cause of action;

(e) Ordering Menzi & Co., Inc., upon the fourth cause of action, to pay the plaintiff the sum of
P3,821.41, with legal interest from the date of the filing of the original until paid;

(f ) Dismissing the fifth cause of action;

(g) Dismissing the sixth cause of action;

(h) Dismissing the seventh cause of action;

(i) Ordering the defendant Menzi & Co., Inc., upon the eighth cause of action, to pay the
plaintiff the sum of P6,578.38 with legal interest from January 1, 1929, the date of the
liquidation of the fertilizer business, until paid;

(j ) Ordering Menzi & Co., Inc., upon the ninth cause of action to pay the plaintiff the sum of
P196,709.20 with legal interest from the date of the filing of the original complaint until paid;

(k) Ordering the said defendant corporation, in view of the plaintiff's share of the profits of the
business accruing from January 1, 1927 to December 31, 1928, to pay the plaintiff 35 per
cent of the net balance shown in Exhibits 51 and 51-A, after deducting the item of P2,410 for
income tax, and any other sum charged for interest under the entry "Purchases";

(l) Ordering the defendant corporation, in connection with the final liquidation set in Exhibit 52
and 52-A, to pay the plaintiff the sum of P17,463.54 with legal interest from January 1, 1929,
until fully paid;

(m) Dismissing the case with reference to the other defendants, J. M. Menzi and P. C.
Schlobohm; and

(n) Menzi & Co., Inc., shall pay the costs of the trial.

The appellant makes the following assignment of error:

I. The trial court erred in finding and holding that the contract Exhibit A constitutes a regular
collective commercial copartnership between the defendant corporation, Menzi & Co., Inc.,
and the plaintiff, Francisco Bastida, and not a contract of employment.

II. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc., had
wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income
taxes partners' balances, foreign drafts, local drafts, and on other credit balances in the sum
of P172,530.49, and that 35 per cent thereof, or the sum of P60,358.67, with legal interest
thereon from the date of filing his complaint, corresponds to the plaintiff.

III. The trial court erred finding and holding that the defendant, Menzi & Co., Inc., had
wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income
taxes for the years 1923, 1924, 1925 and 1926, and that the plaintiff is entitled to 35 per cent
 thereof, or the sum of P3,821.41, with legal interest thereon from the date of filing his
complaint, and in disallowing the item of P2,410 charged as income tax in the liquidation in
Exhibits 51 and 51 A for the period from January 1 to April 27, 1927.

IV. The trial court erred in refusing to find and hold under the evidence in this case that the
contract, Exhibit A was daring the whole period thereof considered by the parties and
performed by them as a contract of employment in relation to the fertilizer business of the
defendant, and that the accounts of said business were kept by the defendant, Menzi & Co.,
Inc., on that theory with the knowledge and consent of the plaintiff, and that at the end of
each year for five years a balance sheet and profit and loss statement of said business were
prepared from the books of account of said business on the same theory and submitted to
the plaintiff, and that each year said balance sheet and profit and loss statement were
examined, approved and signed by said contract in accordance therewith with full knowledge
of the manner in which said business was conducted and the charges for interest and
income taxes made against the same and that by reason of such facts, the plaintiff is now
estopped from raising any question as to the nature of said contract or the propriety of such
charges.

V. The trial court erred in finding and holding that the plaintiff, Francisco Bastida, is entitled to
35 per cent of the net profits in the sum of P18,795.38 received by the defendant, Menzi &
Co., Inc., from its contract with the Compañia General de Tabacos de Filipinas, or the sum of
P6.578.38, with legal interest thereon from January 1, 1929, the date upon which the
liquidation of said business was terminated.

VI. The trial court erred in finding and holding that the value of the good-will of the fertilizer
business in question was P562,312, and that the plaintiff, Francisco Bastida, was entitled to
35 per cent of such valuation, or the sum of P196,709.20, with legal interest thereon from the
date of filing his complaint.

VII. The trial court erred in rendering judgment in favor of the plaintiff and against defendant,
Menzi & Co., Inc., (a) on the second cause of action, for the sum of P60,385.67, with legal
interest thereon from the date of filing the complaint; (b) on the fourth cause of action, for the
sum of P3,821.41, with legal interest thereon from the date of filing the complaint; (c) on the
eight cause of action, for the sum of P6,578.38, with legal interest thereon from January 1,
1929; and (d) on the ninth cause of action, for the sum of P196,709.20, with legal interest
thereon from the date of filing the original complaint; and (e) for the costs of the action, and
in not approving the final liquidation of said business, Exhibits 51 and 51-A and 52 and 52-A,
as true and correct, and entering judgment against said defendant only for the amounts
admitted therein as due the plaintiff with legal interest, with the costs against the plaintiff.

VIII. The trial court erred in overruling the defendants' motion for a new trial.

It appears from the evidence that the defendants corporation was organized in 1921 for purpose of
importing and selling general merchandise, including fertilizers and fertilizer ingredients. It appears
through John Bordman and the Menzi-Bordman Co. the good-will, trade-marks, business, and other
assets of the old German firm of Behn, Meyer & Co., Ltd., including its fertilizer business with its
stocks and trade-marks. Behn, Meyer & Co., Ltd., had owned and carried on this fertilizer business
from 1910 until that firm was taken over the Alien Property Custodian in 1917. Among the trade-
marks thus acquired by the appellant were those known as the "ARADO", "HOZ", and "CORONA".
They were registered in the Bureau of Commerce and Industry in the name of Menzi & Co. The
trade marks "ARADO" and "HOZ" had been used by Behn, Meyer & Co., Ltd., in the sale of its mixed
fertilizers, and the trade mark "CORONA" had been used in its other business. The "HOZ" trade-
mark was used by John Bordman and the Menzi-Bordman Co. in the continuation of the fertilizer
business that had belonged to Behn, Meyer & Co., Ltd.

The business of Menzi & Co., Inc., was divided into several different departments, each of which
was in charge of a manager, who received a fixed salary and a percentage of the profits. The
corporation had to borrow money or obtain credits from time to time and to pay interest thereon. The
amount paid for interest was charged against the department concerned, and the interest charges
were taken into account in determining the net profits of each department. The practice of the
corporation was to debit or credit each department with interest at the bank rate on its daily balance.
The fertilizer business of Menzi & Co., Inc., was carried on in accordance with this practice under the
"Sundries Department" until July, 1923, and after that as a separate department.

In November, 1921, the plaintiff, who had had some experience in mixing and selling fertilizer, went
to see Toehl, the manager of the sundries department of Menzi & Co., Inc., and told him that he had
a written contract with the Philippine Sugar Centrals Agency for 1,250 tons of mixed fertilizers, and
that he could obtain other contracts, including one from the Calamba Sugar Estates for 450 tons, but
the he did not have the money to buy the ingredients to fill the order and carry on the on the
business. He offered to assign to Menzi & Co., Inc., his contract with the Philippine Sugar Centrals
Agency and to supervise the mixing of the fertilizer and to obtain other orders for fifty per cent of the
net profits that Menzi & Co., might derive therefrom. J.M. Menzi, the general manager of Menzi &
Co., accepted plaintiff's offer. Plaintiff assigned to Menzi & Co., Inc., his contract with the Sugar
Centrals Agency, and the defendant corporation proceeded to fill the order. Plaintiff supervised the
mixing of the fertilizer.

On January 10, 1922 the defendant corporation at plaintiff's request gave him the following letter,
Exhibit B:

MANILA, 10 de enero de 1922

Sr. FRANCISCO BASTIDA

Manila

MUY SR. NUESTRO: Interin formalizamos el contrato que, en principio, tenemos convenido para la
explotacion del negocio de abono y fertilizantes, por la presente venimos en confirmar su derecho
de 50 por ciento de las untilidades que se deriven del contrato obtenido por Vd. de la Philippine
Sugar Centrals (por 1250 tonel.) y del contrato con la Calamba Sugar Estates, asi como de cuantos
contratos se cierren con definitiva de nuestro contrato mutuo, lo que formalizacion definitiva de
nuestro contrato mutuo, lo que hacemos para garantia y seguridad de Vd.

MENZI & CO.,

Por (Fdo.) W. TOEHL

Menzi & Co., Inc., continued to carry on its fertilizer business under this arrangement with the
plaintiff. It ordered ingredients from the United States and other countries, and the interest on the
drafts for the purchase of these materials was changed to the business as a part of the cost of the
materials. The mixed fertilizers were sold by Menzi & Co., Inc., between January 19 and April 1,
1922 under its "CORONA" brand. Menzi & Co., Inc., had only one bank account for its whole
business. The fertilizer business had no separate capital. A fertilizer account was opened in the
general ledger, and interest at the rate charged by the Bank of the Philippine Islands was debited or
credited to that account on the daily balances of the fertilizer business. This was in accordance with
appellant's established practice, to which the plaintiff assented.
On or about April 24, 1922 the net profits of the business carried on under the oral agreement were
determined by Menzi & Co., Inc., after deducting interest charges, proportional part of warehouse
rent and salaries and wages, and the other expenses of said business, and the plaintiff was paid
some twenty thousand pesos in full satisfaction of his share of the profits.

Pursuant to the aforementioned verbal agreement, confirmed by the letter, Exhibit B, the defendant
corporation April 27, 1922 entered a written contract with the plaintiff, marked Exhibit A, which is the
basis of the present action.

The fertilizer business was carried on by Menzi & Co., Inc., after the execution of Exhibit A in
practically the same manner as it was prior thereto. The intervention of the plaintiff was limited to
supervising the mixing of the fertilizers in Menzi & Co.'s, Inc., bodegas.

The trade-marks used in the sale of the fertilizer were registered in the Bureau of Commerce &
Industry in the name of Menzi & Co., Inc., and the fees were paid by that company. They were not
changed to the fertilizer business, in which the plaintiff was interested. Only the fees for registering
the formulas in the Bureau of Science were charged to the fertilizer business, and the total amount
thereof was credited to this business in the final liquidation on April 27, 1927.

On May 3, 1924 the plaintiff made a contract with Menzi & Co., Inc., to furnish it all the stems and
scraps to tobacco that it might need for its fertilizer business either in the Philippine Islands or for
export to other countries. This contract is rendered to in the record as the "Vastago Contract". Menzi
& Co., Inc., advanced the plaintiff, paying the salaries of his employees, and other expenses in
performing his contract.

White, Page & Co., certified public accountants, audited the books of Menzi & Co., Inc., every
month, and at the end of each year they prepared a balance sheet and a profit and loss statement of
the fertilizer business. These statements were delivered to the plaintiff for examination, and after he
had had an opportunity of verifying them he approved them without objection and returned them to
Menzi & Co., Inc.

Plaintiff collected from Menzi Co., Inc., as his share or 35 per cent of the net profits of the fertilizer
business the following amounts:

1922 . . . . . . . . . . . . . . . . . . . . . P1,874.73
1923 . . . . . . . . . . . . . . . . . . . . . 30,212.62
1924 . . . . . . . . . . . . . . . . . . . . . 101,081.56

1925 . . . . . . . . . . . . . . . . . . . . . 35,665.03

1926 . . . . . . . . . . . . . . . . . . . . . 27,649.98

Total . . . . . . . . . . . . . . . . . . . . P196,483.92

To this amount must be added plaintiff's share of the net profits from January 1 to April 27, 1927,
amounting to P34,766.87, making a total of P231,250.79.

Prior to the expiration of the contract, Exhibit A, the manager of Menzi & Co. Inc., notified the plaintiff
that the contract for his services would not be renewed.
When plaintiff's contract expired on April 27, 1927, the fertilizer department of Menzi & Co., Inc., had
on hand materials and ingredients and two Ford trucks of the book value of approximately P75,000,
and accounts receivable amounting to P103,000. There were claims outstanding and bills to pay.
Before the net profits could be finally determined, it was necessary to dispose of the materials and
equipment, collect the outstanding accounts for Menzi & Co., Inc., prepared a balance sheet and a
profit and loss statement for the period from January 1 to April 27, 1927 as a basis of settlement, but
the plaintiff refused to accept it, and filed the present action.

