Chapter 1 Cases

246
SUPREME COURT REPORTS ANNOTATED

Aguila, Jr. vs. Court of Appeals
G.R. No. 127347. November 25, 1999.

ALFREDO N. AGUILA, JR., petitioner, vs. HONORABLE COURT OF APPEALS
and FELICIDAD S. VDA. DE ABROGAR, respondents.
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Actions; Parties; Pleadings and Practice; A complaint filed against a party who is not a
real party in interest should be dismissed for failure to state a cause of action.Rule 3, 2 of
the Rules of Court of 1964, under which the complaint in this case was filed, provided that
every action must be prosecuted and defended in the name of the real party in interest. A
real party in interest is one who would be benefited or injured by the judgment, or who is
entitled to the avails of the suit. This ruling is now embodied in Rule 3, 2 of the 1997
Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real
party in interest in the case cannot be executed. Hence, a complaint filed against such a
person should be dismissed for failure to state a cause of action.
Same; Same; Same; Partnerships; A partnership has a juridical personality separate
and distinct from that of each of the partnersit is the partnership, not its officers or
agents, which should be impleaded in any litigation involving property registered in its
name.Under Art. 1768 of the Civil Code, a partnership has a juridical personality
separate and distinct from that of each of the partners. The partners cannot be held liable
for the obligations of the partnership unless it is shown that the legal fiction of a different
juridical personality is being used for fraudulent, unfair, or illegal purposes. In this case,
private respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical
entity, is being used for fraudulent, unfair, or illegal purposes. Moreover, the title to the
subject property is in the name of A.C. Aguila & Sons, Co. and the Memorandum of
Agreement was executed between private respondent, with the consent of her late husband,
and A.C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its
officers or agents, which should be impleaded in any litigation involving property registered
in its name. A violation of this rule will result in the dismissal of the complaint. We cannot
understand why
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SECOND DIVISION.
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VOL. 319, NOVEMBER 25, 1999

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both the Regional Trial Court and the Court of Appeals sidestepped this issue when it
was squarely raised before them by petitioner.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.

Lamberto C. Nanquil for petitioner.
Domingo M. Ballon for private respondent.
MENDOZA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals,
dated November 29, 1990, which reversed the decision of the Regional Trial Court,
Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial court
dismissed the petition for declaration of nullity of a deed of sale filed by private
respondent Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in
lending activities. Private respondent and her late husband, Ruben M. Abrogar,
were the registered owners of a house and lot, covered by Transfer Certificate of
Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent,
with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by
petitioner, entered into a Memorandum of Agreement, which provided:
1
1. (1)That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the abovedescribed property from the FIRST PARTY [Felicidad S. Vda. de Abrogar],
and pursuant to this agreement, a Deed of Absolute Sale shall be executed
by the FIRST PARTY conveying the property to the SECOND PARTY for
and in consideration of the sum
____________________
1
Per Justice Eugenio S. Labitoria and concurred in by Justices Cancio C. Garcia and Omar U. Amin.
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1. of Two Hundred Thousand Pesos (P200,000.00), Philippine Currency;
2. (2)The FIRST PARTY is hereby given by the SECOND PARTY the option to
repurchase the said property within a period of ninety (90) days from the
execution of this memorandum of agreement effective April 18, 1991, for the
amount of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00);
3. (3)In the event that the FIRST PARTY fail to exercise her option to
repurchase the said property within a period of ninety (90) days, the FIRST
PARTY is obliged to deliver peacefully the possession of the property to the
SECOND PARTY within fifteen (15) days after the expiration of the said 90
day grace period;
4. (4)During the said grace period, the FIRST PARTY obliges herself not to file
any lis pendens or whatever claims on the property nor shall be cause the
annotation of say claim at the back of the title to the said property;
5. (5)With the execution of the deed of absolute sale, the FIRST PARTY
warrants her ownership of the property and shall defend the rights of the
SECOND PARTY against any party whom may have any interests over the
property;
6. (6)All expenses for documentation and other incidental expenses shall be for
the account of the FIRST PARTY;
7. (7)Should the FIRST PARTY fail to deliver peaceful possession of the
property to the SECOND PARTY after the expiration of the 15-day grace
period given in paragraph 3 above, the FIRST PARTY shall pay an amount
equivalent to Five Percent of the principal amount of TWO HUNDRED
PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and
liquidated damages;
8. (8)Should the FIRST PARTY fail to exercise her option to repurchase the
property within ninety (90) days period above-mentioned, this memorandum
of agreement shall be deemed cancelled and the Deed of Absolute Sale,
executed by the parties shall be the final contract considered as entered
between the parties and the SECOND PARTY shall proceed to transfer
ownership of the property above described to its name free from lines and
encumbrances.
2
__________________
2
Exh. A, Folder of Exhibits for the Plaintiff, pp. 1-2.
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On the same day, April 18, 1991, the parties likewise executed a deed of absolute
sale, dated June 11, 1991, wherein private respondent, with the consent of her late
husband, sold the subject property to A.C. Aguila & Sons, Co., represented by
petitioner, for P200,000.00. In a special power of attorney dated the same day, April
18, 1991, private respondent authorized petitioner to cause the cancellation of TCT
No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila
and Sons, Co., in the event she failed to redeem the subject property as provided in
the Memorandum of Agreement.
Private respondent failed to redeem the property within the 90-day period as
provided in the Memorandum of Agreement. Hence, pursuant to the special power
of attorney mentioned above, petitioner caused the cancellation of TCT No. 195101
and the issuance of a new certificate of title in the name of A.C. Aguila and Sons,
Co.
Private respondent then received a letter dated August 10, 1991 from Atty.
Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she
vacate the premises within 15 days after receipt of the letter and surrender its
possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring
the appropriate action in court.
Upon the refusal of private respondent to vacate the subject premises, A.C.
Aguila & Sons, Co. filed an ejectment case against her in the Metropolitan Trial
Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3, 1992, the
Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground
that private respondent did not redeem the subject property before the expiration of
the 90-day period provided in the Memorandum of Agreement. Private respondent
appealed first to the Regional Trial Court, Branch
3
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3
Exh. H, id., pp. 12-13.
Exh. 3, Folder of Exhibits for the Defendant, p. 3.
Petition, Rollo, p. 7.
Exh. 4, Folder of Exhibits for the Defendant, pp. 15-16.
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163, Pasig, Metro Manila, then to the Court of Appeals, and later to this Court, but
she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale
with the Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4,
1993. She alleged that the signature of her husband on the deed of sale was a
forgery because he was already dead when the deed was supposed to have been
executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for
falsification against petitioner with the Office of the Prosecutor of Quezon City
which was dismissed in a resolution, dated February 14, 1994. On April 11, 1995,
Branch 273 of RTC-Marikina rendered its decision:
Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they could not
personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her
husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution
of the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center
recuperating from wounds which she suffered at the same vehicular accident on May 8,
1991, cannot be sustained. The Court is convinced that the three required documents, to
wit: the Memorandum of Agreement, the Special Power of Attorney, and the Deed of
Absolute Sale were all signed by the parties on the same date on April 18, 1991. It is a
common and accepted business practice of those engaged in money lending to prepare an
undated absolute deed of sale in loans of money secured by real estate for various reasons,
foremost of which is the evasion of taxes and surcharges. The plaintiff never questioned
receiving the sum of P200,000.00 representing her loan from the defendant. Common sense
dictates that an established lending and realty firm like the Aguila & Sons, Co. would not
part with P200,000.00 to the Abrogar spouses, who are virtual strangers to it, without the
simultaneous accomplishment and signing of all the required documents, more particularly
the Deed of Absolute Sale, to protect its interest.
....
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED
DISMISSED, with costs against the plaintiff.
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On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and
defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New Civil
Code finds strong application in the case at bar in the light of the following circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually
inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the residential
house of plaintiff-appellant stands. The property is inside a subdivision/village. The
property is situated in Marikina which is already part of Metro Manila. The alleged sale
took place in 1991 when the value of the land had considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per
square meter for both the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides that plaintiffappellant is obliged to deliver peacefully the possession of the property to the SECOND
PARTY within fifteen (15) days after the expiration of the said ninety (90) day grace period.
Otherwise stated, plaintiff-appellant is to retain physical possession of the thing allegedly
sold.
In fact, plaintiff-appellant retained possession of the property sold as if they were still
the absolute owners. There was no provision for maintenance or expenses, much less for
payment of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the
property sold. It is well-known that payment of taxes accompanied by actual possession of
the land covered by the tax declaration, constitute evidence of great weight that a person
under whose name the real taxes were declared has a claim of right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602 of the
New Civil Code is sufficient to declare a contract of sale with right to repurchase an
equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually
inadequate, has retained possession of the subject property and has continued paying the
realty taxes over the subject property, (circumstances mentioned in par. [1], [2] and [5] of
Article 1602 of the New Civil Code), it must be conclusively presumed that the transaction
the parties actually entered into is an equitable mortgage, not a sale with right to
repurchase. The factors cited are in support to the finding that the Deed of
Sale/Memorandum of Agreement with right to repurchase is in actuality an equitable
mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by
reason of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan
being the same with the amount of the purchase price.
....
Since the real intention of the party is to secure the payment of debt, now deemed to be
repurchase price: the transaction shall then be considered to be an equitable mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of a
pactum commissorium which is clearly prohibited by Article 2088 of the New Civil Code.
Article 2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist:
(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged
by way of security for the payment of principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the thing pledged and
mortgaged in the event of non-payment of the principal obligation within the stipulated
period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiffappellant secured by a mortgage on the property of plaintiff-appellant. The loan was
payable within ninety (90) days, the period within which plaintiff-appellant can repurchase
the property. Plaintiff-appellant will pay P230,000.00 and not P200,000.00, the P30,000.00
excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the
P230,000.00 within the ninety (90) days period, the property shall automatically belong to
defendant-appellee by virtue of the deed of sale executed.
Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so declare
to be invalid, for being violative of law.
....
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET
ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in
favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendantappellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby
ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby
ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety
(90) days from the finality of this decision. In case of failure to pay the amount of
P230,000.00 from the period therein stated, the property shall be sold at public auction to
satisfy the mortgage debt and costs and if there is an excess, the same is to be given to the
owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila
& Co., against which this case should have been brought; (2) the judgment in the
ejectment case is a bar to the filing of the complaint for declaration of nullity of a
deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and
private respondent is a pacto de retro sale and not an equitable mortgage as held by
the appellate court.
The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case
was filed, provided that every action must be prosecuted and defended in the name
of the real party in interest. A real party in interest is one who would be benefited
or injured by the judgment, or who is entitled to the avails of the suit. This ruling is
7
now embodied in Rule 3, 2 of the 1997 Revised Rules of Civil Procedure. Any
decision rendered against a person who is not a real party in interest in the case
cannot be executed. Hence, a complaint filed against such a person should be
dismissed for failure to state a cause of action.
Under Art. 1768 of the Civil Code, a partnership has a juridical personality
separate and distinct from that of each of the partners. The partners cannot be
held liable for the obligations of the partnership unless it is shown that the legal
fiction of a different juridical personality is being used for fraudulent, unfair, or
illegal purposes. In this case, private respondent has not shown that A.C. Aguila &
Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair, or
illegal purposes. Moreover, the title to the subject property is in the name of A.C.
Aguila & Sons, Co. and the Memorandum of Agreement was executed between
private respondent, with the consent of her late husband, and A.C. Aguila & Sons,
Co., represented by petitioner. Hence, it is the partnership, not its officers or agents,
which should be impleaded in any litigation involving property registered in its
name. A violation of this rule will result in the dismissal of the complaint. We
cannot understand why both the Regional Trial Court and the Court of Appeals
sidestepped this issue when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this
action should be prosecuted makes it unnecessary to discuss the other issues raised
by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and
the complaint against petitioner is DISMISSED.
SO ORDERED.
Bellosillo (Chairman), Quisumbing, Buena and De Leon, Jr., JJ., concur.
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Tan vs. Del Rosario, Jr.

