G.R. No. L-33196

Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-33196 December 19, 1930

TAN SENGUAN AND CO., plaintiff-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Feria and La O and Marcelo P. Karaan for appellant.
Attorney-General Jaranilla for appellee.

STATEMENT

Plaintiff alleges that it is a domestic partnership, with its principal place of business in the City of Manila and the defendant is the Collector of Internal Revenue, who without any authority required the plaintiff to pay P1,357.05 as additional income tax for the years 1925, 1926, and 1927, which plaintiff paid under protest on August 25, 1928, as evidenced by income tax receipts for that amount, for the amount of which plaintiff prays judgment, with costs.

For answer the defendant denies the fourth and sixth paragraphs of the complaint, and as a special defense alleges that the old partnership of Tan Senguan & Company ceased to exist as such when Tan Chuan Hui withdrew in 1925, and Ng Kok Sang and Go Cangdio in 1926 and 1927. That when Tan Kim Pue was admitted as a new member, the capital invested by each member was changed in 1925, 1926, and 1927, without recording in the mercantile registry the resolutions of the partnership as to the change of the capital or personnel of the partnership, and that it was from the new partnership that the tax in question was levied and collected, and defendant prays that the complaint be dismissed, with costs.

The parties made the following agreed statement of facts:

I. That the plaintiff is a general copartnership existing under and by virtue of the laws of the Philippine Islands with its principal place of business located in the City of Manila, P.I.; and the defendant is the duly appointed and qualified Collector of Internal Revenue for the Philippine Islands with his office located in the said City of Manila, P.I., and with authority to be sued.

II. That the original articles of copartnership of the plaintiff were duly registered in the Mercantile Registry on the 24th day of August, 1914, and its amended articles of copartnership were also duly registered therein on the 9th day of June, 1917; copies of which are hereto attached and made part hereof as Exhibits A and B.lawphi1>net

III. That the partners appearing on the said amended articles of copartnership recorded in the Mercantile Registry on the 9th day of June, 1917 (Exhibit B) are the following with their respective capital set opposite their names, to wit:

1. Tan Senguan ........................................... P75,000.00

2. Lim Uy He ................................................ 35,000.00

3. Gaw Chai Lai ............................................ 27,000.00

4. Chua Cho Ching ...................................... 22,000.00

5. Go Cangdio .............................................. 16,500.00

6. Tan Chuan Hui ........................................ 10,000.00

7. Lim Ki Chao ............................................. 9,000.00

8. Ng Koch Su ............................................. 3,000.00

9. Ng Kok Sang ........................................... 2,500.00

200,000.00

IV. That the capital of P200,000 of the partnership was reduced to P130,000.00 in the year 1923 when the partner Tan Senguan reduced his share therein to the sum of P5,000 by withdrawing from the partnership P70,000, such withdrawal of part of his capital or share having been approved by the partnership and duly annotated in the Mercantile Registry.

V. That in the same year 1923 the partner Tan Chuan Hui withdrew from the partnership and the resolution of the plaintiff accepting his withdrawal and reducing the capital to the sum of P120,000 as a result thereof was duly recorded in the Mercantile Registry on November 17, 1923.

VI. That, in the year 1925, according to the books of account of the plaintiff partnership, its profits for that year amounted to the sum of P4,479.01 and were distributed and paid in the following manner:

1. Tan Senguan ........................................... P68.81

2. Lim Uy He ................................................ 1,203.15

3. Gaw Chai Lai ............................................ 1,082.01

4. Chua Cho Ching ...................................... 881.64

5. Go Cangdio .............................................. 661.23

6. Lim Ki Chao ............................................. 360.67

7. Ng Koch Su ............................................. 121.31

8. Ng Kok Sang ........................................... 100.19

4,479.01

and that, all the above named partners to whom the said profits were distributed and paid, except Go Cangdio who paid income tax of P1.98 on his income made up of his share of P661.23 in the aforesaid profit and of other income from other sources, were not required to pay any income tax on their respective shares of such profits as such shares, on account of their amounts, were exempt from payment of the income tax under the provisions of the Income Tax Law.