Menzi & Co., Inc., then proceeded to liquidate fertilizer business in question. In October, 1927 it
proposed to the plaintiff that the old and damaged stocks on hand having a book value of P40,000,
which the defendant corporation had been unable to dispose of, be sold at public or private sale, or
divided between the parties. The plaintiff refused to agree to this. The defendant corporation then
applied to the trial court for an order for the sale of the remaining property at public auction, but
apparently the court did not act on the petition.

The old stocks were taken over by Menzi & Co., Inc., and the final liquidation of the fertilizer
business was completed in December, 1928 and a final balance sheet and a profit and loss
statement were submitted to the plaintiff during the trial. During the liquidation the books of Menzi &
Co., Inc., for the whole period of the contract in question were reaudited by White, Page & Co..,
certain errors of bookkeeping were discovered by them. After making the corrections they found the
balance due the plaintiff to be P21,633.20.

Plaintiff employed a certified public accountant, Vernon Thompson, to examine the books and
vouchers of Menzi & Co. Thompson assumed the plaintiff and Menzi & Co., Inc., to be partners, and
that Menzi & Co., Inc., was obliged to furnish free of charge all the capital the partnership should
need. He naturally reached very different conclusions from those of the auditors of Menzi Co., Inc.

We come now to a consideration of appellant's assignment of error. After considering the evidence
and the arguments of counsel, we are unanimously of the opinion that under the facts of this case
the relationship established between Menzi & Co. and by the plaintiff was to receive 35 per cent of
the net profits of the fertilizer business of Menzi & Co., Inc., in compensation for his services of
supervising the mixing of the fertilizers. Neither the provisions of the contract nor the conduct of the
parties prior or subsequent to its execution justified the finding that it was a contract of
copartnership. Exhibit A, as appears from the statement of facts, was in effect a continuation of the
verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation for
one-half of the net profits derived by the corporation from certain fertilizer contracts. Plaintiff was
paid his share of the profits from those transactions after Menzi & Co., Inc., had deducted the same
items of expense which he now protests. Plaintiff never made any objection to defendant's manner
of keeping the accounts or to the charges. The business was continued in the same manner under
the written agreement, Exhibit A, and for four years the plaintiff never made any objection. On the
contrary he approved and signed every year the balance sheet and the profit and loss statement. It
was only when plaintiff's contract was about to expire and the defendant corporation had notified him
that it would not renew it that the plaintiff began to make objections.

The trial court relied on article 116 of the Code of Commerce, which provides that articles of
association by which two or more persons obligate themselves to place in a common fund any
property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter
what its class may be, provided it has been established in accordance with the provisions of this
Code; but in the case at bar there was no common fund, that is, a fund belonging to the parties as
joint owners or partners. The business belonged to Menzi & Co., Inc. The plaintiff was working for
Menzi & Co., Inc. Instead of receiving a fixed salary or a fixed salary and a small percentage of the
net profits, he was to receive 35 per cent of the net profits as compensation for his services. Menzi &
Co., Inc., was to advanced him P300 a month on account of his participation in the profits. It will be
noted that no provision was made for reimbursing Menzi & Co., Inc., in case there should be no net
profits at the end of the year. It is now well settled that the old rule that sharing profits as profits
made one a partner is overthrown. (Mechem, second edition, p. 89.)

It is nowhere stated in Exhibit A that the parties were establishing a partnership or intended to
become partners. Great stress in laid by the trial judge and plaintiff's attorneys on the fact that in the
sixth paragraph of Exhibit A the phrase "en sociedad con" is used in providing that defendant
corporation not engage in the business of prepared fertilizers except in association with the plaintiff
(en sociedad con). The fact is that en sociedad con as there used merely means en reunion con or
in association with, and does not carry the meaning of "in partnership with".

The trial judge found that the defendant corporation had not always regarded the contract in
question as an employment agreement, because in its answer to the original complaint it stated that
before the expiration of Exhibit A it notified the plaintiff that it would not continue associated with
him in said business. The trial judge concluded that the phrase "associated with", used by the
defendant corporation, indicated that it regarded the contract, Exhibit A, as an agreement of
copartnership.

In the first place, the complaint and answer having been superseded by the amended complaint and
the answer thereto, and the answer to the original complaint not having been presented in evidence
as an exhibit, the trial court was not authorized to take it into account. "Where amended pleadings
have been filed, allegations in the original pleadings are held admissible, but in such case the
original pleadings can have no effect, unless formally offered in evidence." (Jones on Evidence, sec.
273; Lucido vs. Calupitan, 27 Phil., 148.)

In the second place, although the word "associated" may be related etymologically to the Spanish
word "socio", meaning partner, it does not in its common acceptation imply any partnership relation.

The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation obligated itself to
pay to the plaintiff 35 per cent of the net profits of the fertilizer business, to advance to him P300 a
month on account of his share of the profits, and to grant him permission during 1923 to absent
himself from the Philippines for not more than one year are utterly incompatible with the claim that it
was the intention of the parties to form a copartnership. Various other reasons for holding that the
parties were not partners are advanced in appellant's brief. We do not deem it necessary to discuss
them here. We merely wish to add that in the Vastago contract, Exhibit A, the plaintiff clearly
recognized Menzi & Co., Inc., as the owners of the fertilizer business in question.

As to the various items of the expense rejected by the trial judge, they were in our opinion proper
charges and erroneously disallowed, and this would true even if the parties had been partners.
Although Menzi & Co., Inc., agreed to furnish the necessary financial aid for the fertilizer business, it
did not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost
of securing the necessary credit. Some of the contentions of the plaintiff and his expert witness
Thompson are so obviously without merit as not to merit serious consideration. For instance, they
objected to the interest charges on draft for materials purchased abroad. Their contention is that the
corporation should have furnished the money to purchase these materials for cash, overlooking the
fact that the interest was added to the cost price, and that the plaintiff was not prejudiced by the
practice complained of. It was also urged, and this seems to us the height of absurdity, that the
defendant corporation should have furnished free of charge such financial assistance as would have
made it unnecessary to discount customers' notes, thereby enabling the business to reap the
interest. In other words, the defendant corporation should have enabled the fertilizer department to
do business on a credit instead of a cash basis.
The charges now complained of, as we have already stated, are the same as those made under the
verbal agreement, upon the termination of which the parties made a settlement; the charges in
question were acquiesced in by the plaintiff for years, and it is now too late for him to contest them.
The decision of this court in the case of Kriedt vs. E.C. McCullough & Co. (37 Phil., 474), is in point.
A portion of the syllabus of that case reads as follows:

1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS ACTS OF PARTIES. — Acts

done by the parties to a contract in the course of its performance are admissible in evidence
upon the question of its meaning, as being their own contemporaneous interpretation of its
terms.

2. ID, ID; ACTION OF PARTIES UNDER PRIOR CONTRACT. — In an action upon a

contract containing a provision a doubtful application it appeared that under a similar prior
contract the parties had, upon the termination of said contract, adjusted their rights and
made a settlement in which the doubtful clause had been given effect in conformity with the
interpretation placed thereon by one of the parties. Held: That this action of the parties under
the prior contract could properly be considered upon the question of the interpretation of the
same clause in the later contract.

3. ID.; ID.; ACQUIESCENCE. — Where one of the parties to a contract acquiesces in the
interpretation placed by the other upon a provision of doubtful application, the party so
acquiescing is bound by such interpretation.

4. ID.; ID.; ILLUSTRATION. — One of the parties to a contract, being aware at the time of
the execution thereof that the other placed a certain interpretation upon a provision of
doubtful application, nevertheless proceeded, without raising any question upon the point, to
perform the services which he was bound to render under the contract. Upon the termination
of the contract by mutual consent a question was raised as to the proper interpretation of the
doubtful provision. Held: That the party raising such question had acquiesced in the
interpretation placed upon the contract by the other party and was bound thereby.

The trial court held that the plaintiff was entitled to P6,578.38 or 35 per cent of the net profits derived
by Menzi & Co., Inc., from its contract for fertilizers with the Tabacalera. This finding in our opinion is
not justified by the evidence. This contract was obtained by Menzi & Co., Inc., shortly before
plaintiff's contract with the defendant corporation expired. Plaintiff tried to get the Tabacalera
contract for himself. When this contract was filled, plaintiff had ceased to work for Menzi & Co., Inc.,
and he has no right to participate in the profits derived therefrom.

Appellant's sixth assignment of error is that the trial court erred in finding the value of the good-will of
the fertilizer business in question to be P562,312, and that the plaintiff was entitled to 35 per cent
thereof or P196,709.20. In reaching this conclusion the trial court unfortunately relied on the opinion
of the accountant, Vernon Thompson, who assumed, erroneously as we have seen, that the plaintiff
and Menzi & Co., Inc., were partners; but even if they had been partners there would have been no
good-will to dispose of. The defendant corporation had a fertilizer business before it entered into any
agreement with the plaintiff; plaintiff's agreement was for a fixed period, five years, and during that
time the business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s warehouses
and after the expiration of plaintiff's contract Menzi & Co., Inc., continued its fertilizer business, as it
had a perfect right to do. There was really nothing to which any good-will could attach. Plaintiff
maintains, however, that the trade-marks used in the fertilizer business during the time that he was
connected with it acquired great value, and that they have been appropriated by the appellant to its
own use. That seems to be the only basis of the alleged good-will, to which a fabulous valuation was
given. As we have seen, the trade- marks were not new. They had been used by Behn, Meyer & Co.
in its business for other goods and one of them for fertilizer. They belonged to Menzi & Co., Inc., and
were registered in its name; only the expense of registering the formulas in the Bureau of Science
was charged to the business in which the plaintiff was interested. These trade-marks remained the
exclusive property of Menzi & Co., and the plaintiff had no interest therein on the expiration of his
contract.

The balance due the plaintiff, as appears from Exhibit 52, is P21,633.20. We are satisfied by the
evidence that said balance is correct.

For the foregoing reasons, the decision appealed from is modified and the defendant corporation is
sentenced to pay the plaintiff twenty-one thousand, six hundred and thirty-three pesos and twenty
centavos (P21,633.20), with legal interest thereon from the date of the filing of the complaint on June
17, 1927, without a special finding as to costs.

G.R. No. L-49982 April 27, 1988

ELIGIO ESTANISLAO, JR., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, REMEDIOS ESTANISLAO, EMILIO and LEOCADIO
SANTIAGO, respondents.

Agustin O. Benitez for petitioner.

Benjamin C. Yatco for private respondents.

GANCAYCO, J.:

By this petition for certiorari the Court is asked to determine if a partnership exists between members of the same family arising from their
joint ownership of certain properties.

Petitioner and private respondents are brothers and sisters who are co-owners of certain lots at the
corner of Annapolis and Aurora Blvd., QuezonCity which were then being leased to the Shell
Company of the Philippines Limited (SHELL). They agreed to open and operate a gas station thereat
to be known as Estanislao Shell Service Station with an initial investment of P 15,000.00 to be taken
from the advance rentals due to them from SHELL for the occupancy of the said lots owned in
common by them. A joint affidavit was executed by them on April 11, 1966 which was prepared
byAtty. Democrito Angeles 1 They agreed to help their brother, petitioner herein, by allowing him to
operate and manage the gasoline service station of the family. They negotiated with SHELL. For
practical purposes and in order not to run counter to the company's policy of appointing only one
dealer, it was agreed that petitioner would apply for the dealership. Respondent Remedios helped in
managing the bussiness with petitioner from May 3, 1966 up to February 16, 1967.