G.R. No. 109289. October 3, 1994.
RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR., as SECRETARY
OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE,
respondents.
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G.R. No. 109446. October 3, 1994.

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A.
CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN
A. SOMERA, JR., petitioners, vs. RAMON R. DEL ROSARIO, in his capacity as
SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
*
Taxation; Simplified Net Income Taxation (SNIT); Republic Act No. 7496 did not
adopt a gross income, but have retained the net income, taxation scheme.On the basis of
the above language of the law, it would be difficult to accept petitioners view that the
amendatory law should be considered as having now adopted agross income, instead of as
having still retained the net income, taxation scheme. The allowance for deductible items, it
is true, may have significantly been reduced by the questioned law in comparison with that
which has prevailed prior to the amendment; limiting, however, allowable deductions from
gross income is neither discordant with, nor opposed to, the net income tax concept. The
fact of the matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.
Same; Same; Constitutional Law; Titles of Bills; Objectives of the constitutional
provision on titles of bills.Article VI, Section 26(1), of the Constitution has been
envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the
legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid
surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through
such publications of its proceedings as are usually made, of the subjects of legislation. The
above objectives of the fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the law which could not have
been the intendment of the constitutional mandate.
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EN BANC.
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Same; Same; Same; Uniformity of taxation merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges
and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not
forfend classification as long as: (1) the standards that are used therefor are substantial and
not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the
law applies, all things being equal, to both present and future conditions, and (4) the
classification applies equally well to all those belonging to the same class (Pepsi Cola vs.
City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
Same; Same; Same; The legislative intent is to increasingly shift the income tax system
towards the schedular approach in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment on taxable corporations.What may
instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach in the income
taxation of individual taxpayers and to maintain, by and large, the present global treatment
on taxable corporations.
Same; Same; Same; Words and Phrases; Schedular Approach, Defined.Schedular
approach is a system employed where the income tax treatment varies and made to depend
on the kind or category of taxable income of the taxpayer.
Same; Same; Same; Same; Global Treatment, Defined.Global treatment is a system
where the tax treatment views indifferently the tax base and generally treats in common all
categories of taxable income of the taxpayer.
Same; Same; Same; Separation of Powers; With the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation, and the Supreme Court cannot freely delve into those matters.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the
process, what he believes to be an imbalance between the tax liabilities of those covered by
the amendatory law and those who are not. With the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. This court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure
becomes so unconscionable and unjust
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as to amount to confiscation of property, courts will not hesitate to strike it down, for,
despite all its plenitude, the power to tax cannot override constitutional proscriptions. This
stage, however, has not been demonstrated to have been reached within any appreciable
distance in this controversy before us.
Same; Same; Same; Due Process; The due process clause may correctly be invoked only
when there is a clear contravention of inherent or constitutional limitations in the exercise of
the tax power.Having arrived at this conclusion, the plea of petitioner to have the law
declared unconstitutional for being violative of due process must perforce fail. The due
process clause may correctly be invoked only when there is a clear contravention of inherent
or constitutional limitations in the exercise of the tax power. No such transgression is so
evident to us.
Same; Same; Same; Partnerships; A general professional partnership, unlike an
ordinary business partnership, is not itself an income taxpayer, as the income tax is imposed
not on the professional partnership but on the partners themselves in their individual
capacity.The Court, first of all, should like to correct the apparent misconception that
general professional partnerships are subject to the payment of income tax or that there is a
difference in the tax treatment between individuals engaged in business or in the practice of
their respective professions and partners in general professional partnerships. The fact of
the matter is that a general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes and so subject to the
corporate income tax), is not itself an income taxpayer. The income tax is imposed not on
the professional partnership, which is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares of partnership profits.
Same; Same; Same; Same; Words and Phrases; Income Tax-payers, Defined; The Tax
Code, in levying the tax, adopts the most comprehensive tax situs of nationality and
residence of the taxpayer and of the generally accepted and internationally recognized income
taxable base.We can well appreciate the concern taken by petitioners if perhaps we were
to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory,
piece of legislation. The view can easily become myopic, however, when the law is
understood, as it should be, as only forming part of, and subject to, the whole income tax
concept and precepts long obtaining under the National Internal Revenue Code. To
elaborate a little, the phrase income taxpayers is an all embracing term used in the Tax
Code, and it practically covers all persons who derive taxable income. The law, in levying
the tax, adopts
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the most comprehensive tax situs of nationality and residence of the taxpayer (that
renders citizens, regardless of residence, and resident aliens subject to income tax liability
on their income from all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident aliens and foreign
corporations to income tax on their income from Philippine sources). In the process, the
Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations,
(3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as
to corpus and as to income).
Same; Same; Same; Same; Partnerships under the Tax Code, Classified; Ordinarily,
partnerships are subject to income tax which are by law assimilated to be within the context
of, and so legally contemplated as, corporations.Partnerships are, under the Code, either
taxable partnerships or exempt partnerships.Ordinarily, partnerships, no matter how
created or organized, are subject to income tax (and thus alluded to as taxable
partnerships) which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances,
such as in the application of the constructive receipt rule in the derivation of income, the
income tax approach is alike to both juridical persons.
Same; Same; Same; Same; SNIT is not intended or envisioned to cover corporations
and partnerships which are independently subject to the payment of income tax.Obviously,
SNIT is not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.
Same; Same; Same; Same; Exempt partnerships are not similarly identified as
corporations nor even considered as independent taxable entities for income tax purposes.
Exempt partnerships, upon the other hand, are not similarly identified as corporations
nor even considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example. Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for
administration and data]), are liable for the payment of income tax in
their individual capacity computed on their respective and distributive shares of profits. In
the determination of the tax liability, a partner does so as anindividual, and there is no
choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through
entity in the generation of income
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by, and the ultimate distribution of such income to, respectively, each of the individual
partners.
Same; Same; Same; Same; Section 6 of Revenue Regulation No. 2-93 consistent with the
Tax Code as modified by Republic Act No. 7496.Section 6 of Revenue Regulation No. 2-93
did not alter, but merely confirmed, the above standing rule as now so modified by Republic
Act No. 7496 on basically the extent of allowable deductions applicable to all individual
income taxpayers on their non-compensation income. There is no evident intention of the

law, either before or after the amendatory legislation, to place in an unequal footing or in
significant variance the income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional partnership.
SPECIAL CIVIL ACTIONS in the Supreme Court. Prohibition.

Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. No.
109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No.
109289, the constitutionality of Republic Act No. 7496, also commonly known as the
Simplified Net Income Taxation Scheme (SNIT), amending certain provisions of
the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section
6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to
said law.
Petitioners claim to be taxpayers adversely affected by the continued
implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496
violates the following provisions of the Constitution:
Article VI, Section 26(1)Every bill passed by the Congress shall embrace only one subject
which shall be expressed in the title thereof.
Article VI, Section 28(1)The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
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Article III, Section 1No person shall be deprived of x x x property without due process of
law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 293, argue that public respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with
the Courts directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act
No. 7496, is a misnomer or, at least, deficient for being merely entitled, Simplified
Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in
the Practice of their Profession (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of
the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National
Internal Revenue Code, as now amended, provide:
Section 21. Tax on citizens or residents.
x x x
xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the
Practice of Profession.A tax is hereby imposed upon the taxable net income as determined
in Section 27 received during each taxable year from all sources, other than income covered
by paragraphs (b), (c), (d) and (e) of this section by every individual whether a citizen of the
Philippines or an alien residing in the Philippines who is self-employed or practices his
profession herein, determined in accordance with the following schedule:
330
330
SUPREME COURT REPORTS

ANNOTATED
Not over P10,000
3%
Over P 10,000 but not
P 30,000 P 300 + 9% of excess
over
over P 10,000
Over P 30,000 but not
P120,000 P 2,100 + 15% of excess
over
over P 30,000
Over P120,000 but not
P15,600 + 20% of excess over
over P350,000
P120,000
Over P350,000
P61,600 + 30% of excess over
P350,000
SECTION 29. Deductions from gross income.In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions
the items specified in paragraphs (a) to (i) of this section: Provided, however, That in
computing taxable income subject to tax under Section 21 (f) in the case of individuals
engaged in business or practice of profession, only the following direct costs shall be allowed
as deductions:
1. (a)Raw materials, supplies and direct labor;
2. (b)Salaries of employees directly engaged in activities in the course of or pursuant
to the business or practice of their profession;
3. (c)Telecommunications, electricity, fuel, light and water;
4. (d)Business rentals;
5. (e)Depreciation;
6. (f)Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
7. (g)Interest paid or accrued within a taxable year on loans contracted from
accredited financial institutions which must be proven to have been incurred in
connection with the conduct of a taxpayers profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to
answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept
petitioners view that the amendatory law should be considered as having now
adopted a grossincome, instead of as having still retained the net income, taxation
scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to
the amendment; limiting, however, allowable deductions from gross income is
neither discordant with, nor opposed to, the net income tax concept. The fact of the
matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to
prevent log-rolling legislation intended to unite the
331

331
members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually
made, of the subjects of legislation. The above objectives of the fundamental law
appear to us to have been sufficiently met. Anything else would be to require a
virtual compendium of the law which could not have been the intendment of the
constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional
requirement that taxation shall be uniform and equitable in that the law would
now attempt to tax single proprietorships and professionals differently from the
manner it imposes the tax on corporations and partnerships. The contention clearly
forgets, however, that such a system of income taxation has long been the prevailing
rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be treated
alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91
Phil. 371). Uniformity does not forfend classification as long as: (1) the standards
that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being
equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi Cola vs. City of
Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the
legislative intent to increasingly shift the income tax system towards the schedular
approach in the income taxation of individual taxpayers and to maintain, by and
large, the present global treatment on taxable corporations. We certainly
1
_______________
1
Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp. 146-147, citing with approval
Cooley on Constitutional Limitations.

2
A system employed where the income tax treatment varies and made to depend on the kind or
category of taxable income of the taxpayer.

3
A system where the tax treatment views indifferently the tax base and generally treats in common all
categories of taxable income of the taxpayer.