In the year 1926, according to the books of account of the plaintiff partnership, its profits for that year were distributed and paid to the above-named Chua Cho Ching, Tan Senguan, Lim Uy He, Lim Ki Chao, Gaw Chai Lai, Ng Koch Su and another person named Tan Kim Pue whose admission as member into the partnership is referred to in paragraph VII hereof; that, according to the said books of account, no share of the plaintiff's profits in 1926 was paid to, Ng Kok Sang and Go Cangdio; and that of the above-named partners to whom the said plaintiff's profits were distributed and paid only Lim Uy He and Tan Kim Pue paid income tax for 1926 on their respective shares of such profits, while the others did not pay income tax on their own shares of such profits because such shares, on account of their amounts, were exempt from the payment of the income tax under the provisions of the Income Tax Law.

In the year 1927, according to the plaintiff's books of account, its profits for that year were distributed and paid to the above-named Tan Senguan, Chua Cho Ching, Lim Uy He, Gaw Chai Lai, Tan Kim Pue, Lim Ki Chao and Ng Koch Su, as partners; that no share of such profits was paid to, partners Ng Kok Sang and Go Cangdio; and that, of the partners to whom the plaintiff's profits for the year 1927 were distributed and paid, only Lim Uy He and Tan Kim Pue paid income tax on their respective shares of the said profits while the others did not pay income tax for the year 1927 on their own shares thereof because such shares, on account of their amounts, were exempt from the payment of the income tax under the provisions of the Income Tax Law.

VII. That in the year 1926, one Tan Kim Pue became a partner of the plaintiff partnership, contributing as his capital P53,187.33, and continued to be such partner in 1927, his admission as such partner in the said plaintiff partnership having been approved by the other partners and duly annotated on the books of the partnership but not recorded in the Mercantile Registry.

VIII. That no instrument or agreement purporting to show the dissolution of the partnership named and described in Exhibits A and B, or any decree of a competent court ordering such dissolution of the partnership, is recorded in the Mercantile Registry.

IX. That, on August 11, 1926, the defendant demanded from the plaintiff partnership the payment of the amount of P1,317.05 "as additional income taxes due from Messrs. Tan Senguan & Co. for the years 1925, 1926 and 1927" as so stated in defendant's letter which is hereto attached and made part hereof as Exhibit C, and the plaintiff, in order to avoid the payment of further interest and such charge, paid the said sum under protest on official receipts Nos. 96886, 96887, and 96888 dated August 25, 1928, said receipts being hereto attached and made part hereof as Exhibits D, E, and F.

X. That pursuant to the provisions of section 1579 of the Revised Administrative Code, the plaintiff partnership requested the defendant to decide its protest as made by the same when the above-mentioned taxes were paid, and on the 22d day of September, 1928, the defendant overruled the said protest, and as a consequence therewith, the plaintiff partnership filed this action on the 2nd day of January, 1929.

At the trial both parties offered additional evidence. The lower court rendered judgment for the defendant, from which the plaintiff appealed and contends that the court erred in holding that the plaintiff is an unregistered partnership; that it is liable for the additional income tax; in dismissing the complaint; and denying the motion for a new trial.

JOHNS, J.:

It is admitted that the original articles of copartnership of the plaintiff were duly registered in the mercantile registry on the 24th of August, 1914, and that its amended articles were also registered on the 9th of June, 1917, at which time the capital of the partnership was P200,000 of which Tan Senguan was then the owner of P75,000. That in the year 1923 Tan Senguan withdrew P70,000 from the partnership, which reduced his share to P5,000, and that in the same year Tan Chuan Hui withdrew all of his P10,000 thereby reducing the capital of the partnership to P120,000. That both of such withdrawals were approved by the partnership and duly annotated in the mercantile registry. That in the year 1926, one Tan Kim Pue became a partner and contributed P53,187.33 to the partnership, which was also approved by the other partners, which was duly annotated on the books of the partnership, but was not recorded in the mercantile registry.