On May 26, 1966, the parties herein entered into an Additional Cash Pledge Agreement with SHELL
wherein it was reiterated that the P 15,000.00 advance rental shall be deposited with SHELL to
cover advances of fuel to petitioner as dealer with a proviso that said agreement "cancels and
supersedes the Joint Affidavit dated 11 April 1966 executed by the co-owners." 2

For sometime, the petitioner submitted financial statements regarding the operation of the business
to private respondents, but therafter petitioner failed to render subsequent accounting. Hence
through Atty. Angeles, a demand was made on petitioner to render an accounting of the profits.
The financial report of December 31, 1968 shows that the business was able to make a profit of P
87,293.79 and that by the year ending 1969, a profit of P 150,000.00 was realized. 3

Thus, on August 25, 1970 private respondents filed a complaint in the Court of First Instance of Rizal
against petitioner praying among others that the latter be ordered:

1. to execute a public document embodying all the provisions of the partnership

agreement entered into between plaintiffs and defendant as provided in Article 1771
of the New Civil Code;

2. to render a formal accounting of the business operation covering the period from
May 6, 1966 up to December 21, 1968 and from January 1, 1969 up to the time the
order is issued and that the same be subject to proper audit;

3. to pay the plaintiffs their lawful shares and participation in the net profits of the
business in an amount of no less than P l50,000.00 with interest at the rate of 1% per
month from date of demand until full payment thereof for the entire duration of the
business; and

4. to pay the plaintiffs the amount of P 10,000.00 as attorney's fees and costs of the
suit (pp. 13-14 Record on Appeal.)

After trial on the merits, on October 15, 1975, Hon. Lino Anover who was then the temporary
presiding judge of Branch IV of the trial court, rendered judgment dismissing the complaint and
counterclaim and ordering private respondents to pay petitioner P 3,000.00 attorney's fee and costs.
Private respondent filed a motion for reconsideration of the decision. On December 10, 1975, Hon.
Ricardo Tensuan who was the newly appointed presiding judge of the same branch, set aside the
aforesaid derision and rendered another decision in favor of said respondents.

The dispositive part thereof reads as follows:

WHEREFORE, the Decision of this Court dated October 14, 1975 is hereby
reconsidered and a new judgment is hereby rendered in favor of the plaintiffs and as
against the defendant:

(1) Ordering the defendant to execute a public instrument embodying all the
provisions of the partnership agreement entered into between plaintiffs and
defendant as provided for in Article 1771, Civil Code of the Philippines;

(2) Ordering the defendant to render a formal accounting of the business operation
from April 1969 up to the time this order is issued, the same to be subject to
examination and audit by the plaintiff,

(3) Ordering the defendant to pay plaintiffs their lawful shares and participation in the
net profits of the business in the amount of P 150,000.00, with interest thereon at the
rate of One (1%) Per Cent per month from date of demand until full payment thereof;

(4) Ordering the defendant to pay the plaintiffs the sum of P 5,000.00 by way of
attorney's fees of plaintiffs' counsel; as well as the costs of suit. (pp. 161-162. Record
on Appeal).
Petitioner then interposed an appeal to the Court of Appeals enumerating seven (7) errors allegedly
committed by the trial court. In due course, a decision was rendered by the Court of Appeals on
November 28,1978 affirming in toto the decision of the lower court with costs against petitioner. *

A motion for reconsideration of said decision filed by petitioner was denied on January 30, 1979. Not
satisfied therewith, the petitioner now comes to this court by way of this petition for certiorari alleging
that the respondent court erred:

1. In interpreting the legal import of the Joint Affidavit (Exh. 'A') vis-a-vis the
Additional Cash Pledge Agreement (Exhs. "B-2","6", and "L"); and

2. In declaring that a partnership was established by and among the petitioner and
the private respondents as regards the ownership and or operation of the gasoline
service station business.

Petitioner relies heavily on the provisions of the Joint Affidavit of April 11, 1966 (Exhibit A) and the
Additional Cash Pledge Agreement of May 20, 1966 (Exhibit 6) which are herein reproduced-

(a) The joint Affidavit of April 11, 1966, Exhibit A reads:

(1) That we are the Lessors of two parcels of land fully describe in Transfer
Certificates of Title Nos. 45071 and 71244 of the Register of Deeds of Quezon City,
in favor of the LESSEE - SHELL COMPANY OF THE PHILIPPINES LIMITED a
corporation duly licensed to do business in the Philippines;

(2) That we have requested the said SHELL COMPANY OF THE PHILIPPINE
LIMITED advanced rentals in the total amount of FIFTEEN THOUSAND PESOS (P
l5,000.00) Philippine Currency, so that we can use the said amount to augment our
capital investment in the operation of that gasoline station constructed ,by the said
company on our two lots aforesaid by virtue of an outstanding Lease Agreement we
have entered into with the said company;

(3) That the and SHELL COMPANY OF THE PHILIPPINE LIMITED out of its
benevolence and desire to help us in aumenting our capital investment in the
operation of the said gasoline station, has agreed to give us the said amount of P
15,000.00, which amount will partake the nature of ADVANCED RENTALS;

(4) That we have freely and voluntarily agreed that upon receipt of the said amount of
FIFTEEN THOUSAND PESOS (P l6,000.00) from he SHELL COMPANY OF THE
PHILIPPINES LIMITED, the said sum as ADVANCED RENTALS to us be applied as
monthly rentals for the sai two lots under our Lease Agreement starting on the 25th
of May, 1966 until such time that the said of P 15,000.00 be applicable, which time to
our estimate and one-half months from May 25, 1966 or until the 10th of October,
1966 more or less;

(5) That we have likewise agreed among ourselves that the SHELL COMPANY OF
THE PHILIPPINES LIMITED execute an instrument for us to sign embodying our
conformity that the said amount that it will generously grant us as requested be
applied as ADVANCED RENTALS; and

(6) FURTHER AFFIANTS SAYETH NOT.,

(b) The Additional Cash Pledge Agreement of May 20,1966, Exhibit 6, is as follows:

WHEREAS, under the lease Agreement dated 13th November, 1963 (identified as
doc. Nos. 491 & 1407, Page Nos. 99 & 66, Book Nos. V & III, Series of 1963 in the
Notarial Registers of Notaries Public Rosauro Marquez, and R.D. Liwanag,
respectively) executed in favour of SHELL by the herein CO-OWNERS and another
Lease Agreement dated 19th March 1964 . . . also executed in favour of SHELL by
CO-OWNERS Remedios and MARIA ESTANISLAO for the lease of adjoining
portions of two parcels of land at Aurora Blvd./ Annapolis, Quezon City, the CO
OWNERS RECEIVE a total monthly rental of PESOS THREE THOUSAND THREE
HUNDRED EIGHTY TWO AND 29/100 (P 3,382.29), Philippine Currency;

WHEREAS, CO-OWNER Eligio Estanislao Jr. is the Dealer of the Shell Station
constructed on the leased land, and as Dealer under the Cash Pledge Agreement
dated llth May 1966, he deposited to SHELL in cash the amount of PESOS TEN
THOUSAND (P 10,000), Philippine Currency, to secure his purchase on credit of
Shell petroleum products; . . .

WHEREAS, said DEALER, in his desire, to be granted an increased the limit up to P

25,000, has secured the conformity of his CO-OWNERS to waive and assign to
SHELL the total monthly rentals due to all of them to accumulate the equivalent
amount of P 15,000, commencing 24th May 1966, this P 15,000 shall be treated as
additional cash deposit to SHELL under the same terms and conditions of the
aforementioned Cash Pledge Agreement dated llth May 1966.

NOW, THEREFORE, for and in consideration of the foregoing premises,and the

mutual covenants among the CO-OWNERS herein and SHELL, said parties have
agreed and hereby agree as follows:

l. The CO-OWNERS dohere by waive in favor of DEALER the monthly rentals due to
all CO-OWNERS, collectively, under the above describe two Lease Agreements, one
dated 13th November 1963 and the other dated 19th March 1964 to enable DEALER
to increase his existing cash deposit to SHELL, from P 10,000 to P 25,000, for such
purpose, the SHELL CO-OWNERS and DEALER hereby irrevocably assign to
SHELL the monthly rental of P 3,382.29 payable to them respectively as they fall
due, monthly, commencing 24th May 1966, until such time that the monthly rentals
accumulated, shall be equal to P l5,000.

2. The above stated monthly rentals accumulated shall be treated as additional cash
deposit by DEALER to SHELL, thereby in increasing his credit limit from P 10,000 to
P 25,000. This agreement, therefore, cancels and supersedes the Joint affidavit
dated 11 April 1966 executed by the CO-OWNERS.

3. Effective upon the signing of this agreement, SHELL agrees to allow DEALER to
purchase from SHELL petroleum products, on credit, up to the amount of P 25,000.

4. This increase in the credit shall also be subject to the same terms and conditions
of the above-mentioned Cash Pledge Agreement dated llth May 1966. (Exhs. "B-2,"
"L," and "6"; emphasis supplied)

In the aforesaid Joint Affidavit of April 11, 1966 (Exhibit A), it is clearly stipulated by the parties that
the P 15,000.00 advance rental due to them from SHELL shall augment their "capital investment" in
the operation of the gasoline station, which advance rentals shall be credited as rentals from May
25, 1966 up to four and one-half months or until 10 October 1966, more or less covering said P
15,000.00.

In the subsequent document entitled "Additional Cash Pledge Agreement" above reproduced
(Exhibit 6), the private respondents and petitioners assigned to SHELL the monthly rentals due them
commencing the 24th of May 1966 until such time that the monthly rentals accumulated equal P
15,000.00 which private respondents agree to be a cash deposit of petitioner in favor of SHELL to
increase his credit limit as dealer. As above-stated it provided therein that "This agreement,
therefore, cancels and supersedes the Joint Affidavit dated 11 April 1966 executed by the CO-
OWNERS."

Petitioner contends that because of the said stipulation cancelling and superseding that previous
Joint Affidavit, whatever partnership agreement there was in said previous agreement had thereby
been abrogated. We find no merit in this argument. Said cancelling provision was necessary for the
Joint Affidavit speaks of P 15,000.00 advance rentals starting May 25, 1966 while the latter
agreement also refers to advance rentals of the same amount starting May 24, 1966. There is,
therefore, a duplication of reference to the P 15,000.00 hence the need to provide in the subsequent
document that it "cancels and supersedes" the previous one. True it is that in the latter document, it
is silent as to the statement in the Joint Affidavit that the P 15,000.00 represents the "capital
investment" of the parties in the gasoline station business and it speaks of petitioner as the sole
dealer, but this is as it should be for in the latter document SHELL was a signatory and it would be
against its policy if in the agreement it should be stated that the business is a partnership with
private respondents and not a sole proprietorship of petitioner.

Moreover other evidence in the record shows that there was in fact such partnership agreement
between the parties. This is attested by the testimonies of private respondent Remedies Estanislao
and Atty. Angeles. Petitioner submitted to private respondents periodic accounting of the
business. 4 Petitioner gave a written authority to private respondent Remedies Estanislao, his sister,
to examine and audit the books of their "common business' aming negosyo). 5 Respondent
Remedios assisted in the running of the business. There is no doubt that the parties hereto formed a
partnership when they bound themselves to contribute money to a common fund with the intention of
dividing the profits among themselves.6 The sole dealership by the petitioner and the issuance of all
government permits and licenses in the name of petitioner was in compliance with the afore-stated
policy of SHELL and the understanding of the parties of having only one dealer of the SHELL
products.

Further, the findings of facts of the respondent court are conclusive in this proceeding, and its
conclusion based on the said facts are in accordancewith the applicable law.

WHEREFORE, the judgment appealed from is AFFIRMED in toto with costs against petitioner. This
decision is immediately executory and no motion for extension of time to file a motion for
reconsideration shag beentertained.