332
332

do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating,
in the process, what he believes to be an imbalance between the tax liabilities of
those covered by the amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve
into those matters which, by constitutional fiat, rightly rest on legislative judgment.
Of course, where a tax measure becomes so unconscionable and unjust as to amount
to confiscation of property, courts will not hesitate to strike it down, for, despite all
its plenitude, the power to tax cannot override constitutional proscriptions. This
stage, however, has not been demonstrated to have been reached within any
appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared
unconstitutional for being violative of due process must perforce fail. The due
process clause may correctly be invoked only when there is a clear contravention of
inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of
whether or not public respondents have exceeded their authority in promulgating
Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional PartnershipThe general professional partnership (GPP) and

the partners comprising the GPP are covered by R.A. No. 7496. Thus, in determining the
net profit of the partnership, only the direct costs mentioned in said law are to be deducted
from partnership income. Also, the expenses paid or incurred by partners in their
individual capacities in the practice of their profession which are not reimbursed or paid by
the partnership but are not considered as direct cost, are not deductible from his gross
income.
The real objection of petitioners is focused on the administrative interpretation of

public respondents that would apply SNIT to partners in general professional
partnerships. Petitioners cite
333

333
the pertinent deliberations in Congress during its enactment of Republic Act No.
7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the
House of Representatives, in the latters privilege speech by way of commenting on
the questioned implementing regulation of public respondents following the

effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression on this bill. Do we
speak here of individuals who are earning, I mean, who earn through business enterprises and
therefore, should file an income tax return? MR. PEREZ. That is correct, Mr. Speaker. This does not
apply to corporations. It applies only to individuals.
(See Deliberations on H.B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours)
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is
intended to increase collections as far as individuals are concerned and to make collection of taxes
equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours)
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of
the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with
respect to individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that
general professional partnerships are subject to the payment of income tax or that
there is a difference in the tax treatment between individuals engaged in business
or in the practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership,
unlike an ordinary business partnership (which is treated as a corporation for
income tax purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional
334
334

partnership, which is tax exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership profits. Section 23 of
the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:
SECTION 23. Tax liability of members of general professional partnerships.(a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or
otherwise, shall be returned for taxation and the tax paid in accordance with the provisions
of this Title.
(b) In determining his distributive share in the net income of the partnership, each
partner
1. (1)Shall take into account separately his distributive share of the partnerships
income, gain, loss, deduction, or credit to the extent provided by the pertinent
provisions of this Code, and
2. (2)Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through
partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax
on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the
same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to
consider Republic Act No. 7496 as an entirely independent, not merely as an
amendatory, piece of legislation. The view can easily become myopic, however, when
the law is understood, as it should be, as only forming part of, and subject to, the
whole income tax concept and precepts long obtaining under the National Internal
Revenue Code. To elaborate a little, the phrase income taxpayers is an all
embracing term used in the Tax Code, and it practically covers all persons who
derive taxable income. The law, in levying the tax, adopts the most comprehensive
tax situs of nationality and residence of the
335

335
taxpayer (that renders citizens, regardless of residence, and resident aliens subject
to income tax liability on their income from all sources) and of the generally
accepted and internationally recognized income taxable base (that can subject nonresident aliens and foreign corporations to income tax on their income from
Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as
to income).
Partnerships are, under the Code, either taxable partnerships or exempt

partnerships. Ordinarily,partnerships, no matter how created or organized, are
subject to income tax (and thus alluded to as taxable partnerships) which, for
purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations.Except for few variances, such as in
the application of the constructive receipt rule in the derivation of income, the
income tax approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in Congress
during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.
Exempt partnerships, upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income tax
purposes. A general professional partnership is such an example. Here, the
partners themselves, not the partnership (although it is still obligated to file an
income tax return [mainly for administration and data]), are liable for
4
_______________
4
A general professional partnership, in this context, must be formed for the sole purpose of exercising
a common profession, no part of the income of which is derived from its engaging in any trade business;
otherwise, it is subject to tax as an ordinary business partnership or, which is to say, as a corporation and
thereby subject to the corporate income tax. The only other exempt partnership is a joint venture for
undertaking construction projects or engaging in petroleum operations pursuant to an operating
agreement under a service contract with the government (see Sections 20, 23 and 24, National Internal
Revenue Code).
336
336

the payment of income tax in their individual capacity computed on their respective
and distributive shares of profits. In the determination of the tax liability, a partner
does so as an individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed to be no
more than a mere mechanism or a flow-through entity in the generation of income
by, and the ultimate distribution of such income to, respectively, each of the
individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the
above standing rule as now so modified by Republic Act No. 7496 on basically the
extent of allowable deductions applicable to all individual income taxpayers on their
noncompensation income. There is no evident intention of the law, either before or
after the amendatory legislation, to place in an unequal footing or in significant

variance the income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional
partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on
costs.
SO ORDERED.
Narvasa (C.J.), Cruz, Feliciano, Regalado, Davide,
Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan andMendoza, JJ., concur.
Padilla and Bidin, JJ., On leave.
Petitions dismissed.
Note.The law does not look with favor on tax exemptions and he who would
seek to be thus privileged must justify it by words too plain to be mistaken and too
categorical to be misinterpreted. (Reagan vs. Commissioner of Internal Revenue, 30
SCRA 968 [1969])
G.R. No. 159333.July 31, 2006.*
ARSENIO T. MENDIOLA, petitioner, vs. COURT OF APPEALS, NATIONAL
LABOR RELATIONS COMMISSION, PACIFIC FOREST RESOURCES, PHILS.,
INC. and/or CELLMARK AB, respondents.
Partnership; In a partnership, the members become co-owners of what is contributed to
the firm capital and of all property that may be acquired thereby and through the efforts of
the members; Each partner possesses a joint interest in the whole of partnership property; If
the relation does not have this feature, it is not one of partnership.In a partnership, the
members become co-owners of what is contributed to the firm capital and of all property
that may be acquired thereby and through the efforts of the members. The property or stock
of the partnership forms a community of goods, a common fund, in which each party has a
proprietary interest. In fact, the New Civil Code regards a partner as a co-owner of specific
partnership property. Each partner possesses a joint interest in the whole of partnership
property. If the relation does not have this feature, it is not one of partnership. This
essential element, the community of interest, or co-ownership of, or joint interest in
partnership property is absent in the relations between petitioner and private respondent
Pacfor. Petitioner is not a part-owner of Pacfor Phils. William Gleason, private respondent
Pacfors President established this fact when he said that Pacfor Phils. is simply a
theoretical company for the purpose of dividing the income 50-50. He stressed that
petitioner knew of this arrangement from the very start, having been the one to propose to
private respondent Pacfor the setting up of a representative office, and not a branch office
in the Philippines to save on taxes. Thus, the parties in this case, merely shared profits.
This alone does not make a partnership.
Labor Law; Employer-Employee Relationship; The principal consideration is whether
the employer has the right to control the manner of doing the work, and it is not the actual
exercise of the right by interfering with the work, but the right to control, which constitutes
the test of the existence of an employer-employee relationship.
_______________
* SECOND DIVISION.
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VOL. 497, JULY 31, 2006

Mendiola vs. Court of Appeals
347
The power of control refers merely to the existence of the power, and not to the actual
exercise thereof. The principal consideration is whether the employer has the right to
control the manner of doing the work, and it is not the actual exercise of the right by
interfering with the work, but the right to control, which constitutes the test of the
existence of an employer-employee relationship. In the case at bar, private respondent
Pacfor, as employer, clearly possesses such right of control. Petitioner, as private respondent
Pacfors resident agent in the Philippines, is, exactly so, only an agent of the corporation, a
representative of Pacfor, who transacts business, and accepts service on its behalf.
Employer-Employee Relationship; Constructive Dismissals; Although there is no
reduction of the salary of petitioner, constructive dismissal is still present because continued
employment of petitioner is rendered, at the very least, unreasonable.Although there is no
reduction of the salary of petitioner, constructive dismissal is still present because
continued employment of petitioner is rendered, at the very least, unreasonable. There is an
act of clear discrimination, insensibility or disdain by the employer that continued
employment may become so unbearable on the part of the employee so as to foreclose any
choice on his part except to resign from such employment.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
Felipe S. Velasquez for petitioner.
Vissia Concepcion C. Calderon for respondent Pacific Forest Resources Phils.,
Inc.
PUNO,J.:
On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated
January 30, 2003 and July 30, 2003, respec_______________
1 CA Rollo, pp. 1058-1072.

2 Id., at p. 1105.
348
348

tively, in CA-G.R. SP No. 71028, affirming the ruling 3 of the National Labor
Relations Commission (NLRC), which in turn set aside the July 30, 2001
Decision4 of the labor arbiter. The labor arbiter declared illegal the dismissal of
petitioner from employment and awarded separation pay, moral and exemplary
damages, and attorneys fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation
organized and existing under the laws of California, USA. It is a subsidiary of
Cellulose Marketing International, a corporation duly organized under the laws of
Sweden, with principal office in Gothenburg, Sweden.
Private respondent Pacfor entered into a Side Agreement on Representative
Office known as Pacific Forest Resources (Phils.), Inc. 5 with petitioner Arsenio T.
Mendiola (ATM), effective May 1, 1995, assuming that Pacfor-Phils. is already
approved by the Securities and Exchange Commission [SEC] on the said date. 6 The
Side Agreement outlines the business relationship of the parties with regard to the
Philippine operations of Pacfor. Private respondent will establish a Pacfor
representative office in the Philippines, to be known as Pacfor Phils, and petitioner
ATM will be its President. Petitioners base salary and the overhead expenditures of
the company shall be borne by the representative office and funded by Pacfor/ATM,
since Pacfor Phils. is equally owned on a 50-50 equity by ATM and Pacfor-USA.
On July 14, 1995, the SEC granted the application of private respondent Pacfor
for a license to transact business in the Philippines under the name of Pacfor or
Pacfor Phils.7 In its application, private respondent Pacfor proposed to estab_______________
3 Id., at pp. 28-37.

4 Id., at pp. 118-139.
5 Id., at pp. 682-683.

6 Id., at p. 683.
7 Rollo, p. 63.
349
VOL. 497, JULY 31, 2006

349
lish its representative office in the Philippines with the purpose of monitoring and
coordinating the market activities for paper products. It also designated petitioner
as its resident agent in the Philippines, authorized to accept summons and
processes in all legal proceedings, and all notices affecting the corporation. 8
In March 1997, the Side Agreement was amended through a Revised Operating
and Profit Sharing Agreement for the Representative Office Known as Pacific Forest
Resources (Philippines),9 where the salary of petitioner was increased to
$78,000 per annum. Both agreements show that the operational expenses will be
borne by the representative office and funded by all parties as equal partners,
while the profits and commissions will be shared among them.
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor,
seeking confirmation of his 50% equity of Pacfor Phils. 10 Private respondent Pacfor,
through William Gleason, its President, replied that petitioner is not a part-owner
of Pacfor Phils. because the latter is merely Pacfor-USAs representative office and
not an entity separate and
_______________
8 Id., at p. 64.
9 CA Rollo, p. 684. Other terms of the revised agreement include:
a)ATM and Pacfor-USA shall jointly manage Pacfor Phils.
b)Pacfor-Phils. will earn commissions at 1.5% of F.O.B. value, the computation of which shall
be shown in a credit memo issued by Cellmark/Pacfor.
c)Losses,
if
any,
will
be
reimbursed
by
Cellmark/
Pacfor to ATM for ATMs share of the loss, for two consecutive years beginning with the first year of
loss.
d)The revised agreement shall take effect on January 1, 1997.
e)Cash paid to the representative office by Pacific Paper belongs to Pacfor and will be held in
trust by ATM.
10 Id., at p. 685.
350
350