The question is thus squarely presented as to whether, for the purpose of taxation, the admission of Tan Kim Pue in 1926 as a new member in the old partnership legally operates as a dissolution of the old firm and the creation of a new partnership which, it is admitted, was not registered.

Article 25 of the Code of Commerce is as follows:

There shall also be recorded in the registry all resolutions or acts which affect the increase or decrease in the capital of mercantile associations, whatever may be their denomination, and those which modify or alter the conditions of the recorded instrument.

The omission of this requisite shall produce the effects mentioned in the foregoing article.

This clearly implies that, for a registered partnership to maintain its status as such, it is necessary that all its acts and resolutions, changing its membership and capital, should be recorded, so that the public in dealing with the partnership may be fully advised as to the names of the partners and the capital stock of the partnership. If the partnership may change its capital stock or its personnel of its own volition without the making of a corresponding record in the mercantile registry of such changes, the persons with whom it does business would then be misled and deceived as to the personnel and capital stock of the partnership. The purpose of the law is to exempt from such taxation a partnership which has its articles of copartnership duly registered in the mercantile registry, and to require the payment of the tax of a copartnership which does not have its articles of copartnership duly registered in the mercantile registry, and it is the policy of the law to encourage a copartnership to have its articles duly registered in the mercantile registry, so that the public may know the names of the partners and the capital stock of the partnership, and the amount of stock of each partner. To permit changes in the capital stock and personnel of a registered partnership at the whim and volition of its members, without recording the changes in the mercantile registry, would in legal effect nullify the purpose and intent of the law.

As the lower court well says:

The law is clear that unregistered concerns must pay income taxes as entities, while registered ones do not. The law was adopted for the very purpose of encouraging registration of partnerships. The courts would render poor service to the business community, if they did not strictly enforce the law.

The making of such changes in the official records is easy and simple and would avoid the tax in question.

The judgment of the lower court is affirmed, with costs. So ordered.

Johnson, Malcolm, Ostrand and Romualdez, JJ., concur.

Separate Opinions

STREET, J., dissenting:

The bringing of new capital into a registered general partnership by the admission of a new member, and the withdrawal therefrom of the capital pertaining to one or more of the original partners therein are undoubtedly acts that modify the conditions of partnership. These acts should, therefore, be recorded in the mercantile registry, in conformity with the requirement of article 25 of the Code of Commerce. But the omission to effect the notation of these acts in the registry does not, in the opinion of the undersigned, have the effect of destroying the status of the partnership as a registered partnership and of converting it into an unregistered partnership. The reason for this is found in the second paragraph of article 25, in relation with article 24 of the same Code, which, taken together, define the effect of the omission, and the dissolution, or destruction, of the partnership is not the effect there attributed to it. Said two provisions declare in substance that the omission to record resolutions or acts of the character mentioned shall be this, namely, that, while binding on the members of the partnership who participated in the execution of such acts, they shall not prejudice third persons, who, however, may make use thereof in so far as advantageous. This definition plainly excludes the idea of dissolution as a consequence of the omission to make the necessary notation in the registry.

The opinion of the court apparently proceeds upon the idea, familiar to common law, that changes in the personnel of a partnership result in the formation of an entirely new partnership. But the partnership, according to the conception of the common law, is not a legal entity; while a registered partnership under the civil law is a distinct legal entity. The rules relating to common law partnerships should not be applied in this jurisdiction with the effect of abrogating express provisions of our Code of Commerce.

It was, therefore, an error on the part of the trial court to treat the partnership entity Tan Senguan & Co. as an unregistered partnership, with the result of imposing upon it the taxes which were paid under protest in this case. The judgment, in the opinion of the undersigned, should be reversed; and the plaintiff should be permitted to recover the taxes improperly collected from it.

Villamor and Villa-Real, JJ., concur.

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