SO ORDERED.

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in
the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo
T. Oña the surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo
T. Oña, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they
received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned,
two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T.
Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p.
74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in
 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)

decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the
Tax Code. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

1955
 Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co.,
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE

PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN
NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS
 FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED
USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,

THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales thereof in real properties and
securities," as a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years
herein involved, some of the said properties were sold at considerable profit, and that with said
profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It
is likewise admitted that all the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-
owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to
continue holding said shares under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil
Code from that of unregistered partnerships which are considered as "corporations" under Sections
24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of that
of its members. Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in common
law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial
operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. ... . (7A Merten's Law of
Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture

or other unincorporated organization, through or by means of which
any business, financial operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
ours.)

For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore, clear to
our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue,
G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently,
We consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the
partnership should be limited to the income derived from the acquisition and sale of
real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties
but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision
of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that

the herein petitioners have formed an unregistered partnership and,
therefore, have to be taxed as such, it might be recalled that the
petitioners in their individual income tax returns reported their shares
of the profits of the unregistered partnership. We think it only fair and
equitable that the various amounts paid by the individual petitioners
as income tax on their respective shares of the unregistered
partnership should be deducted from the deficiency income tax found
by this Honorable Court against the unregistered partnership. (page
7, Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the other
way around. The partnership profits distributable to the partners (petitioners herein)
should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in
issue in this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is
argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since they paid their individual
income taxes, they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay
the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be
reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the
State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.

G.R. No. L-45425 April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.

Office of the Solicitor-General Tuason for appellee.

IMPERIAL, J.:

The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum
of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance
of the City of Manila, which dismissed the action with the costs against them.

The case was submitted for decision upon the following stipulation of facts:

Come now the parties to the above-mentioned case, through their respective undersigned
attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the
following statement of facts:

1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is
the Collector of Internal Revenue of the Philippines;

2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:

1. Jose Gatchalian .................................................................................................... P0.18

2. Gregoria Cristobal ............................................................................................... .18
3. Saturnina Silva .................................................................................................... .08
4. Guillermo Tapia ................................................................................................... .13
5. Jesus Legaspi ...................................................................................................... .15

6. Jose Silva ............................................................................................................. .07

7. Tomasa Mercado ................................................................................................ .08

8. Julio Gatchalian ................................................................................................... .13

9. Emiliana Santiago ................................................................................................ .13

10. Maria C. Legaspi ............................................................................................... .16
11. Francisco Cabral ............................................................................................... .13

12. Gonzalo Javier .................................................................................................... .14

13. Maria Santiago ................................................................................................... .17

14. Buenaventura Guzman ...................................................................................... .13

15. Mariano Santos ................................................................................................. .14

Total ........................................................................................................ 2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that
the said ticket was registered in the name of Jose Gatchalian and Company;

4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-
mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000
and that the corresponding check covering the above-mentioned prize of P50,000 was drawn
by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against
the Philippine National Bank, which check was cashed during the latter part of December,
1934 by Jose Gatchalian & Company;

5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by Jose
Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose
Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;

6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &
Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer
of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within
which to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is
enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a
copy of which marked Exhibit C is attached and made a part hereof, requesting exemption
from payment of the income tax to which reply there were enclosed fifteen (15) separate
individual income tax returns filed separately by each one of the plaintiffs, copies of which
returns are attached and marked Exhibit D-1 to D-15, respectively, in order of their names
listed in the caption of this case and made parts hereof; a statement of sale signed by Jose
Gatchalian showing the amount put up by each of the plaintiffs to cover up the attached and
marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose
Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part
thereof;

8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G
is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment
of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and
gave plaintiffs until February 10, 1935 within which to pay the said tax;

9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed,
defendant on May 13, 1935 issued a warrant of distraint and levy against the property of the
plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part hereof;

10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs,
the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus
Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is
attached and marked Exhibit J and made a part hereof, and requested defendant that
plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly
installments;

11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two solvent
persons to guarantee prompt payment of each installments as it becomes due;

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed
and made a part hereof, to guarantee the payment of the balance of the alleged tax liability
by monthly installments at the rate of P118.70 a month, the first payment under protest to be
effected on or before July 31, 1935;

13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the
sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935 overruled the protest and denied the request for
refund of the plaintiffs;

14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance
with the terms and conditions of bond filed by them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of
Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against
the plaintiffs on May 13, 1935;

15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria
 Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan,
Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and
penalties demanded by defendant as evidenced by income tax receipt No. 35811 which is
attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the
plaintiffs formally protested to the defendant against the payment of said amount and
requested the refund thereof, copy of which is attached and marked Exhibit O and made part
hereof; but that on September 4, 1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and

16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand
eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest
by them but that defendant refused and still refuses to refund the said amount
notwithstanding the plaintiffs' demands.

17. The parties hereto reserve the right to present other and additional evidence if
necessary.

Exhibit E referred to in the stipulation is of the following tenor:

To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the
11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and
for the amount indicated below and the part of may share remaining is also shown to wit:

Purchaser Amount Address

1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.

2. Buenaventura Guzman ............................... .13 - Do -

3. Maria Santiago ............................................ .17 - Do -
4. Gonzalo Javier .............................................. .14 - Do -

5. Francisco Cabral .......................................... .13 - Do -

6. Maria C. Legaspi .......................................... .16 - Do -

7. Emiliana Santiago ......................................... .13 - Do -

8. Julio Gatchalian ............................................ .13 - Do -

9. Jose Silva ...................................................... .07 - Do -

10. Tomasa Mercado ....................................... .08 - Do -

11. Jesus Legaspi ............................................. .15 - Do -

12. Guillermo Tapia ........................................... .13 - Do -

13. Saturnina Silva ............................................ .08 - Do -
14. Gregoria Cristobal ....................................... .18 - Do -
 15. Jose Gatchalian ............................................ .18 - Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever
prize that might be won by said ticket.

Pulilan, Bulacan, P.I.

(Sgd.) JOSE GATCHALIAN

And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:

RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED

JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Exhibit Purchase Price Net

Name Expenses
No. Price Won prize
1. Jose Gatchalian
D-1 P0.18 P4,425 P 480 3,945
..........................................

2. Gregoria Cristobal
D-2 .18 4,575 2,000 2,575
......................................
3. Saturnina Silva
D-3 .08 1,875 360 1,515
.............................................

4. Guillermo Tapia
D-4 .13 3,325 360 2,965
..........................................
5. Jesus Legaspi by Maria
D-5 .15 3,825 720 3,105
Cristobal .........
6. Jose Silva
D-6 .08 1,875 360 1,515
....................................................

7. Tomasa Mercado
D-7 .07 1,875 360 1,515
.......................................

8. Julio Gatchalian by Beatriz

D-8 .13 3,150 240 2,910
Guzman .......
9. Emiliana Santiago
D-9 .13 3,325 360 2,965
......................................
10. Maria C. Legaspi
D-10 .16 4,100 960 3,140
......................................

11. Francisco Cabral

D-11 .13 3,325 360 2,965
......................................
12. Gonzalo Javier D-12 .14 3,325 360 2,965
 ..........................................
13. Maria Santiago
D-13 .17 4,350 360 3,990
..........................................
14. Buenaventura Guzman
D-14 .13 3,325 360 2,965
...........................

15. Mariano Santos

D-15 .14 3,325 360 2,965
........................................

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The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to
the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own; in the first case it is admitted that the partnership thus formed is
liable for the payment of income tax, whereas if there was merely a community of property, they are
exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:

SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association or insurance
company, organized in the Philippine Islands, no matter how created or organized, but not
including duly registered general copartnership (compañias colectivas), a tax of three per
centum upon such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar year from all sources
within the Philippine Islands by every corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance company organized, authorized,
or existing under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however, That
nothing in this section shall be construed as permitting the taxation of the income derived
from dividends or net profits on which the normal tax has been paid.

The gain derived or loss sustained from the sale or other disposition by a corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association, or
insurance company, or property, real, personal, or mixed, shall be ascertained in accordance
with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred
and thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six.

The foregoing tax rate shall apply to the net income received by every taxable corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
 insurance company in the calendar year nineteen hundred and twenty and in each year
thereafter.

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt
from the payment of income tax under the law. But according to the stipulation facts the plaintiffs
organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the
amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office
of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize,
the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.

[G.R. No. 110782. September 25, 1998]

IRMA IDOS, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE

PHILIPPINES, respondents.

DECISION
QUISUMBING, J.:

Before this Court is the petition for review of the Decision of respondent Court of
Appeals[1] dismissing petitioners appeal in CA-G.R. CR No. 11960; and affirming her conviction
as well as the sentence imposed on her by the Regional Trial Court of Malolos, Bulacan, in
Criminal Case No. 1395-M-88[2] as follows:
WHEREFORE . . . the [c]ourt finds the accused Irma Idos guilty beyond
reasonable doubt and is hereby sentenced to suffer the penalty of
imprisonment of six (6) months and to pay a fine of P135,000.00 and to pay
private complainant Eddie Alarilla the amount of the check in question
of P135,000.00 at 12% interest from the time of the filing of the [i]nformation
(August 10, 1988) until said amount has been fully paid.
Elevated from the Third Division[3] of this Court, the case was accepted for resolution en
banc on the initial impression that here, a constitutional question might be involved.[4] It was
opined that petitioners sentence, particularly six months imprisonment, might be in violation of
the constitutional guarantee against imprisonment for non-payment of a debt.[5]
A careful consideration of the issues presented in the petition as well as the comments
thereon and the findings of fact by the courts below in the light of applicable laws and precedents
convinces us, however, that the constitutional dimension need not be reached in order to resolve
those issues adequately. For, as herein discussed, the merits of the petition could be determined
without delving into aspects of the cited constitutional guarantee vis--vis provisions of
the Bouncing Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay
aside discussions of the constitutional challenge to said law in deciding this petition.
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her
accuser for violation of B.P. 22 is her erstwhile supplier and business partner, the complainant
below, Eddie Alarilla.
As narrated by the Court of Appeals, the background of this case is as follows:
The complainant Eddie Alarilla supplied chemicals and rawhide to the
accused-appellant Irma L. Idos for use in the latters business of manufacturing
leather. In 1985, he joined the accused-appellants business and formed with
her a partnership under the style Tagumpay Manufacturing, with offices in
Bulacan and Cebu City.
However, the partnership was short lived. In January, 1986 the parties agreed
to terminate their partnership. Upon liquidation of the business the partnership
had as of May 1986 receivables and stocks worth P1,800,000.00. The
complainants share of the assets was P900,000.00 to pay for which the
accused-appellant issued the following postdated checks, all drawn against
Metrobank Branch in Mandaue, Cebu:

CHECK NO. DATE AMOUNT

1) 103110295 8-15-86 P135,828.87

2) 103110294 P135,828.87
3) 103115490 9-30-86 P135,828.87
4) 103115491 10-30-86 P126,656.01

The complainant was able to encash the first, second, and fourth checks, but
the third check (Exh. A) which is the subject of this case, was dishonored on
October 14, 1986 for insufficiency of funds.The complainant demanded
payment from the accused-appellant but the latter failed to pay. Accordingly,
on December 18, 1986, through counsel, he made a formal demand for
payment. (Exh. B) In a letter dated January 2, 1987, the accused-appellant
denied liability. She claimed that the check had been given upon demand of
complainant in May 1986 only as assurance of his share in the assets of the
 partnership and that it was not supposed to be deposited until the stocks had
been sold.
Complainant then filed his complaint in the Office of the Provincial Fiscal of
Bulacan which on August 22, 1988 filed an information for violation of BP
Blg. 22 against accused-appellant.
Complainant denied that the checks issued to him by accused-appellant were
subject to the disposition of the stocks and the collection of receivables of the
business. But the accused-appellant insisted that the complainant had known
that the checks were to be funded from the proceeds of the sale of the stocks
and the collection of receivables. She claimed that the complainant himself
asked for the checks because he did not want to continue in the tannery
business and had no use for a share of the stocks. (TSN, p. 7, April 14,
1991; id., pp. 8-9, Nov. 13, 1989; id., pp. 12, 16, 20, Feb. 14, 1990; id., p. 14,
June 4, 1990).
On February 15, 1992, the trial court rendered judgment finding the accused-
appellant guilty of the crime charged. The accused-appellants motion for
annulment of the decision and for reconsideration was denied by the trial court
in its order dated April 12, 1991.[6]
Herein respondent court thereafter affirmed on appeal the decision of the trial
court. Petitioner timely moved for a reconsideration, but this was subsequently denied by
respondent court in its Resolution[7] dated June 11, 1993. Petitioner has now appealed to us by
way of a petition for certiorari under Rule 45 of the Rules of Court.
During the pendency of this petition, this Court by a resolution[8] dated August 30, 1993,
took note of the compromise agreement executed between the parties, regarding the civil aspect
of the case, as manifested by petitioner in a Motion to Render Judgment based on Compromise
Agreement[9]filed on August 5, 1993. After submission of the Comment[10] by the Solicitor
General, and the Reply[11] by petitioner, this case was deemed submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial courts decision,
petitioner cites the following reasons to justify the review of her case:

1. The Honorable Court of Appeals has decided against the innocence of the
accused based on mere probabilities which, on the contrary, should have
warranted her acquittal on reasonable doubt. Even then, the conclusion of the
trial court is contrary to the evidence on record, including private complainants
judicial admission that there was no consideration for the check.

2. The Honorable Court of Appeals has confused and merged into one the legal
concepts of dissolution, liquidation and termination of a partnership and, on the
basis of such misconception of the law, disregarded the fact of absence of
consideration of the check and convicted the accused.
 3. While this appeal was pending, the parties submitted for the approval of the
Honorable Court a compromise agreement on the civil liability. The accused
humbly submits that this supervening event, which by its terms puts to rest any
doubt the Court of Appeals had entertained against the defense of lack of
consideration, should have a legal effect favorable to the accused, considering
that the dishonored check constitutes a private transaction between partners
which does not involve the public interest, and considering further that the
offense is not one involving moral turpitude.

4. The Honorable Court of Appeals failed to appreciate the fact that the accused
had warned private complainant that the check was not sufficiently funded,
which should have exonerated the accused pursuant to the ruling in the recent
case of Magno vs. Court of Appeals, 210 SCRA 471, which calls for a more
flexible and less rigid application of the Bouncing Checks law.[12]

For a thorough consideration of the merits of petitioners appeal, we find pertinent and
decisive the following issues:

1. Whether respondent court erred in holding that the subject check was issued by
petitioner to apply on account or for value, that is, as part of the consideration of a
buy-out of said complainants interest in the partnership, and not merely as a
commitment on petitioners part to return the investment share of complainant, along
with any profit pertaining to said share, in the partnership.

2. Whether the respondent court erred in concluding that petitioner issued the subject
check knowing at the time of issue that she did not have sufficient funds in or credit
with the drawee bank and without communicating this fact of insufficiency of funds to
the complainant.

Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming
the trial courts judgment that she violated Batas Pambansa Blg. 22?
Considering that penal statutes are strictly construed against the state and liberally in favor
of the accused, it bears stressing that for an act to be punishable under the B.P. 22, it must come
clearly within both the spirit and the letter of the statute.[13] Otherwise, the act has to be declared
outside the laws ambit and a plea of innocence by the accused must be sustained.
The relevant provisions of B.P. 22 state that:

SECTION 1. Checks without sufficient funds. Any person who makes or draws and
issues any check to apply on account or for value, knowing at the time of issue that he
does not have sufficient funds in or credit with the drawee bank for the payment of
such check in full upon its presentment, which check is subsequently dishonored by
the drawee bank for insufficiency of funds or credit or would have been dishonored
for the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment, shall be punished by imprisonment of not less than thirty days but not
more than one (1) year or by a fine of not less than but not more than double the
amount of the check which fine shall in no case exceed Two hundred thousand pesos,
or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who having sufficient funds in or
credit with the drawee bank when he makes or draws and issues a check, shall fail to
keep sufficient funds or to maintain a credit or to cover the full amount of the check if
presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons
who actually signed the check in behalf of such drawer shall be liable under this Act.

SECTION 2. Evidence of knowledge of insufficient funds. The making, drawing and

issuance of a check payment of which is refused by the drawee because of insufficient
funds in or credit with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of such insufficiency of
funds or credit unless such maker or drawer pays the holder thereof the amount due
thereon, or makes arrangements for payment in full by the drawee of such check
within five (5) banking days after receiving notice that such check has not been paid
by the drawee. (Underscoring supplied)

As decided by this Court, the elements of the offense penalized under B.P. 22, are as
follows: (1) the making, drawing and issuance of any check to apply to account or for value; (2)
the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient
funds in or credit with the drawee bank for the payment of such check in full upon its
presentment; and (3) subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.[14]
In the present case, with regard to the first issue, evidence on record would show that the
subject check was to be funded from receivables to be collected and goods to be sold by the
partnership, and only when such collection and sale were realized.[15] Thus, there is sufficient
basis for the assertion that the petitioner issued the subject check (Metrobank Check No.
103115490 dated October 30, 1986, in the amount of P135,828.87) to evidence only
complainants share or interest in the partnership, or at best, to show her commitment that when
receivables are collected and goods are sold, she would give to private complainant the net
amount due him representing his interest in the partnership. It did not involve a debt of or any
account due and payable by the petitioner.
Two facts stand out. Firstly, three of four checks were properly encashed by complainant;
only one (the third) was not. But eventually even this one was redeemed by petitioner. Secondly,
even private complainant admitted that there was no consideration whatsoever for the issuance of
the check, whose funding was dependent on future sales of goods and receipts of payment of
account receivables.
Now, it could not be denied that though the parties petitioners and complainant had agreed
to dissolve the partnership, such agreement did not automatically put an end to the partnership,
since they still had to sell the goods on hand and collect the receivables from debtors. In short,
they were still in the process of winding up the affairs of the partnership, when the check in
question was issued.
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-
up; and (3) termination. These stages are distinguished, to wit:

(1) Dissolution Defined

Dissolution is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on of the business
(Art. 1828). It is that point of time the partners cease to carry on the
business together. [Citation omitted]

(2) Winding Up Defined

Winding up is the process of settling business affairs after dissolution.

(NOTE: Examples of winding up: the paying of previous

obligations; the collecting of assets previously demandable; even
new business if needed to wind up, as the contracting with a
demolition company for the demolition of the garage used in a used
car partnership.)

(3) Termination Defined

Termination is the point in time after all the partnership affairs have
been wound up.[16] [Citation omitted] (Underscoring supplied.)
These final stages in the life of a partnership are recognized under the Civil Code that
explicitly declares that upon dissolution, the partnership is not terminated, to wit:

Art. 1828. The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished
from the winding up of the business.

Art. 1829. On dissolution the partnership is not terminated, but continues until the
winding up of partnership affairs is completed. (Underscoring supplied.)
 The best evidence of the existence of the partnership, which was not yet terminated (though
in the winding up stage), were the unsold goods and uncollected receivables, which were
presented to the trial court. Since the partnership has not been terminated, the petitioner and
private complainant remained as co-partners. The check was thus issued by the petitioner to
complainant, as would a partner to another, and not as payment from a debtor to a creditor.
The more tenable view, one in favor of the accused, is that the check was issued merely to
evidence the complainants share in the partnership property, or to assure the latter that he would
receive in time his due share therein. The alternative view that the check was in consideration of
a buy out is but a theory, favorable to the complainant, but lacking support in the record; and
must necessarily be discarded.
For there is nothing on record which even slightly suggests that petitioner ever became
interested in acquiring, much less keeping, the shares of the complainant. What is very clear
therefrom is that the petitioner exerted her best efforts to sell the remaining goods and to collect
the receivables of the partnership, in order to come up with the amount necessary to satisfy the
value of complainants interest in the partnership at the dissolution thereof. To go by accepted
custom of the trade, we are more inclined to the view that the subject check was issued merely to
evidence complainants interest in the partnership.Thus, we are persuaded that the check was not
intended to apply on account or for value; rather it should be deemed as having been drawn
without consideration at the time of issue.
Absent the first element of the offense penalized under B.P. 22, which is the making,
drawing and issuance of any check to apply on account or for value, petitioners issuance of the
subject check was not an act contemplated in nor made punishable by said statute.
As to the second issue, the Solicitor General contends that under the Bouncing Checks Law,
the elements of deceit and damage are not essential or required to constitute a violation
thereof. In his view, the only essential element is the knowledge on the part of the maker or
drawer of the check of the insufficiency of his/her funds at the time of the issuance of said check.
The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special
offense punishable by law. Malice or intent in issuing the worthless check is immaterial, the
offense being malum prohibitum,[17] so goes the argument for the public respondents.
But of course this could not be an absolute proposition without descending to absurdity. For
if a check were issued by a kidnap victim to a kidnapper for ransom, it would be absurd to hold
the drawer liable under B.P. 22, if the check is dishonored and unpaid. That would go against
public policy and common sense.
Public respondents further contend that since petitioner issued the check in favor of
complainant Alarilla and when notified that it was returned for insufficiency of funds, failed to
make good the check, then petitioner is liable for violation of B.P. 22.[18] Again, this matter could
not be all that simple. For while the makers knowledge of the insufficiency of funds is legally
presumed from the dishonor of his checks for insufficiency of funds,[19] this presumption is
rebuttable.
In the instant case, there is only a prima facie presumption which did not preclude the
presentation of contrary evidence.[20] In fact, such contrary evidence on two points could be
gleaned from the record concerning (1) lack of actual knowledge of insufficiency of funds; and
(2) lack of adequate notice of dishonor.
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee
bank for the payment of a check upon its presentment is an essential element of the offense.[21] It
must be proved, particularly where the prima facie presumption of the existence of this element
has been rebutted. The prima facie presumption arising from the fact of drawing, issuing or
making a check, the payment of which was subsequently refused for insufficiency of funds is,
moreover, not sufficient proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals,[22] it was held that the subsequent dishonor of the
subject check issued by accused merely engendered the prima facie presumption that she knew
of the insufficiency of funds, but did not render the accused automatically guilty under B.P.
22.[23]

The prosecution has a duty to prove all the elements of the crime, including the acts
that give rise to the prima facie presumption; petitioner, on the other hand, has a right
to rebut the prima facie presumption.Therefore, if such knowledge of insufficiency of
funds is proven to be actually absent or non-existent, the accused should not be held
liable for the offense defined under the first paragraph of Section 1 of B.P.
22. Although the offense charged is a malum prohibitum, the prosecution is not
thereby excused from its responsibility of proving beyond reasonable doubt all the
elements of the offense, one of which is knowledge of the insufficiency of funds.