distinct from Pacfor-USA. Its simply a theoretical company with the purpose of
dividing the income 50-50.11Petitioner presumably knew of this arrangement from
the start, having been the one to propose to private respondent Pacfor the setting up
of a representative office, and not a branch office in the Philippines to save on
taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint
venture with them. He alleged he would have been better off remaining as an
independent agent or representative of Pacfor-USA as ATM Marketing Corp. 13 Had
he known that no joint venture existed, he would not have allowed Pacfor to take the
profitable business of his own company, ATM Marketing Corp. 14Petitioner raised
other issues, such as the rentals of office furniture, salary of the employees, company
car, as well as commissions allegedly due him. The issues were not resolved, hence,
in October 2000, petitioner wrote Pacfor-USA demanding payment of unpaid
commissions and office furniture and equipment rentals, amounting to more than
one million dollars.15
On November 27, 2000, private respondent Pacfor, through counsel, ordered
petitioner to turn over to it all papers, documents, files, records, and other materials
in his or ATM Marketing Corporations possession that belong to Pacfor or Pacfor
Phils.16 On December 18, 2000, private respondent Pacfor also required petitioner to
remit more than three hundred thousand-peso Christmas giveaway fund for clients
of Pacfor Phils.17 Lastly, private respondent Pacfor withdrew all
_______________
11 Rollo, p. 528.
12 Id., at p. 527.
13 Ibid.
14 Id., at p. 532.
15 Id., at p. 539.
16 Id., at p. 541.
17 Id., at p. 544.
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351
its offers of settlement and ordered petitioner to transfer title and turn over to it
possession of the service car.18
Private respondent Pacfor likewise sent letters to its clients in the Philippines,
advising them not to deal with Pacfor Phils. In its letter to Intercontinental Paper
Industries, Inc., dated November 21, 2000, private respondent Pacfor stated:
Until further notice, please course all inquiries and communications for Pacific Forest
Resources (Philippines) to:
Pacific Forest Resources
200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax
Please do not send any communication to Mr. Arsenio Boy T. Mendiola or to the offices of
ATM Marketing Corporation at Room 504, Concorde Building, Legaspi Village, Makati City,
Philippines.
19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated

December 2000, private respondent directed said client to please communicate
directly with us on any further questions associated with these payments or any
future business. Do not communicate with [Pacfor] and/or [ATM].20
Petitioner construed these directives as a severance of the unregistered
partnership between him and Pacfor, and the termination of his employment as
resident manager of Pacfor Phils.21 In a memorandum to the employees of Pacfor
Phils., dated January 29, 2001, he stated:
_______________
18 Id., at p. 545.
19 CA Rollo, p. 829.
20 Id., at p. 828.
21 Rollo, pp. 546-550.
352
352

I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all records
to them effective December 19, 2000. The company records were turned over only on
January 26, 2001. This means our jobs with Pacific Forest were terminated effective
December 19, 2000. I am concerned about your welfare. I would like to help you by offering
you to work with ATM Marketing Corporation.
Please let me know if you are interested.
22
On the basis of the Side Agreement, petitioner insisted that he and Pacfor
equally own Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on a
50/50 basis, Pacfor Phils. office furniture and equipment and the service car. He
also reiterated his demand for unpaid commissions, and proposed to offset these
with the remaining Christmas giveaway fund in his possession. 23Furthermore, he
did not renew the lease contract with Pulp and Paper, Inc., the lessor of the office
premises of Pacfor Phils., wherein he was the signatory to the lease agreement. 24
On February 2, 2001, private respondent Pacfor placed petitioner on preventive
suspension and ordered him to show cause why no disciplinary action should be
taken against him. Private respondent Pacfor charged petitioner with willful
disobedience and serious misconduct for his refusal to turn over the service car and
the Christmas giveaway fund which he applied to his alleged unpaid commissions.
Private respondent also alleged loss of confidence and gross neglect of duty on the
part of petitioner for allegedly allowing another corporation owned by petitioners
relatives, High End Products, Inc. (HEPI), to use the same telephone and facsimile
numbers of Pacfor, to possibly steal and divert the sales and business of private
respondent for HEPIs principal, International Forest Products, a competitor of
private respondent.25
_______________
22 Id., at p. 553.
23 Id., at pp. 546-550.
24 Id., at p. 560.
25 Id., at pp. 554-558.
353
VOL. 497, JULY 31, 2006

353
Petitioner denied the charges. He reiterated that he considered the import of

Pacfor President William Gleasons letters as a cessation of his position and of the
existence of Pacfor Phils. He likewise informed private respondent Pacfor that ATM
Marketing Corp. now occupies Pacfor Phils. office premises, 26 and demanded
payment of his separation pay.27 On February 15, 2001, petitioner filed his complaint
for illegal dismissal, recovery of separation pay, and payment of attorneys fees with
the NLRC.28
In the meantime, private respondent Pacfor lodged fresh charges against
petitioner. In a memorandum dated March 5, 2001, private respondent directed
petitioner to explain why he should not be disciplined for serious misconduct and
conflict of interest. Private respondent charged petitioner anew with serious
misconduct for the latters alleged act of fraud and misrepresentation in authorizing
the release of an additional peso salary for himself, besides the dollar salary agreed
upon by the parties. Private respondent also accused petitioner of disloyalty and
representation of conflicting interests for having continued using the Pacfor Phils.
office for operations of HEPI. In addition, petitioner allegedly solicited business for
HEPI from a competitor company of private respondent Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was
constructive dismissal. By directing petitioner to turn over all office records and
materials, regardless of whether he may have retained copies, private respondent
Pacfor virtually deprived petitioner of his job by the gradual diminution of his
authority as resident manager. Petitioners position as resident manager whose
duty, among others, was to maintain the security of its business transactions and
_______________
26 Id., at p. 560.
27 Id., at p. 561.
28 CA Rollo, p. 652.
29 Rollo, pp. 562-563.
354
354

communications was rendered meaningless. The dispositive portion of the

decision of the Labor Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein

respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least one
month for every year of service, whichever is higher (sic), as reinstatement is no longer
feasible by reason of the strained relations of the parties equivalent to five (5) months in the
amount of $32,000.00 plus the sum of P250,000.00; pay complainant the sum of P500,000.00
as moral and exemplary damages and ten percent (10%) of the amounts awarded as and for
attorneys fees.
All other claims are dismissed for lack of basis.
SO ORDERED.
30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On
December 20, 2001, the NLRC set aside the July 30, 2001 decision of the labor
arbiter, for lack of jurisdiction and lack of merit. 31 It held there was no employeremployee relationship between the parties. Based on the two agreements between
the parties, it concluded that petitioner is not an employee of private respondent
Pacfor, but a full co-owner (50/50 equity). The NLRC denied petitioners Motion for
Reconsideration.32
Petitioner was not successful on his appeal to the Court of Appeals. The appellate
court upheld the ruling of the NLRC.
Petitioners Motion for Reconsideration33 of the decision of the Court of Appeals
was denied.Hence, this appeal.34
Petitioner assigns the following errors:
_______________
30 Id., at p. 150.
31 Id., at pp. 231-240.
32 CA Rollo, pp. 333-335.
33 Id., at pp. 84-86.
34 Rollo, pp. 14-36.
355
VOL. 497, JULY 31, 2006

355
A.THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE ERROR

AND ABUSED ITS DISCRETION IN RENDERING JUDGMENT AGAINST PETITIONER
SINCE JURISDICTION HAS BEEN ACQUIRED OVER THE SUBJECT MATTER OF
THE CASE AS THERE EXISTS EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN
THE PARTIES.
B.THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE ERROR
AND ABUSED ITS DISCRETION IN RULING THAT JURISDICTION OVER THE
SUBJECT MATTER CANNOT BE WAIVED AND MAY BE ALLEGED EVEN FOR THE
FIRST TIME ON APPEAL OR CONSIDERED BY THE COURT MOTU PROP[R]IO.
35
The first issue is whether an employer-employee relationship exists between

petitioner and private respondent Pacfor.
Petitioner argues that he is an industrial partner of the partnership he formed
with private respondent Pacfor, and also an employee of the partnership. Petitioner
insists that an industrial partner may at the same time be an employee of the
partnership, provided there is such an agreement, which, in this case, is the Side
Agreement and the Revised Operating and Profit Sharing Agreement. The Court
of Appeals denied the appeal of petitioner, holding that the legal basis of the
complaint is not employment but perhaps partnership, co-ownership, or

independent contractorship. Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that no
partnership or co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the
firm capital and of all property that may be acquired thereby and through the
efforts of the members.36
_______________
35 Id., at p. 27.
36 Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing Nelson v. Abraham,
177 P.2d 931 (1947); Henry
356
356

The property or stock of the partnership forms a community of goods, a common

fund, in which each party has a proprietary interest.37 In fact, the New Civil Code
regards a partner as a co-owner of specific partnership property. 38 Each partner
possesses a joint interest in the whole of partnership property. If the relation does
not have this feature, it is not one of partnership. 39 This essential element, the
community of interest, or co-ownership of, or joint interest in partnership property
is absent in the relations between petitioner and private respondent Pacfor.
Petitioner is not a part-owner of Pacfor Phils. William Gleason, private respondent
Pacfors President established this fact when he said that Pacfor Phils. is simply a
theoretical company for the purpose of dividing the income 50-50. He stressed that
petitioner knew of this arrangement from the very start, having been the one to
propose to private respondent Pacfor the setting up of a representative office, and
not a branch office in the Philippines to save on taxes. Thus, the parties in this
case, merely shared profits. This alone does not make a partnership. 40
Besides, a corporation cannot become a member of a partnership in the absence
of express authorization by statute or charter. 41 This doctrine is based on the
following considerations: (1) that the mutual agency between the partners, whereby
the corporation would be bound by the acts of persons who are not its duly
appointed and authorized agents
_______________
v. Darnall, 246 Ill.App. 250 (1927), cited in Notes of Decisions, 7 U.L.A. 15 (1949).
37 Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing Darden v. Cox, 123
So.2d 68 (1960).
38 Art. 1811 (1st par.).
39 Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed.
40 Fortis v. Gutierrez Hermanos, 6 Phil. 100 (1906).
41 J.M. Tuason v. Bolanos, 95 Phil. 106 (1954); Esteban B. Bautista,Treatise on Philippine
Partnership Law, 1978 ed., citing 60 A.L.R.2d 917; 6 Fletcher, Cyclopedia of Corporations, Sec. 2520
(1950).
357
VOL. 497, JULY 31, 2006

357
and officers, would be inconsistent with the policy of the law that the corporation
shall manage its own affairs separately and exclusively; and, (2) that such an
arrangement would improperly allow corporate property to become subject to risks
not contemplated by the stockholders when they originally invested in the
corporation.42 No such authorization has been proved in the case at bar.
Be that as it may, we hold that on the basis of the evidence, an employeremployee relationship is present in the case at bar. 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.43
In the instant case, all the foregoing elements are present. First, it was private
respondent Pacfor which selected and engaged the services of petitioner as its
resident agent in the Philippines. Second, as stipulated in their Side Agreement,
private respondent Pacfor pays petitioner his salary amounting to $65,000 per
annumwhich was later increased to $78,000. Third, private respondent Pacfor holds
the power of dismissal, as may be gleaned through the various memoranda
_______________
42 Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing 13 Am.Jur. 830; 60
A.L.R.2d 913.
43 Sy v. Court of Appeals, G.R. No. 142293, February 27, 2003, 398 SCRA 301, citing Caurdanetaan
Piece Workers Union v. Laguesma, 286 SCRA 401, 420 (1998); Maraguinot, Jr. v. National Labor Relations
Commission, 284 SCRA 539, 552 (1998); APP Mutual Benefit Association, Inc. v. National Labor Relations
Commission, 267 SCRA 47, 57 (1997);Aurora Land Projects Corp. v. National Labor Relations
Commission, 266 SCRA 48, 59 (1997); Encyclopedia Britannica (Phils.), Inc. v. National Labor Relations
Commission, 264 SCRA 1, 6-7 (1996).
358
358

it issued against petitioner, placing the latter on preventive suspension while

charging him with various offenses, including willful disobedience, serious
misconduct, and gross neglect of duty, and ordering him to show cause why no
disciplinary action should be taken against him.
Lastly and most important, private respondent Pacfor has the power of control
over the means and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the
actual exercise thereof. The principal consideration is whether the employer has the
right to control the manner of doing the work, and it is not the actual exercise of the
right by interfering with the work, but the right to control, which constitutes the
test of the existence of an employer-employee relationship.44 In the case at bar,
private respondent Pacfor, as employer, clearly possesses such right of control.
Petitioner, as private respondent Pacfors resident agent in the Philippines, is,
exactly so, only an agent of the corporation, a representative of Pacfor, who
transacts business, and accepts service on its behalf.
This right of control was exercised by private respondent Pacfor during the period
of November to December 2000, when it directed petitioner to turn over to it all
records of Pacfor Phils.; when it ordered petitioner to remit the Christmas giveaway
fund intended for clients of Pacfor Phils.; and, when it withdrew all its offers of
settlement and ordered petitioner to transfer title and turn over to it the possession
of the service car. It was also during this period when private respondent Pacfor
sent letters to its clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, advising them not to deal with petitioner and/or
Pacfor Phils. In its letter to DAVCOR, private respondent
_______________
44 Feati University v. Bautista, G.R. No. L-21278, December 27, 1966, 18 SCRA 1191, 1217,
citing Amalgamated Roofing Co. v. Travelers Ins. Co., 133 N.E. 259, 261; 300 Ill. 487.
359
VOL. 497, JULY 31, 2006

359
Pacfor replied to the clients request for an invoice payment extension, and
formulated a revised payment program for DAVCOR. This is one unmistakable proof
that private respondent Pacfor exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from
employment.
The evidence shows that when petitioner insisted on his 50% equity in Pacfor
Phils., and would not quit however, private respondent Pacfor began to
systematically deprive petitioner of his duties and benefits to make him feel that his
presence in the company was no longer wanted. First, private respondent Pacfor
directed petitioner to turn over to it all records of Pacfor Phils. This would certainly
make the work of petitioner very difficult, if not impossible.Second, private
respondent Pacfor ordered petitioner to remit the Christmas giveaway fund
intended for clients of Pacfor Phils. Then it ordered petitioner to transfer title and
turn over to it the possession of the service car. It also advised its clients in the
Philippines, particularly Intercontinental Paper Industries, Inc. and DAVCOR, not
to deal with petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor
appointed a new resident agent for Pacfor Phils.45
Although there is no reduction of the salary of petitioner, constructive dismissal
is still present because continued employment of petitioner is rendered, at the very
least, unreasonable.46 There is an act of clear discrimination, insensibility or disdain
by the employer that continued employment may become so unbearable on the part
of the employee so as to foreclose any choice on his part except to resign from such
employment.47
_______________
45 CA Rollo, pp. 724-733.

46 Philippine Japan Active Carbon Corp. v. National Labor Relations Commission, G.R. No. 83239,
March 8, 1989, 171 SCRA 164.
47 Unicorn Safety Glass, Inv. v. Basarte, G.R. No. 154689, November 25, 2004, 444 SCRA 287.
360
360

The harassing acts of the private respondent are unjustified. They were
undertaken when petitioner sought clarification from the private respondent about
his supposed 50% equity on Pacfor Phils. Private respondent Pacfor invokes its
rights as an owner. Allegedly, its issuance of the foregoing directives against

petitioner was a valid exercise of management prerogative. We remind private
respondent Pacfor that the exercise of management prerogative is not absolute. By
its very nature, encompassing as it could be, management prerogative must be
exercised in good faith and with due regard to the rights of laborverily, with the
principles of fair play at heart and justice in mind. The exercise of management
prerogative cannot be utilized as an implement to circumvent our laws and oppress
employees.48
As resident agent of private respondent corporation, petitioner occupied a
position involving trust and confidence. In the light of the strained relations
between the parties, the full restoration of an employment relationship based on
trust and confidence is no longer possible. He should be awarded separation pay, in
lieu of reinstatement.
IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals January
30, 2003 Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming
the December 20, 2001 Decision of the National Labor Relations Commission, are
ANNULED and SET ASIDE. The July 30, 2001 Decision of the Labor Arbiter is
REINSTATED with the MODIFICATION that the amount of P250,000.00
representing an alleged increase in petitioners salary shall be deducted from the
grant of separation pay for lack of evidence.
SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna and Garcia, JJ.,concur.
_______________
48 Ibid.
Copyright 2016 Central Book Supply, Inc. All rights reserved.
OSCAR ANGELES and EMERITA ANGELES, petitioners,vs. THE

SECRETARY OF JUSTICE and FELINO MERCADO, respondents.
HON.
Actions; Certiorari; Words and Phrases; Grave Abuse of Discretion, Defined.An act
of a court or tribunal may constitutegrave abuse of discretion when the same is performed
in a capricious or whimsical exercise of judgment amounting to lack of jurisdiction. The
abuse of discretion must be so patent and gross as to amount to an evasion of positive duty,
or to a virtual refusal to perform a duty enjoined by law, as where the power is exercised in
an arbitrary and despotic manner because of passion or personal hostility.
Same; Same; Pleadings and Practice; Motions for Reconsideration; A previous motion
for reconsideration before the filing of a petition for certiorari is necessary; Exceptions.The
Angeles spouses fail to convince us that the Secretary of Justice committed grave abuse of
discretion when he dismissed their appeal. Moreover, the Angeles spouses committed an
error in procedure when they failed to file a motion for reconsideration of the Secretary of
Justices resolution. A
_______________
*
FIRST DIVISION.
107
VOL. 465, JULY 29, 2005

Angeles vs. Secretary of Justice
107
previous motion for reconsideration before the filing of a petition for certiorari is
necessary unless: (1) the issue raised is one purely of law; (2) public interest is involved; (3)
there is urgency; (4) a question of jurisdiction is squarely raised before and decided by the
lower court; and (5) the order is a patent nullity. The Angeles spouses failed to show that
their case falls under any of the exceptions. In fact, this present petition for certiorari is
dismissible for this reason alone.
Partnership; Mere failure to register the contract of partnership with the Securities and
Exchange Commission does not invalidate a contract that has the essential requisites of
partnershipa partnership may exist even if the partners do not use the words partner or
partnership.The Angeles spouses position that there is no partnership because of the
lack of a public instrument indicating the same and a lack of registration with the
Securities and Exchange Commission (SEC) holds no water. First, the Angeles spouses
contributed money to the partnership and not immovable property. Second, mere failure to
register the contract of partnership with the SEC does not invalidate a contract that has the
essential requisites of a partnership. The purpose of registration of the contract of
partnership is to give notice to third parties. Failure to register the contract of partnership
does not affect the liability of the partnership and of the partners to third persons. Neither
does such failure to register affect the partnerships juridical personality. A partnership
may exist even if the partners do not use the words partner or partnership. Indeed, the
Angeles spouses admit to facts that prove the existence of a partnership: a contract showing
a sosyo industrial or industrial partnership, contribution of money and industry to a

common fund, and division of profits between the Angeles spouses and Mercado.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari.

Leonardo G. Ragaza, Sr. for petitioners.
Cayetano T. Santos & Associates for private respondent.
108
108

CARPIO, J.:
The Case
This is a petition for certiorari to annul the letter-resolution dated 1 February 2000
of the Secretary of Justice in Resolution No. 155. The Secretary of Justice affirmed
the resolution in I.S. No. 96-939 dated 28 February 1997 rendered by the Provincial
Prosecution Office of the Department of Justice in Santa Cruz, Laguna (Provincial
Prosecution Office). The Provincial Prosecution Office resolved to dismiss the
complaint for estafa filed by petitioners Oscar and Emerita Angeles (Angeles
spouses) against respondent Felino Mercado (Mercado).
Antecedent Facts
1
On 19 November 1996, the Angeles spouses filed a criminal complaint for estafa
under Article 315 of the Revised Penal Code against Mercado before the Provincial
Prosecution Office. Mercado is the brother-in-law of the Angeles spouses, being
married to Emerita Angeles sister Laura.
In their affidavits, the Angeles spouses claimed that in November 1992, Mercado
convinced them to enter into a contract of antichresis, colloquially known
as sanglaang-perde, covering eight parcels of land (subject land) planted with
fruit5
_______________
1
Under Rule 65 of the Rules of Court.
Penned by Secretary of Justice Serafin R. Cuevas.
Series of 2000.
Penned by 4th Assistant Provincial Prosecutor Carlos I. Acain, recommended for approval by 1st
Assistant Prosecutor Felipe L. Arcigal, Jr., and approved by Provincial Prosecutor George C. Dee.
Article 2132 of the Civil Code provides: By the contract of antichresis the creditor acquires the right
to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit.
109
VOL. 465, JULY 29, 2005

109
bearing lanzones trees located in Nagcarlan, Laguna and owned by Juana Suazo.
The contract of antichresis was to last for five years with P210,000 as consideration.
As the Angeles spouses stay in Manila during weekdays and go to Laguna only on
weekends, the parties agreed that Mercado would administer the lands and
complete the necessary paperwork.
After three years, the Angeles spouses asked for an accounting from Mercado.
Mercado explained that the subject land earned P46,210 in 1993, which he used to
buy more lanzones trees. Mercado also reported that the trees bore no fruit in 1994.
Mercado gave no accounting for 1995. The Angeles spouses claim that only after this
demand for an accounting did they discover that Mercado had put the contract
of sanglaang-perde over the subject land under Mercado and his spouses
names. The relevant portions of the contract of sanglaang-perde, signed by Juana
Suazo alone, read:
6
xxx
Na alang-alang sa halagang DALAWANG DAAN AT SAMPUNG LIBONG PISO
(P210,000), salaping gastahin, na aking tinanggap sa mag[-]asawa nila G. AT GNG.
FELINO MERCADO, mga nasa hustong gulang, Filipino, tumitira at may pahatirang sulat
sa Bgy. Maravilla, bayan ng Nagcarlan, lalawigan ng Laguna, ay aking ipinagbili, iniliwat
at isinalin sa naulit na halaga, sa nabanggit na mag[-] asawa nila G. AT GNG. FELINO
MERCADO[,] sa kanila ay magmamana, kahalili at ibang dapat pagliwatan ng kanilang
karapatan, ang lahat na ibubunga ng lahat na puno ng lanzones, hindi kasama ang ibang
halaman na napapalooban nito, ng nabanggit na WALONG (8) Lagay na Lupang CocalLanzonal, sa takdang LIMA (5) NA [sic] TAON, magpapasimula sa taong 1993, at
magtatapos sa taong 1997, kayat pagkatapos ng lansonesan sa taong 1997, ang
pamomosision at pakikinabang sa lahat na puno ng lanzones sa nabanggit na WALONG (8)
Lagay na Lupang Cocal-Lanzonal ay manunumbalik sa akin, sa akin ay magmamana,
kahalili at ibang dapat pagliwatan ng aking karapatan na ako ay
_______________
6
Rollo, pp. 24, 26.
Ibid., pp. 24, 26-27.
110
110