Section 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the
check, be shown that he knows at the time of issue, that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment.
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the
proportionate share of complainant in the partnership assets upon its dissolution. Payment of that
share in the partnership was conditioned on the subsequent realization of profits from the unsold
goods and collection of the receivables of the firm. This condition must be satisfied or complied
with before the complainant can actually encash the check. The reason for the condition is that
petitioner has no independent means to satisfy or discharge the complainants share, other than by
the future sale and collection of the partnership assets. Thus, prior to the selling of the goods and
collecting of the receivables, the complainant could not, as of yet, demand his proportionate
share in the business. This situation would hold true until after the winding up, and subsequent
termination of the partnership. For only then, when the goods were already sold and receivables
paid that cash money could be availed of by the erstwhile partners.
Complainant did not present any evidence that petitioner signed and issued four checks
actually knowing that funds therefor would be insufficient at the time complainant would present
them to the drawee bank. For it was uncertain at the time of issuance of the checks whether the
unsold goods would have been sold, or whether the receivables would have been collected by the
time the checks would be encashed. As it turned out, three were fully funded when presented to
the bank; the remaining one was settled only later on.
 Since petitioner issued these four checks without actual knowledge of the insufficiency of
funds, she could not be held liable under B.P. 22 when one was not honored right away. For it is
basic doctrine that penal statutes such as B.P. 22 must be construed with such strictness as to
carefully safeguard the rights of the defendant x x x.[24] The element of knowledge of
insufficiency of funds has to be proved by the prosecution; absent said proof, petitioner could not
be held criminally liable under that law. Moreover, the presumption of prima facie knowledge of
such insufficiency in this case was actually rebutted by petitioners evidence.
Further, we find that the prosecution also failed to prove adequate notice of dishonor of the
subject check on petitioners part, thus precluding any finding of prima facie evidence of
knowledge of insufficiency of funds. There is no proof that notice of dishonor was actually sent
by the complainant or by the drawee bank to the petitioner. On this point, the record is bereft of
evidence to the contrary.
But in fact, while the subject check initially bounced, it was later made good by
petitioner. In addition, the terms of the parties compromise agreement, entered into during the
pendency of this case, effectively invalidates the allegation of failure to pay or to make
arrangement for the payment of the check in full. Verily, said compromise agreement constitutes
an arrangement for the payment in full of the subject check.
The absence of notice of dishonor is crucial in the present case. As held by this Court in
prior cases:

Because no notice of dishonor was actually sent to and received by the petitioner,
the prima facie presumption that she knew about the insufficiency of funds cannot
apply. Section 2 of B.P. 22 clearly provides that this presumption arises not from the
mere fact of drawing, making and issuing a bum check; there must also be a showing
that, within five banking days from receipt of the notice of dishonor, such maker or
drawer failed to pay the holder of the check the amount due thereon or to make
arrangement for its payment in full by the drawee of such check.[25] [Underscoring
supplied.]

The absence of a notice of dishonor necessarily deprives an accused an opportunity to

preclude a criminal prosecution. Accordingly, procedural due process clearly enjoins
that a notice of dishonor be actually served on petitioner. Petitioner has a right to
demand and the basic postulates of fairness require that the notice of dishonor be
actually sent to and received by her to afford her the opportunity to avert prosecution
under B.P. 22.[26]

Further, what militates strongly against public respondents stand is the fact that petitioner
repeatedly notified the complainant of the insufficiency of funds. Instructive is the following
pronouncement of this Court in Magno v. Court of Appeals:

Furthermore, the element of knowing at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in
full upon its presentment, which check is subsequently dishonored by the drawee bank
for insufficiency of funds or credit or would have been dishonored for the same reason
x x x is inversely applied in this case. From the very beginning, petitioner never hid
the fact that he did not have the funds with which to put up the warranty deposit and
as a matter of fact, he openly intimated this to the vital conduit of the transaction, Joey
Gomez, to whom petitioner was introduced by Mrs. Teng. It would have been
different if this predicament was not communicated to all the parties he dealt with
regarding the lease agreement the financing of which was covered by L.S. Finance
Management.[27]

In the instant case, petitioner intimated to private complainant the possibility that funds
might be insufficient to cover the subject check, due to the fact that the partnerships goods were
yet to be sold and receivables yet to be collected.
As Magno had well observed:

For all intents and purposes, the law was devised to safeguard the interest of the
banking system and the legitimate public checking account user. It did not intend to
shelter or favor nor encourage users of the system to enrich themselves through
manipulations and circumvention of the noble purpose and objective of the law. Least
should it be used also as a means of jeopardizing honest-to-goodness transactions with
some color of get-rich scheme to the prejudice of well-meaning businessmen who are
the pillars of society.

xxx

Thus, it behooves upon a court of law that in applying the punishment imposed upon
the accused, the objective of retribution of a wronged society, should be directed
against the actual and potential wrongdoers. In the instant case, there is no doubt that
petitioners four (4) checks were used to collateralize an accommodation, and not to
cover the receipt of an actual account or credit for value as this was absent, and
therefore petitioner should not be punished for mere issuance of the checks in
question. Following the aforecited theory, in petitioners stead the potential wrongdoer,
whose operation could be a menace to society, should not be glorified by convicting
the petitioner.[28]

Under the circumstances obtaining in this case, we find the petitioner to have issued the
check in good faith, with every intention of abiding by her commitment to return, as soon as
able, the investments of complainant in the partnership. Evidently, petitioner issued the check
with benign considerations in mind, and not for the purpose of committing fraud, deceit, or
violating public policy
To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable
for violation of B.P. 22 for the following reasons: (1) the subject check was not made, drawn and
issued by petitioner in exchange for value received as to qualify it as a check on account or for
value; (2) there is no sufficient basis to conclude that petitioner, at the time of issue of the check,
had actual knowledge of the insufficiency of funds; and (3) there was no notice of dishonor of
said check actually served on petitioner, thereby depriving her of the opportunity to pay or make
arrangements for the payment of the check, to avoid criminal prosecution.
Having resolved the foregoing principal issues, and finding the petition meritorious, we no
longer need to pass upon the validity and legality or necessity of the purported compromise
agreement on civil liability between the petitioner and the complainant.
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER
ACQUITTED. The Decision of the respondent Court of Appeals in CA-G.R. CR No. 11960 is
hereby REVERSED and the Decision of Regional Trial Court in Criminal Case No. 1395-M-88
is hereby SET ASIDE.
NO COSTS.
SO ORDERED.

[G.R. No. 142293. February 27, 2003]

VICENTE SY, TRINIDAD PAULINO, 6BS TRUCKING CORPORATION,

and SBT TRUCKING CORPORATION, petitioners, vs. HON.
[1]

COURT OF APPEALS and JAIME SAHOT, respondents.

DECISION
QUISUMBING, J.:

This petition for review seeks the reversal of the decision of the Court of [2]

Appeals dated February 29, 2000, in CA-G.R. SP No. 52671, affirming with
modification the decision of the National Labor Relations Commission
[3]

promulgated on June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners

also pray for the reinstatement of the decision of the Labor Arbiter in NLRC
[4]

NCR Case No. 00-09-06717-94.

Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot started working as a[5]

truck helper for petitioners family-owned trucking business named Vicente Sy

Trucking. In 1965, he became a truck driver of the same family business,
renamed T. Paulino Trucking Service, later 6Bs Trucking Corporation in 1985,
and thereafter known as SBT Trucking Corporation since 1994.Throughout all
these changes in names and for 36 years, private respondent continuously
served the trucking business of petitioners.
 In April 1994, Sahot was already 59 years old. He had been incurring
absences as he was suffering from various ailments. Particularly causing him
pain was his left thigh, which greatly affected the performance of his task as a
driver. He inquired about his medical and retirement benefits with the Social
Security System (SSS) on April 25, 1994, but discovered that his premium
payments had not been remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May 27 , he th

was medically examined and treated for EOR, presleyopia, hypertensive

retinopathy G II (Annexes G-5 and G-3, pp. 48, 104, respectively), HPM, UTI,
[6]

Osteoarthritis (Annex G-4, p. 105), and heart enlargement (Annex G, p.

[7]

107). On said grounds, Belen Paulino of the SBT Trucking Service

[8]

management told him to file a formal request for extension of his leave. At the
end of his week-long absence, Sahot applied for extension of his leave for the
whole month of June, 1994. It was at this time when petitioners allegedly
threatened to terminate his employment should he refuse to go back to work.
At this point, Sahot found himself in a dilemma. He was facing dismissal if
he refused to work, But he could not retire on pension because petitioners
never paid his correct SSS premiums. The fact remained he could no longer
work as his left thigh hurt abominably. Petitioners ended his dilemma. They
carried out their threat and dismissed him from work, effective June 30, 1994.
He ended up sick, jobless and penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration
Branch, a complaint for illegal dismissal, docketed as NLRC NCR Case No.
00-09-06717-94. He prayed for the recovery of separation pay and attorneys
fees against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy
Trucking, T. Paulino Trucking Service, 6Bs Trucking and SBT Trucking, herein
petitioners.
For their part, petitioners admitted they had a trucking business in the
1950s but denied employing helpers and drivers. They contend that private
respondent was not illegally dismissed as a driver because he was in fact
petitioners industrial partner. They add that it was not until the year 1994,
when SBT Trucking Corporation was established, and only then did
respondent Sahot become an employee of the company, with a monthly
salary that reached P4,160.00 at the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994, Sahot
went on leave and was not able to report for work for almost seven days. On
June 1, 1994, Sahot asked permission to extend his leave of absence until
June 30, 1994. It appeared that from the expiration of his leave, private
respondent never reported back to work nor did he file an extension of his
leave. Instead, he filed the complaint for illegal dismissal against the trucking
company and its owners.
Petitioners add that due to Sahots refusal to work after the expiration of
his authorized leave of absence, he should be deemed to have voluntarily
resigned from his work. They contended that Sahot had all the time to extend
his leave or at least inform petitioners of his health condition. Lastly, they cited
NLRC Case No. RE-4997-76, entitled Manuelito Jimenez et al. vs. T. Paulino
Trucking Service, as a defense in view of the alleged similarity in the factual
milieu and issues of said case to that of Sahots, hence they are in pari
material and Sahots complaint ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente
Santos, ruled that there was no illegal dismissal in Sahots case. Private
respondent had failed to report to work. Moreover, said the Labor Arbiter,
petitioners and private respondent were industrial partners before January
1994. The Labor Arbiter concluded by ordering petitioners to pay financial
assistance of P15,000 to Sahot for having served the company as a regular
employee since January 1994 only.
On appeal, the National Labor Relations Commission modified the
judgment of the Labor Arbiter. It declared that private respondent was an
employee, not an industrial partner, since the start. Private respondent Sahot
did not abandon his job but his employment was terminated on account of his
illness, pursuant to Article 284 of the Labor Code. Accordingly, the NLRC
[9]

ordered petitioners to pay private respondent separation pay in the amount of

P60,320.00, at the rate of P2,080.00 per year for 29 years of service.
Petitioners assailed the decision of the NLRC before the Court of Appeals.
In its decision dated February 29, 2000, the appellate court affirmed with
modification the judgment of the NLRC. It held that private respondent was
indeed an employee of petitioners since 1958. It also increased the amount of
separation pay awarded to private respondent to P74,880, computed at the
rate of P2,080 per year for 36 years of service from 1958 to 1994. It decreed:

WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION.

SB Trucking Corporation is hereby directed to pay complainant Jaime Sahot the sum
of SEVENTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY (P74,880.00)
PESOS as and for his separation pay. [10]

Hence, the instant petition anchored on the following contentions:

I
RESPONDENT COURT OF APPEALS IN PROMULGATING THE
QUESTION[ED] DECISION AFFIRMING WITH MODIFICATION THE
DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT
IN ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL
CODE. [11]

II

RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING

THAT THE NATIONAL LABOR RELATIONS COMMISSION IS BOUND BY
THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE LATTER WAS
IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND
DEPORTMENT OF THE WITNESSES IN THE CASE OF ASSOCIATION OF
INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS NATIONAL CAPITAL
REGION (305 SCRA 233). [12]

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT

TRUCKING CORPORATION. [13]

Three issues are to be resolved: (1) Whether or not an employer-

employee relationship existed between petitioners and respondent Sahot; (2)
Whether or not there was valid dismissal; and (3) Whether or not respondent
Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first issue.
Before a case for illegal dismissal can prosper, an employer-employee
relationship must first be established. [14]

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos
which found that respondent Sahot was not an employee but was in fact,
petitioners industrial partner. It is contended that it was the Labor Arbiter who
[15]

heard the case and had the opportunity to observe the demeanor and
deportment of the parties. The same conclusion, aver petitioners, is supported
by substantial evidence. Moreover, it is argued that the findings of fact of the
[16]

Labor Arbiter was wrongly overturned by the NLRC when the latter made the
following pronouncement:

We agree with complainant that there was error committed by the Labor Arbiter when
he concluded that complainant was an industrial partner prior to 1994. A computation
of the age of complainant shows that he was only twenty-three (23) years when he
started working with respondent as truck helper. How can we entertain in our mind
that a twenty-three (23) year old man, working as a truck helper, be considered an
industrial partner. Hence we rule that complainant was only an employee, not a
partner of respondents from the time complainant started working for respondent. [17]

Because the Court of Appeals also found that an employer-employee

relationship existed, petitioners aver that the appellate courts decision gives
an imprimatur to the illegal finding and conclusion of the NLRC.
Private respondent, for his part, denies that he was ever an industrial
partner of petitioners. There was no written agreement, no proof that he
received a share in petitioners profits, nor was there anything to show he had
any participation with respect to the running of the business. [18]

The elements to determine the existence of an employment relationship

are: (a) the selection and engagement of the employee; (b) the payment of
wages; (c) the power of dismissal; and (d) the employers power to control the
employees conduct. The most important element is the employers control of
the employees conduct, not only as to the result of the work to be done, but
also as to the means and methods to accomplish it. [19]

As found by the appellate court, petitioners owned and operated a trucking

business since the 1950s and by their own allegations, they determined
private respondents wages and rest day. Records of the case show that
[20]

private respondent actually engaged in work as an employee. During the

entire course of his employment he did not have the freedom to determine
where he would go, what he would do, and how he would do it. He merely
followed instructions of petitioners and was content to do so, as long as he
was paid his wages. Indeed, said the CA, private respondent had worked as a
truck helper and driver of petitioners not for his own pleasure but under the
latters control.
Article 1767 of the Civil Code states that in a contract of partnership two
[21]

or more persons bind themselves to contribute money, property or industry to

a common fund, with the intention of dividing the profits among
themselves. Not one of these circumstances is present in this case. No
[22]

written agreement exists to prove the partnership between the parties. Private
respondent did not contribute money, property or industry for the purpose of
engaging in the supposed business. There is no proof that he was receiving a
share in the profits as a matter of course, during the period when the trucking
business was under operation. Neither is there any proof that he had actively
participated in the management, administration and adoption of policies of the
business. Thus, the NLRC and the CA did not err in reversing the finding of
the Labor Arbiter that private respondent was an industrial partner from 1958
to 1994.
On this point, we affirm the findings of the appellate court and the NLRC.
Private respondent Jaime Sahot was not an industrial partner but an
employee of petitioners from 1958 to 1994. The existence of an employer-
employee relationship is ultimately a question of fact and the findings
[23]

thereon by the NLRC, as affirmed by the Court of Appeals, deserve not only
respect but finality when supported by substantial evidence. Substantial
evidence is such amount of relevant evidence which a reasonable mind might
accept as adequate to justify a conclusion. [24]

Time and again this Court has said that if doubt exists between the
evidence presented by the employer and the employee, the scales of justice
must be tilted in favor of the latter. Here, we entertain no doubt. Private
[25]

respondent since the beginning was an employee of, not an industrial partner
in, the trucking business.
Coming now to the second issue, was private respondent validly
dismissed by petitioners?
Petitioners contend that it was private respondent who refused to go back
to work. The decision of the Labor Arbiter pointed out that during the
conciliation proceedings, petitioners requested respondent Sahot to report
back for work. However, in the same proceedings, Sahot stated that he was
no longer fit to continue working, and instead he demanded separation pay.
Petitioners then retorted that if Sahot did not like to work as a driver anymore,
then he could be given a job that was less strenuous, such as working as a
checker. However, Sahot declined that suggestion. Based on the foregoing
recitals, petitioners assert that it is clear that Sahot was not dismissed but it
was of his own volition that he did not report for work anymore.
In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue working with
respondents despite his alleged illness, there is no direct evidence that will prove that
complainants illness prevents or incapacitates him from performing the function of a
driver. The fact remains that complainant suddenly stopped working due to boredom
or otherwise when he refused to work as a checker which certainly is a much less
strenuous job than a driver.[26]

But dealing the Labor Arbiter a reversal on this score the NLRC, concurred
in by the Court of Appeals, held that:
While it was very obvious that complainant did not have any intention to report back
to work due to his illness which incapacitated him to perform his job, such intention
cannot be construed to be an abandonment. Instead, the same should have been
considered as one of those falling under the just causes of terminating an employment.
The insistence of respondent in making complainant work did not change the
scenario.

It is worthy to note that respondent is engaged in the trucking business where physical
strength is of utmost requirement (sic). Complainant started working with respondent
as truck helper at age twenty-three (23), then as truck driver since 1965. Complainant
was already fifty-nine (59) when the complaint was filed and suffering from various
illness triggered by his work and age.

xxx [27]

In termination cases, the burden is upon the employer to show by

substantial evidence that the termination was for lawful cause and validly
made. Article 277(b) of the Labor Code puts the burden of proving that the
[28]

dismissal of an employee was for a valid or authorized cause on the

employer, without distinction whether the employer admits or does not admit
the dismissal. For an employees dismissal to be valid, (a) the dismissal must
[29]

be for a valid cause and (b) the employee must be afforded due process. [30]

Article 284 of the Labor Code authorizes an employer to terminate an

employee on the ground of disease, viz:

Art. 284. Disease as a ground for termination- An employer may terminate the
services of an employee who has been found to be suffering from any disease and
whose continued employment is prohibited by law or prejudicial to his health as well
as the health of his co-employees: xxx

However, in order to validly terminate employment on this ground, Book

VI, Rule I, Section 8 of the Omnibus Implementing Rules of the Labor Code
requires:

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease
and his continued employment is prohibited by law or prejudicial to his health or to
the health of his co-employees, the employer shall not terminate his employment
unless there is a certification by competent public health authority that the disease is
of such nature or at such a stage that it cannot be cured within a period of six (6)
months even with proper medical treatment. If the disease or ailment can be cured
within the period, the employer shall not terminate the employee but shall ask the
employee to take a leave. The employer shall reinstate such employee to his former
position immediately upon the restoration of his normal health. (Italics supplied).

As this Court stated in Triple Eight integrated Services, Inc. vs.

NLRC, the requirement for a medical certificate under Article 284 of the
[31]

Labor Code cannot be dispensed with; otherwise, it would sanction the

unilateral and arbitrary determination by the employer of the gravity or extent
of the employees illness and thus defeat the public policy in the protection of
labor.
In the case at bar, the employer clearly did not comply with the medical
certificate requirement before Sahots dismissal was effected. In the same
case of Sevillana vs. I.T. (International) Corp., we ruled:

Since the burden of proving the validity of the dismissal of the employee rests on the
employer, the latter should likewise bear the burden of showing that the requisites for
a valid dismissal due to a disease have been complied with. In the absence of the
required certification by a competent public health authority, this Court has ruled
against the validity of the employees dismissal. It is therefore incumbent upon the
private respondents to prove by the quantum of evidence required by law that
petitioner was not dismissed, or if dismissed, that the dismissal was not illegal;
otherwise, the dismissal would be unjustified. This Court will not sanction a dismissal
premised on mere conjectures and suspicions, the evidence must be substantial and
not arbitrary and must be founded on clearly established facts sufficient to warrant his
separation from work. [32]

In addition, we must likewise determine if the procedural aspect of due

process had been complied with by the employer.
From the records, it clearly appears that procedural due process was not
observed in the separation of private respondent by the management of the
trucking company. The employer is required to furnish an employee with two
written notices before the latter is dismissed: (1) the notice to apprise the
employee of the particular acts or omissions for which his dismissal is sought,
which is the equivalent of a charge; and (2) the notice informing the employee
of his dismissal, to be issued after the employee has been given reasonable
opportunity to answer and to be heard on his defense. These, the petitioners
[33]

failed to do, even only for record purposes. What management did was to
threaten the employee with dismissal, then actually implement the threat when
the occasion presented itself because of private respondents painful left thigh.
All told, both the substantive and procedural aspects of due process were
violated. Clearly, therefore, Sahots dismissal is tainted with invalidity.
 On the last issue, as held by the Court of Appeals, respondent Jaime
Sahot is entitled to separation pay. The law is clear on the matter. An
employee who is terminated because of disease is entitled to separation pay
equivalent to at least one month salary or to one-half month salary for every
year of service, whichever is greater xxx. Following the formula set in Art.
[34]

284 of the Labor Code, his separation pay was computed by the appellate
court at P2,080 times 36 years (1958 to 1994) or P74,880. We agree with the
computation, after noting that his last monthly salary was P4,160.00 so that
one-half thereof is P2,080.00. Finding no reversible error nor grave abuse of
discretion on the part of appellate court, we are constrained to sustain its
decision. To avoid further delay in the payment due the separated worker,
whose claim was filed way back in 1994, this decision is immediately
executory. Otherwise, six percent (6%) interest per annum should be charged
thereon, for any delay, pursuant to provisions of the Civil Code.
WHEREFORE, the petition is DENIED and the decision of the Court of
Appeals dated February 29, 2000 is AFFIRMED. Petitioners must pay private
respondent Jaime Sahot his separation pay for 36 years of service at the rate
of one-half monthly pay for every year of service, amounting to P74,880.00,
with interest of six per centum (6%) per annum from finality of this decision
until fully paid.
Costs against petitioners.
SO ORDERED.

G.R. No. 31057 September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees,

vs.
VICENTE POLISTICO, ET AL., defendants-appellants.

Marcelino Lontok and Manuel dela Rosa for appellants.

Sumulong & Lavides for appellees.

VILLAMOR, J.:

This is an action to bring about liquidation of the funds and property of the association called
"Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants were
designated as president-treasurer, directors and secretary of said association.

It is well to remember that this case is now brought before the consideration of this court for the
second time. The first one was when the same plaintiffs appeared from the order of the court below
sustaining the defendant's demurrer, and requiring the former to amend their complaint within a
period, so as to include all the members of "Turnuhan Polistico & Co.," either as plaintiffs or as a
defendants. This court held then that in an action against the officers of a voluntary association to
wind up its affairs and enforce an accounting for money and property in their possessions, it is not
necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico,
47 Phil., 345.) The case having been remanded to the court of origin, both parties amend,
respectively, their complaint and their answer, and by agreement of the parties, the court appointed
Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to examine all the books,
documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the
parties might desire to present.

The commissioner rendered his report, which is attached to the record, with the following resume:

Income:

Member's shares............................ 97,263.70

Credits paid................................ 6,196.55

Interest received........................... 4,569.45

Miscellaneous............................... 1,891.00

P109,620.70

Expenses:

Premiums to members....................... 68,146.25

Loans on real-estate....................... 9,827.00

Loans on promissory notes.............. 4,258.55

Salaries.................................... 1,095.00

Miscellaneous............................... 1,686.10

85,012.90

Cash on hand........................................ 24,607.80

The defendants objected to the commissioner's report, but the trial court, having examined the
reasons for the objection, found the same sufficiently explained in the report and the evidence, and
accepting it, rendered judgment, holding that the association "Turnuhan Polistico & Co." is unlawful,
and sentencing the defendants jointly and severally to return the amount of P24,607.80, as well as
the documents showing the uncollected credits of the association, to the plaintiffs in this case, and to
the rest of the members of the said association represented by said plaintiffs, with costs against the
defendants.