walang ibabalik na ano pa mang halaga, sa mag[-] asawa nila G. AT GNG. FELINO
MERCADO.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na ako
ay bibigyan nila ng LIMA (5) na [sic] kaing na lanzones taon-taon sa loob ng LIMA (5) na
[sic] taon ng aming kasunduang ito.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na
silang mag[-]asawa nila G. AT GNG. FELINO MERCADO ang magpapaalis ng dapo sa
puno ng lansones taon-taon [sic] sa loob ng LIMA (5) [sic] taonng [sic] aming kasunduang
ito.
8
In his counter-affidavit, Mercado denied the Angeles spouses allegations. Mercado

claimed that there exists an industrial partnership, colloquially known as sosyo
industrial, between him and his spouse as industrial partners and the Angeles
spouses as the financiers. This industrial partnership had existed since 1991, before
the contract of antichresis over the subject land. As the years passed, Mercado used
his and his spouses earnings as part of the capital in the business transactions
which he entered into in behalf of the Angeles spouses. It was their practice to enter
into business transactions with other people under the name of Mercado because
the Angeles spouses did not want to be identified as the financiers.
Mercado attached bank receipts showing deposits in behalf of Emerita Angeles
and contracts under his name for the Angeles spouses. Mercado also attached the
minutes of the barangay conciliation proceedings held on 7 September 1996. During
the barangay conciliation proceedings, Oscar Angeles stated that there was a
written sosyo industrialagreement: capital would come from the Angeles spouses
while the profit would be divided evenly between Mercado and the Angeles spouses.
9
_______________
8
Ibid., p. 75.
Ibid., pp. 30-32.
111
VOL. 465, JULY 29, 2005

111
The Ruling of the Provincial Prosecution Office

On 3 January 1997, the Provincial Prosecution Office issued a resolution
recommending the filing of criminal information for estafa against Mercado. This
resolution, however, was issued without Mercados counter-affidavit.
Meanwhile, Mercado filed his counter-affidavit on 2 January 1997. On receiving

the 3 January 1997 resolution, Mercado moved for its reconsideration. Hence, on 26
February 1997, the Provincial Prosecution Office issued an amended resolution
dismissing the Angeles spouses complaint for estafa against Mercado.
The Provincial Prosecution Office stated thus:
The subject of the complaint hinges on a partnership gone sour. The partnership was
initially unsaddled [with] problems. Management became the source of misunderstanding
including the accounting of profits, which led to further misunderstanding until it was
revealed that the contract with the orchard owner was only with the name of the
respondent, without the names of the complainants.
The accusation of estafa here lacks enough credible evidentiary support to sustain
a prima facie finding.
Premises considered, it is respectfully recommended that the complaint for estafa be
dismissed.
RESPECTFULLY SUBMITTED.
10
The Angeles spouses filed a motion for reconsideration, which the Provincial
Prosecution Office denied in a resolution dated 4 August 1997.
The Ruling of the Secretary of Justice
On appeal to the Secretary of Justice, the Angeles spouses emphasized that the
document evidencing the contract ofsanglaang-perde with Juana Suazo was
executed in the name of the Mercado spouses, instead of the Angeles spouses. The
_______________
10
Ibid., p. 53.
112
112

Angeles spouses allege that this document alone proves Mercados misappropriation
of their P210,000.
The Secretary of Justice found otherwise. Thus:
Reviewing the records of the case, we are of the opinion that the indictment of [Mercado]
for the crime of estafa cannot be sustained. [The Angeles spouses] failed to show sufficient
proof that [Mercado] deliberately deceived them in the sanglaang perde transaction. The
document alone, which was in the name of [Mercado and his spouse], failed to convince us
that there was deceit or false representation on the part of [Mercado] that induced the
[Angeles spouses] to part with their money. [Mercado] satisfactorily explained that the
[Angeles spouses] do not want to be revealed as the financiers. Indeed, it is difficult to
believe that the [Angeles spouses] would readily part with their money without holding on
to some document to evidence the receipt of money, or at least to inspect the document
involved in the said transaction. Under the circumstances, we are inclined to believe that
[the Angeles spouses] knew from the very start that the questioned document was not really
in their names.
In addition, we are convinced that a partnership truly existed between the [Angeles
spouses] and [Mercado]. The formation of a partnership was clear from the fact that they
contributed money to a common fund and divided the profits among themselves. Records
would show that [Mercado] was able to make deposits for the account of the [Angeles
spouses]. These deposits represented their share in the profits of their business venture.
Although the [Angeles spouses] deny the existence of a partnership, they, however, never
disputed that the deposits made by [Mercado] were indeed for their account.
The transcript of notes on the dialogue between the [Angeles spouses] and [Mercado]
during the hearing of their barangay conciliation case reveals that the [Angeles spouses]
acknowledged their joint business ventures with [Mercado] although they assailed the
manner by which [Mercado] conducted the business and handled and distributed the funds.
The veracity of this transcript was not raised in issued [sic] by [the Angeles spouses].
Although the legal formalities for the formation of a partnership were not adhered to, the
partnership relationship of the [Angeles spouses] and [Mercado] is evident in this case.
Consequently, there is no estafa where money is
113
VOL. 465, JULY 29, 2005

113
delivered by a partner to his co-partner on the latters representation that the amount shall
be applied to the business of their partnership. In case of misapplication or conversion of
the money received, the co-partners liability is civil in nature (People v. Clarin, 7 Phil. 504)
WHEREFORE, the appeal is hereby DISMISSED.
11
Hence, this petition.

Issues
The Angeles spouses ask us to consider the following issues:
1. 1.Whether the Secretary of Justice committed grave abuse of discretion
amounting to lack of jurisdiction in dismissing the appeal of the Angeles
spouses;
2. 2.Whether a partnership existed between the Angeles spouses and Mercado
even without any documentary proof to sustain its existence;
3. 3.Assuming that there was a partnership, whether there was

misappropriation by Mercado of the proceeds of the lanzones after the
Angeles spouses demanded an accounting from him of the income at the
office of the barangay authorities on 7 September 1996, and Mercado failed
to do so and also failed to deliver the proceeds to the Angeles spouses;
4. 4.Whether the Secretary of Justice should order the filing of the information
for estafa against Mercado.
12
The Ruling of the Court

The petition has no merit.
Whether
the
Secretary
of
Justice
Committed
Grave Abuse of Discretion
An act of a court or tribunal may constitute grave abuse of discretion when the same
is performed in a capricious or
_______________
11
Ibid., pp. 21-22.
12
See Rollo, p. 9.
114
114

whimsical exercise of judgment amounting to lack of jurisdiction. The abuse of

discretion must be so patent and gross as to amount to an evasion of positive duty,
or to a virtual refusal to perform a duty enjoined by law, as where the power is
exercised in an arbitrary and despotic manner because of passion or personal
hostility.
The Angeles spouses fail to convince us that the Secretary of Justice committed
grave abuse of discretion when he dismissed their appeal. Moreover, the Angeles
spouses committed an error in procedure when they failed to file a motion for
reconsideration of the Secretary of Justices resolution. A previous motion for
reconsideration before the filing of a petition for certiorari is necessary unless: (1)
the issue raised is one purely of law; (2) public interest is involved; (3) there is
urgency; (4) a question of jurisdiction is squarely raised before and decided by the
lower court; and (5) the order is a patent nullity. The Angeles spouses failed to
show that their case falls under any of the exceptions. In fact, this present petition
forcertiorari is dismissible for this reason alone.
13
14
Whether
a
Partnership
Existed
Between Mercado and the Angeles Spouses
The Angeles spouses allege that they had no partnership with Mercado. The
Angeles spouses rely on Articles 1771 to 1773 of the Civil Code, which state that:
Art. 1771. A partnership may be constituted in any form, except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be necessary.
_______________
13
Intestate Estate of Carmen de Luna v. Intermediate Appellate Court, G.R. No. 72424, 13 February 1989, 170
SCRA 246 citing Litton Mills, Inc. v. Galleon Trader, Inc., No. L-40867, 26 July 1988, 163 SCRA 489.
14
JUSTICE JOSE Y. FERIA (RET.) AND MARIA CONCEPCION S. NOCHE,2CIVILPROCEDURE
ANNOTATED, 473 (2001).
115
VOL. 465, JULY 29, 2005

115
Art. 1772. Every contract of partnership having a capital of three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be recorded in
the Office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed
thereto, if an inventory of said property is not made, signed by the parties, and attached to
the public instrument.
The Angeles spouses position that there is no partnership because of the lack of a
public instrument indicating the same and a lack of registration with the Securities
and Exchange Commission (SEC) holds no water. First, the Angeles spouses
contributed money to the partnership and not immovable property. Second, mere
failure to register the contract of partnership with the SEC does not invalidate a
contract that has the essential requisites of a partnership. The purpose of
registration of the contract of partnership is to give notice to third parties. Failure
to register the contract of partnership does not affect the liability of the partnership
and of the partners to third persons. Neither does such failure to register affect the
partnerships juridical personality. A partnership may exist even if the partners do
not use the words partner or partnership.
Indeed, the Angeles spouses admit to facts that prove the existence of a
partnership: a contract showing a sosyo industrial or industrial partnership,
contribution of money and industry to a common fund, and division of profits
between the Angeles spouses and Mercado.
Whether
there
was
Misappropriation by Mercado
The Secretary of Justice adequately explained the alleged misappropriation by
Mercado: The document alone, which
116
116

was in the name of [Mercado and his spouse], failed to convince us that there was
deceit or false representation on the part of [Mercado] that induced the [Angeles
spouses] to part with their money. [Mercado] satisfactorily explained that the
[Angeles spouses] do not want to be revealed as the financiers.
Even Branch 26 of the Regional Trial Court of Santa Cruz, Laguna which
decided the civil case for damages, injunction and restraining order filed by the
Angeles spouses against Mercado and Leo Cerayban, stated:
15
x x x [I]t was the practice to have all the contracts of antichresis of their partnership
secured in [Mercados] name as [the Angeles spouses] are apprehensive that, if they come
out into the open as financiers of said contracts, they might be kidnapped by the New
Peoples Army or their business deals be questioned by the Bureau of Internal Revenue or
worse, their assets and unexplained income be sequestered, as x x x Oscar Angeles was then
working with the government.
16
Furthermore, accounting of the proceeds is not a proper subject for the present case.
For these reasons, we hold that the Secretary of Justice did not abuse his discretion
in dismissing the appeal of the Angeles spouses.
WHEREFORE, we AFFIRM the decision of the Secretary of Justice. The present
petition for certiorari is DISMISSED.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Quisumbing, Ynares-Santiago and Azcuna,
JJ., concur.
Petition dismissed, decision of Secretary of Justice affirmed.
G.R. No. 126881. October 3, 2000.
HEIRS OF TAN ENG KEE, petitioners, vs. COURT OF APPEALS and BENGUET
LUMBER COMPANY, represented by its President TAN ENG LAY, respondents.
Appeals; Evidence; Findings of facts of the Court of Appeals will not be disturbed on
appeal if such are supported by the evidence.As a premise, we reiterate the oft-repeated
rule that findings of facts of the Court of Appeals will not be disturbed on appeal if such are
supported by the evidence. Our jurisdiction, it must be emphasized, does not include review
of factual issues.
Same; Same; Exceptions.Admitted exceptions have been recognized, though, and
when present, may compel us to analyze the evidentiary basis on which the lower court
rendered judgment. Review of factual issues is therefore warranted: (1) when the factual
findings of the Court of Appeals and the trial court are contradictory; (2) when the findings
are
_______________
*
SECOND DIVISION.
741

Heirs of Tan Eng Kee vs. Court of Appeals
741
grounded entirely on speculation, surmises, or conjectures; (3) when the inference

made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or
impossible; (4) when there is grave abuse of discretion in the appreciation of facts; (5) when
the appellate court, in making its findings, goes beyond the issues of the case, and such
findings are contrary to the admissions of both appellant and appellee; (6) when the
judgment of the Court of Appeals is premised on a misapprehension of facts; (7) when the
Court of Appeals fails to notice certain relevant facts which, if properly considered, will
justify a different conclusion; (8) when the findings of fact are themselves conflicting; (9)
when the findings of fact are conclusions without citation of the specific evidence on which
they are based; and (10) when the findings of fact of the Court of Appeals are premised on
the absence of evidence but such findings are contradicted by the evidence on record.
Partnerships; Words and Phrases; In order to constitute a partnership, it must be
established that (1) two or more persons bound themselves to contribute money, property or
industry to a common fund, and (2) they intended to divide the profits among themselves.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in
Benguet Lumber. A contract of partnership is defined by law as one where: x x x two or
more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves. Two or more persons may also
form a partnership for the exercise of a profession. Thus, in order to constitute a
partnership, it must be established that (1) two or more persons bound themselves to
contribute money, property, or industry to a common fund, and (2) they intend to divide the
profits among themselves. The agreement need not be formally reduced into writing, since
statute allows the oral constitution of a partnership, save in two instances: (1) when
immovable property or real rights are contributed, and (2) when the partnership has a
capital of three thousand pesos or more. In both cases, a public instrument is required. An
inventory to be signed by the parties and attached to the public instrument is also
indispensable to the validity of the partnership whenever immovable property is
contributed to the partnership.
Same; Same; Joint Ventures; Partnership and Joint Venture, Distinguished.The
trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture,
which it said is akin to a particular partnership. A particular partnership is distinguished
from a joint adventure, to wit: (a) A joint adventure (an American concept similar to our
joint accounts ) is a sort of informal partnership, with no firm name and no legal
personality. In a joint account, the participating merchants can
742
742

transact business under their own name, and can be individually liable therefor, (b)
Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful termination may continue for a number of
years; a partnership generally relates to a continuing business of various transactions of a
certain kind.
Same; Same; Same; Same; A joint venture may be likened to a particular partnership;
The legal concept of a joint venture is of common law origin and has no precise legal
definition, but it has been generally understood to mean an organization formed for some
temporary purpose.A joint venture presupposes generally a parity of standing between
the joint co-ventures or partners, in which each party has an equal proprietary interest in
the capital or property contributed, and where each party exercises equal rights in the
conduct of the business. Nonetheless, in Aurbach, et al. v. Sanitary Wares Manufacturing
Corporation, et al., we expressed the view that a joint venture may be likened to a
particular partnership, thus: The legal concept of a joint venture is of common law origin. It
has no precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920])
It is hardly distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a mutual right of
control. (Blackner v. McDermott, 176 F. 2d. 498 [1949]; Carboneau v. Peterson, 95 P.2d.,
1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The
main distinction cited by most opinions in common law jurisdiction is that the partnership
contemplates a general business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a temporary nature. (Tufts v.
Mann, 116 Cal. App. 170, 2 P.2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel, 266 Fed. 811 [1920]). This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil
Code). It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however engage in a
joint venture with others. (At p. 12, Tuazon v. Bolaos, 95 Phil. 906 [1954]) (Campos and
Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).
743

743
Same; Co-Ownership; A co-ownership or co-possession is not an indicium of the

existence of a partnership.None of petitioners witnesses could suitably account for the
beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose
deceased wife was related to Matilde Abubo. He stated that when he met Tan Eng Kee after
the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets
supposedly owned by both brothers. Tan Eng Lay, however, denied knowledge of this
meeting or of the conversation between Peralta and his brother. Tan Eng Lay consistently
testified that he had his business and his brother had his, that it was only later on that his
said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or
copossession (specifically here, of the G.I. sheets) is not an indicium of the existence of a
partnership.
Same; The essence of a partnership is that the partners share in the profits and losses; A
demand for periodic accounting is evidence of a partnership.Besides, it is indeed odd, if
not unnatural, that despite the forty years the partnership was allegedly in existence, Tan
Eng Kee never asked for an accounting. The essence of a partnership is that the partners
share in the profits and losses. Each has the right to demand an accounting as long as the
partnership exists. We have allowed a scenario wherein [i]f excellent relations exist among
the partners at the start of the business and all the partners are more interested in seeing
the firm grow rather than get immediate returns, a deferment of sharing in the profits is
perfectly plausible. But in the situation in the case at bar, the deferment, if any, had gone
on too long to be plausible. A person is presumed to take ordinary care of his concerns, x x x
A demand for periodic accounting is evidence of a partnership. During his lifetime, Tan Eng
Kee appeared never to have made any such demand for accounting from his brother, Tang
Eng Lay.
Same; Where circumstances taken singly may be inadequate to prove the intent to form a
partnership, nevertheless, the collective effect of these circumstances may be such as to
support a finding of the existence of the parties intent.In the instant case, we find private
respondents arguments to be well-taken. Where circumstances taken singly may be
inadequate to prove the intent to form a partnership, nevertheless, the collective effect of
these circumstances may be such as to support a finding of the existence of the parties
intent. Yet, in the case at bench, even the aforesaid circumstances when taken together are
not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was
involved in the operations of Benguet Lumber, but in what capacity is unclear. We cannot
discount the likelihood that as a member of the family, he occupied
744
744

a niche above the rank-and-file employees. He would have enjoyed liberties otherwise
unavailable were he not kin, such as his residence in the Benguet Lumber Company
compound. He would have moral, if not actual, superiority over his fellow employees,
thereby entitling him to exercise powers of supervision. It may even be that among his
duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do
not provide a logical nexus to the conclusion desired; these are not inconsistent with the
powers and duties of a manager, even in a business organized and run as informally as
Benguet Lumber Company.
PETITION for review on certiorari of a decision of the Court of Appeals.

Lauro D. Gacayan for petitioner.
Soo, Gutierrez, Leogardo & Lee collaborating counsel for petitioner.
Francisco S. Reyes Law Office for private respondents.
DE LEON, JR., J .:
In this petition for review on certiorari, petitioners pray for the reversal of the
Decision dated March 13, 1996 of the former Fifth Division of the Court of Appeals
in CA-G.R. CV No. 47937, the dispositive portion of which states:
1
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the
complaint dismissed.
The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the
common-law spouse of the decedent, joined by their children Teresita, Nena, Clarita,
Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF
TAN ENG KEE, filed suit against the decedents brother TAN ENG LAY on
_______________
1
Rollo, pp. 129-147.
Justice Bernardo LL. Salas, ponente, with Justices Pedro A. Ramirez and Ma. Alicia Austria-
Martinez, concurring.
745

745
February 19, 1990. The complaint, docketed as Civil Case No. 1983-R in the
Regional Trial Court of Baguio City was for accounting, liquidation and winding up
of the alleged partnership formed after World War II between Tan Eng Kee and Tan
Eng Lay. On March 18, 1991, the petitioners filed an amended
complaint impleading private respondent herein BENGUET LUMBER COMPANY,
as represented by Tan Eng Lay. The amended complaint was admitted by the trial
court in its Order dated May 3, 1991.
The amended complaint principally alleged that after the second World War, Tan
Eng Kee and Tan Eng Lay, pooling their resources and industry together, entered
into a partnership engaged in the business of selling lumber and hardware and
construction supplies. They named their enterprise Benguet Lumber which they
jointly managed until Tan Eng Kees death. Petitioners herein averred that the
business prospered due to the hard work and thrift of the alleged partners.
However, they claimed that in 1981, Tan Eng Lay and his children caused the
conversion of the partnership Benguet Lumber into a corporation called Benguet
Lumber Company. The incorporation was purportedly a ruse to deprive Tan Eng
Kee and his heirs of their rightful participation in the profits of the business.
Petitioners prayed for accounting of the partnership assets, and the dissolution,
winding up and liquidation thereof, and the equal division of the net assets of
Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment on
April 12, 1995, to wit:
3
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. a)Declaring that Benguet Lumber is a joint venture which is akin to a particular

partnership;
2. b)Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers
and/or partners in a business venture and/or particular
_______________
3
Records, pp. 1-4.
Records, pp. 123-126.
Records, p. 130.
Records, pp. 632-647.
746
746

1. its and/or losses of the business venture or particular partnership;
2. c)Declaring that the assets of Benguet Lumber are the same assets turned over to
Benguet Lumber Co., Inc. and as such the heirs or legal representatives of the
deceased Tan Eng Kee have a legal right to share in said assets;
3. d)Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer
and/or as partner in a particular partnership have descended to the plaintiffs who
are his legal heirs.
4. e)Ordering the defendant Tan Eng Lay and/or the President and/or General
Manager of Benguet Lumber Company, Inc. to render an accounting of all the
assets of Benguet Lumber Company, Inc. so the plaintiffs know their proper share
in the business;
5. f)Ordering the appointment of a receiver to preserve and/or administer the assets of
Benguet Lumber Company, Inc. until such time that said corporation is finally
liquidated are directed to submit the name of any person they want to be appointed
as receiver failing in which this Court will appoint the Branch Clerk of Court or
another one who is qualified to act as such.
6. g)Denying the award of damages to the plaintiffs for lack of proof except the expenses
in filing the instant case.
7. h)Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13,
1996, rendered the assailed decision reversing the judgment of the trial court.
Petitioners motion for reconsideration was denied by the Court of Appeals in a

Resolution dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856
against Tan Eng Lay and Wilborn Tan for the use of allegedly falsified documents in
a judicial proceeding. Petitioners complained that Exhibits 4 to 4-U offered by
the defendants before the trial court, consisting of payrolls indicating that Tan
7
_______________
7
Rollo, pp. 148-149.
Rollo, p. 173.
747

747
Eng Kee was a mere employee of Benguet Lumber, were fake, based on the
discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos.
78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy,
all surnamed Tan, for alleged falsification of commercial documents by a private
individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1,
wherein the charges were filed, rendered judgment dismissing the cases for
insufficiency of evidence.
In their assignment of errors, petitioners claim that:
9
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO

PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG
LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM
LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES;
AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP
(PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE
SELF-SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET
LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN
EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH
PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE
THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE
SECURITIES AND EXCHANGE COMMISSION:
1. a.THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL
LIVING AT THE BENGUET LUMBER COMPOUND;
_______________
9
Rollo, pp. 412-419.
748
748