The defendants assigned several errors as grounds for their appeal, but we believe they can all be
reduced to two points, to wit: (1) That not all persons having an interest in this association are
included as plaintiffs or defendants; (2) that the objection to the commissioner's report should have
been admitted by the court below.

As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants,
we are of opinion that, the trial court having examined all the evidence touching the grounds for the
objection and having found that they had been explained away in the commissioner's report, the
conclusion reached by the court below, accepting and adopting the findings of fact contained in said
report, and especially those referring to the disposition of the association's money, should not be
disturbed.

In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of
facts made by a referee appointed under the provisions of section 135 of the Code of Civil
Procedure stand upon the same basis, when approved by the Court, as findings made by the judge
himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under section 140 of
the Code of Civil Procedure it is made the duty of the court to render judgment in accordance with
the report of the referee unless the court shall unless for cause shown set aside the report or
recommit it to the referee. This provision places upon the litigant parties of the duty of discovering
and exhibiting to the court any error that may be contained therein." The appellants stated the
grounds for their objection. The trial examined the evidence and the commissioner's report, and
accepted the findings of fact made in the report. We find no convincing arguments on the appellant's
brief to justify a reversal of the trial court's conclusion admitting the commissioner's findings.

There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39
Phil., 962), but the appellants allege that because it is so, some charitable institution to whom the
partnership funds may be ordered to be turned over, should be included, as a party defendant. The
appellants refer to article 1666 of the Civil Code, which provides:

A partnership must have a lawful object, and must be established for the common benefit of
the partners.

When the dissolution of an unlawful partnership is decreed, the profits shall be given to
charitable institutions of the domicile of the partnership, or, in default of such, to those of the
province.

Appellant's contention on this point is untenable. According to said article, no charitable institution is
a necessary party in the present case of determination of the rights of the parties. The action which
may arise from said article, in the case of unlawful partnership, is that for the recovery of the
amounts paid by the member from those in charge of the administration of said partnership, and it is
not necessary for the said parties to base their action to the existence of the partnership, but on the
fact that of having contributed some money to the partnership capital. And hence, the charitable
institution of the domicile of the partnership, and in the default thereof, those of the province are not
necessary parties in this case. The article cited above permits no action for the purpose of obtaining
the earnings made by the unlawful partnership, during its existence as result of the business in
which it was engaged, because for the purpose, as Manresa remarks, the partner will have to base
his action upon the partnership contract, which is to annul and without legal existence by reason of
its unlawful object; and it is self evident that what does not exist cannot be a cause of action. Hence,
paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is
decreed, the profits cannot inure to the benefit of the partners, but must be given to some charitable
institution.

We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear

explanation of the scope and spirit of the provision of the Civil Code which we are concerned.
Commenting on said article Manresa, among other things says:
When the subscriptions of the members have been paid to the management of the
partnership, and employed by the latter in transactions consistent with the purposes of the
partnership may the former demand the return of the reimbursement thereof from the
manager or administrator withholding them?

Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered

juridically non-existent, the contract entered into can have no legal effect; and in that case,
how can it give rise to an action in favor of the partners to judicially demand from the
manager or the administrator of the partnership capital, each one's contribution?

The authors discuss this point at great length, but Ricci decides the matter quite clearly,
dispelling all doubts thereon. He holds that the partner who limits himself to demanding only
the amount contributed by him need not resort to the partnership contract on which to base
his action. And he adds in explanation that the partner makes his contribution, which passes
to the managing partner for the purpose of carrying on the business or industry which is the
object of the partnership; or in other words, to breathe the breath of life into a partnership
contract with an objection forbidden by law. And as said contrast does not exist in the eyes of
the law, the purpose from which the contribution was made has not come into existence, and
the administrator of the partnership holding said contribution retains what belongs to
others, without any consideration; for which reason he is not bound to return it and he who
has paid in his share is entitled to recover it.

But this is not the case with regard to profits earned in the course of the partnership,
because they do not constitute or represent the partner's contribution but are the result of the
industry, business or speculation which is the object of the partnership, and therefor, in order
to demand the proportional part of the said profits, the partner would have to base his action
on the contract which is null and void, since this partition or distribution of the profits is one of
the juridical effects thereof. Wherefore considering this contract as non-existent, by reason of
its illicit object, it cannot give rise to the necessary action, which must be the basis of the
judicial complaint. Furthermore, it would be immoral and unjust for the law to permit a profit
from an industry prohibited by it.

Hence the distinction made in the second paragraph of this article of this Code, providing
that the profits obtained by unlawful means shall not enrich the partners, but shall upon the
dissolution of the partnership, be given to the charitable institutions of the domicile of the
partnership, or, in default of such, to those of the province.

This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of
the former law, which did not describe the purpose to which those profits denied the partners
were to be applied, nor state what to be done with them.

The profits are so applied, and not the contributions, because this would be an excessive
and unjust sanction for, as we have seen, there is no reason, in such a case, for depriving
the partner of the portion of the capital that he contributed, the circumstances of the two
cases being entirely different.

Our Code does not state whether, upon the dissolution of the unlawful partnership, the
amounts contributed are to be returned by the partners, because it only deals with the
disposition of the profits; but the fact that said contributions are not included in the disposal
prescribed profits, shows that in consequences of said exclusion, the general law must be
followed, and hence the partners should reimburse the amount of their respective
contributions. Any other solution is immoral, and the law will not consent to the latter
 remaining in the possession of the manager or administrator who has refused to return them,
by denying to the partners the action to demand them. (Manresa, Commentaries on the
Spanish Civil Code, vol. XI, pp. 262-264)

The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with
costs against the appellants; provided, however, the defendants shall pay the legal interest on the
sum of P24,607.80 from the date of the decision of the court, and provided, further, that the
defendants shall deposit this sum of money and other documents evidencing uncollected credits in
the office of the clerk of the trial court, in order that said court may distribute them among the
members of said association, upon being duly identified in the manner that it may deem proper. So
ordered.

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

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,

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

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

Ruiz Law Offices for defendant-appellant.

CASTRO, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That the Party of the First Part will be the administrator of the same she having financed the
construction and improvement of said fishpond;
 That this contract was the result of a verbal agreement entered into between the Parties
sometime in the month of November, 1947, with all the above-mentioned conditions
enumerated; ...

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

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

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

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

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

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

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

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

On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction,
praying among other things, that during the pendency of the case and upon their filling the requisite
bond as may be fixed by the court, a preliminary injunction be issued to restrain Casteel from doing
the acts complained of, and that after trial the said injunction be made permanent. The lower court
on April 26, 1951 granted the motion, and, two days later, it issued a preliminary mandatory
injunction addressed to Casteel, the dispositive portion of which reads as follows:
 POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado
y todos usu abogados, agentes, mandatarios y demas personas que obren en su ayuda,
desista de impedir a la demandante Inocencia R. Deluao que continue administrando
personalmente la pesqueria objeto de esta causa y que la misma continue recibiendo los
productos de la venta de los pescados provenientes de dicha pesqueria, y que, asimismo,
se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza al encargado
de los demandantes llamado Jesus Donesa de la pesqueria objeto de la demanda de autos.

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

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

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

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

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

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

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

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

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

An examination of the records of this case shows that this case was initiated as early as April
1951 and that the same has been under advisement of the Honorable Enrique A. Fernandez,
Presiding Judge of Branch No. I, since September 24, 1953, and that various incidents have
already been considered and resolved by Judge Fernandez on various occasions. The last
 order issued by Judge Fernandez on this case was issued on March 21, 1956, wherein he
definitely states that the Court will not entertain any further postponement of the hearing of
this case.

CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and
termination of any incident referring to this case should be referred back to Branch I, so that
the same may be disposed of therein. (emphasis supplied)

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

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

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

demandado Nicanor Casteel:

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

(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad

(½) del "fishpond" en cuestion con todas las mejoras existentes dentro de la misma;

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

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

(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los

pescado beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda
de autos hasta el completo pago de la obligacion principal;

(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos

incurridos por aquella durante la pendencia de esta causa;

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

P2,000.00;

(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en

cuanto se refiere al demandado Juan Depra;

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

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

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

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

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

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

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

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

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

Casteel raises the following issues:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-
called "contract of service" on November 25, 1949, there were two pending applications over the
fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural
Resources after it was disallowed by the Director of Fisheries on October 25, 1949. The other was
Felipe Deluao's application over the same area which was likewise rejected by the Director of
Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by letter dated
March 15, 1950 to the Secretary of Agriculture and Natural Resources. Clearly, although the
fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the holder of a
fishpond permit over the area. But be that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application
over the same area — whichever event happened first. No law, rule or regulation prohibited them
from doing so. Thus, rather than let the fishpond remain idle they cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not to
form a co-ownership but to establish a partnership — Inocencia Deluao as capitalist partner and
Casteel as industrial partner — the ultimate undertaking of which was to divide into two equal parts
such portion of the fishpond as might have been developed by the amount extended by the plaintiffs-
appellees, with the further provision that Casteel should reimburse the expenses incurred by the
appellees over one-half of the fishpond that would pertain to him. This can be gleaned, among
others, from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit
because you are the ones interested in half of the work we have done so far, besides I did
not insist on our being partners in my fishpond permit, but it was you "Tatay" Eping the one
who wanted that we be partners and it so happened that we became partners because I am
poor, but in the midst of my poverty it never occurred to me to be unfair to you. Therefore so
that each of us may be secured, let us have a document prepared to the effect that we are
partners in the fishpond that we caused to be made here in Balasinon, but it does not mean
that you will treat me as one of your "Bantay" (caretaker) on wage basis but not earning
wages at all, while the truth is that we are partners. In the event that you are not amenable to
my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I
withdraw all my cases and be left without even a little and you likewise.
(emphasis supplied)9

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their
partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although
denominated a "contract of service," was actually the memorandum of their partnership agreement.
That it was not a contract of the services of the appellant, was admitted by the appellees themselves
in their letter10 to Casteel dated December 19, 1949 wherein they stated that they did not employ him
in his (Casteel's) claim but because he used their money in developing and improving the fishpond,
his right must be divided between them. Of course, although exhibit A did not specify any wage or
share appertaining to the appellant as industrial partner, he was so entitled — this being one of the
conditions he specified for the execution of the document of partnership.11

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, pursuant to our holding that there was a partnership between the parties for the
exploitation of the fishpond before it was awarded to Casteel, this case should be remanded to the
lower court for the reception of evidence relative to an accounting from November 25, 1949 to
September 15, 1950, in order for the court to determine (a) the profits realized by the partnership, (b)
the share (in the profits) of Casteel as industrial partner, (e) the share (in the profits) of Deluao as
capitalist partner, and (d) whether the amounts totalling about P27,000 advanced by Deluao to
Casteel for the development and improvement of the fishpond have already been liquidated.
Besides, since the appellee Inocencia Deluao continued in possession and enjoyment of the
fishpond even after it was awarded to Casteel, she did so no longer in the concept of a capitalist
partner but merely as creditor of the appellant, and therefore, she must likewise submit in the lower
court an accounting of the proceeds of the sales of all the fishes harvested from the fishpond from
September 16, 1950 until Casteel shall have been finally given the possession and enjoyment of the
same. In the event that the appellee Deluao has received more than her lawful credit of P27,000 (or
whatever amounts have been advanced to Casteel), plus 6% interest thereon per annum, then she
should reimburse the excess to the appellant.

ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered:
(1) dissolving the injunction issued against the appellant, (2) placing the latter back in possession of
the fishpond in litigation, and (3) remanding this case to the court of origin for the reception of
evidence relative to the accounting that the parties must perforce render in the premises, at the
termination of which the court shall render judgment accordingly. The appellant's counterclaim is
dismissed. No pronouncement as to costs.