1. b.THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE
EMPLOYEES OF BENGUET LUMBER;
2. c.THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE
EMPLOYEES THEREIN;
3. d.THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING
THE PRICES OF STOCKS TO BE SOLD TO THE PUBLIC; AND
4. e.THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING
ORDERS TO THE SUPPLIERS (PAGE 18, DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO

PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE:
ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH THEIR WITNESS BEATRIZ
TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT
KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A
PARTNERSHIP (PAGE 16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS

NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN
ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER IS
DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC
INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO
SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17,
DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of
Appeals will not be disturbed on appeal if such are supported by the evidence. Our
jurisdiction, it must be emphasized, does not include review of factual issues. Thus:
10
_______________
10
Brusas v. Court of Appeals, 313 SCRA 176, 188 (1999); Guerrero v. Court of Appeals, 285 SCRA 670,
678 (1998); Atillo III v. Court of Appeals266 SCRA 596, 605-606 (1997); Mallari v. Court of Appeals, 265
SCRA 456, 461 (1996).
749

749
Filing of petition with Supreme Court.A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The petition shall raise only
questions of law which must be distinctly set forth. [italics supplied]
11
Admitted exceptions have been recognized, though, and when present, may compel
us to analyze the evidentiary basis on which the lower court rendered judgment.
Review of factual issues is therefore warranted:
1. (1)when the factual findings of the Court of Appeals and the trial court are
contradictory;
2. (2)when the findings are grounded entirely on speculation, surmises, or
conjectures;
3. (3)when the inference made by the Court of Appeals from its findings of fact
is manifestly mistaken, absurd, or impossible;
4. (4)when there is grave abuse of discretion in the appreciation of facts;
5. (5)when the appellate court, in making its findings, goes beyond the issues of
the case, and such findings are contrary to the admissions of both appellant
and appellee;
6. (6)when the judgment of the Court of Appeals is premised on a
misapprehension of facts;
7. (7)when the Court of Appeals fails to notice certain relevant facts which, if
properly considered, will justify a different conclusion;
8. (8)when the findings of fact are themselves conflicting;
9. (9)when the findings of fact are conclusions without citation of the specific
evidence on which they are based; and
10. (10)when the findings of fact of the Court of Appeals are premised on the
absence of evidence but such findings are contradicted by the evidence on
record.
12
_______________
11
1997 RULES OF CIVIL PROCEDURE, Rule 45, Sec. 1.
12
Fuentes v. Court of Appeals, 268 SCRA 703, 708-709 (1997).
750
750

In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs
mentioned only the existence of a partnership, the Court in turn went beyond that by
justifying the existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing
between the parties, equal proprietary interest and the exercise by the parties equally of the
conduct of the business, thus:
xxx
xxx
xxx
xxx
We have the admission that the father of the plaintiffs was not a partner of the Benguet
Lumber before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is
because during the war, the entire stocks of the pre-war Benguet Lumber were confiscated if
not burned by the Japanese. After the war, because of the absence of capital to start a
lumber and hardware business, Lay and Kee pooled the proceeds of their individual
businesses earned from buying and selling military supplies, so that the common fund
would be enough to form a partnership, both in the lumber and hardware business. That
Lay and Kee actually established the Benguet Lumber in Baguio City, was even testified to
by witnesses. Because of the pooling of resources, the postwar Benguet Lumber was
eventually established. That the father of the plaintiffs and Lay were partners, is obvious
from the fact that: (1) they conducted the affairs of the business during Kees lifetime,
jointly, (2) they were the ones giving orders to the employees, (3) they were the ones
preparing orders from the suppliers, (4) their families stayed together at the Benguet
Lumber compound, and (5) all their children were employed in the business in different
capacities.
xxx
xxx
xxx
xxx
It is obvious that there was no partnership whatsoever. Except for a firm name, there
was no firm account, no firm letterheads submitted as evidence, no certificate of
partnership, no agreement as to profits and losses, and no time fixed for the duration of the
partnership. There was even no attempt to submit an accounting corresponding to the
period after the war until Kees death in 1984. It had no business book, no written account
nor any memorandum for that matter and no license mentioning the existence of a
partnership [citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification
dated March 4, 1971, Exhibit 2, mentioned codefendant Lay as the only registered owner
of the Benguet Lumber and Hardware. His application for registration, effective 1954, in
fact mentioned that his business started in 1945 until 1985 (thereafter, the incor751

751
poration). The deceased, Kee, on the other hand, was merely an employee of the Benguet
Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit 3. In the
Payrolls, Exhibits 4 to 4-U, inclusive, for the years 1982 to 1983, Kee was similarly listed
only as an employee; precisely, he was on the payroll listing. In the Termination Notice,
Exhibit 5, Lay was mentioned also as the proprietor.
xxx
xxx
xxx
xxx
We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted
in any form, but when an immovable is constituted, the execution of a public instrument
becomes necessary. This is equally true if the capitalization exceeds P3,000.00, in which
case a public instrument is also necessary, and which is to be recorded with the Securities
and Exchange Commission. In this case at bar, we can easily assume that the business
establishment, which from the language of the appellees, prospered (pars. 5 & 9,
Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real properties
and to the fact that it is now a compound. The execution of a public instrument, on the other
hand, was never established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay
and the members of his family. There is no proof either that the capital assets of the
partnership, assuming them to be in existence, were maliciously assigned or transferred by
Lay, supposedly to the corporation and since then have been treated as a part of the latters
capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room
in the bunk house in Trinidad, but within the compound of the lumber establishment, as
testified to by Tandoc; 2) that both Lay and Kee were seated on a table and were
commanding people as testified to by the son, Elpidio Tan; 3) that both were supervising
the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly
being told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the
business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either
oral or written. However, if it involves real property or where the capital is P3,000.00 or
more, the execution of a contract is necessary; 2) the capacity of the parties to execute the
contract; 3) money property or industry contribution; 4) community of funds and interest,
mentioning equality of the partners or one having a proportionate share in the benefits; and
5) intention to divide the profits, being the true test of
752
752

the partnership. The intention to join in the business venture for the purpose of obtaining
profits thereafter to be divided, must be established. We cannot see these elements from the
testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which
had adjudged that TAN ENG KEE and TAN ENG LAY had allegedly entered into a
joint venture. In this connection, we have held that whether a partnership exists is
a factual matter; consequently, since the appeal is brought to us under Rule 45, we
cannot entertain inquiries relative to the correctness of the assessment of the
evidence by the court a quo. Inasmuch as the Court of Appeals and the trial court
had reached conflicting conclusions, perforce we must examine the record to
determine if the reversal was justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were
partners in Benguet Lumber. A contract of partnership is defined by law as one
where:
13
x x x two or more persons bind themselves to contribute money, property, or industry to a

common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
14
Thus, in order to constitute a partnership, it must be established that (1) two or

more persons bound themselves to contribute money, property, or industry to a
common fund, and (2) they intend to divide the profits among themselves. The
agreement need not be formally reduced into writing, since statute allows the oral
constitution of a partnership, save in two instances: (1) when immovable property or
real rights are contributed, and (2) when the partnership has a capital of three
thousand pesos or more. In both
15
16
17
_______________
13
Cf. Alicbusan v. Court of Appeals, 269 SCRA 336, 340-341 (1997)
14
CIVIL CODE, Art. 1767.
15
Yulo v. Yang Chiao Seng, 106 Phil. 110, 116 (1959).
16
17
753

753
cases, a public instrument is required. An inventory to be signed by the parties and

attached to the public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to the partnership.
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into
a joint venture, which it said is akin to a particular partnership. A particular
partnership is distinguished from a joint adventure, to wit:
18
19
20
1. (a)A joint adventure (an American concept similar to our joint accounts) is a
sort of informal partnership, with no firm name and no legal personality. In
a joint account, the participating merchants can transact business under
their own name, and can be individually liable therefor.
2. (b)Usually, but not necessarily a joint adventure is limited to a SINGLE
TRANSACTION, although the business of pursuing to a successful
termination
may
continue
for
a
number
of
years;
a
partnershipgenerally relates to a continuing business of various transactions
of a certain kind.
21
A joint venture presupposes generally a parity of standing between the joint coventures or partners, in which each party has an equal proprietary interest in the
capital or property contributed, and where each party exercises equal rights in the
conduct of the business. Nonetheless, inAurbach, et al. v. Sanitary Wares
Manufacturing Corporation, et al. we expressed the view that a joint venture may
be likened to a particular partnership, thus:
22
23
_______________
18
Note, however, Article 1768 of the Civil Code which provides: The partnership has a juridical
personality separate and distinct from that of each of the partners, even in case of failure to comply with
the requirements of Article 1772, first paragraph.
19
20
A particular partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation. (CIVIL CODE, Art. 1783)

21
V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 (13th ed., 1995).
22
Sevilla v. Court of Appeals, 160 SCRA 171, 181 (1988).
23
180 SCRA 130, 146-147 (1989).
754
754

The legal concept of a joint venture is of common law origin. It has no precise legal
temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable
from the partnership, since their elements are similarcommunity of interest in the
business, sharing of profits and losses, and a mutual right of control. (Blackner v.
McDermott, 176 F. 2d. 498 [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by
most opinions in common law jurisdiction is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is formed for the execution
of a single transaction, and is thus of a temporary nature. (Tufts v. Mann, 116 Cal. App.
170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947];Gates v.
Megargel, 266 Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would
seem therefore that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint
venture with others. (At p. 12, Tuazon v. Bolaos, 95 Phil. 906 [1954]) (Campos and LopezCampos Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself,
or the articles of partnership, but there is none. The alleged partnership, though,
was never formally organized. In addition, petitioners point out that the New Civil
Code was not yet in effect when the partnership was allegedly formed sometime in
1945, although the contrary may well be argued that nothing prevented the parties
from complying with the provisions of the New Civil Code when it took effect on
August 30, 1950. But all that is in the past. The net effect, however, is that we are
asked to determine whether a partnership existed based purely on circumstantial
evidence. A review of the record persuades us that the Court of Appeals correctly
reversed the decision of the trial court. The evidence presented by petitioners falls
short of the quantum of proof required to establish a partnership.
755

755
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from
Tan Eng Lay, could have expounded on the precise nature of the business
relationship between them. In the absence of evidence, we cannot accept as an
established fact that Tan Eng Kee allegedly contributed his resources to a common
fund for the purpose of establishing a partnership. The testimonies to that effect of
petitioners witnesses is directly controverted by Tan Eng Lay. It should be noted
that it is not with the number of witnesses wherein preponderance lies; the quality
of their testimonies is to be considered. None of petitioners witnesses could suitably
account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio
Peralta whose deceased wife was related to Matilde Abubo. He stated that when he
met Tan Eng Kee after the liberation, the latter asked the former to accompany him
to get 80 pieces of G.I. sheets supposedly owned by both brothers. Tan Eng Lay,
however, denied knowledge of this meeting or of the conversation between Peralta
and his brother. Tan Eng Lay consistently testified that he had his business and his
brother had his, that it was only later on that his said brother, Tan Eng Kee, came
to work for him. Be that as it may, co-ownership or co-possession (specifically here,
of the G.I. sheets) is not an indicium of the existence of a partnership.
Besides, it is indeed odd, if not unnatural, that despite the forty years the
partnership was allegedly in existence, Tan Eng Kee never asked for an accounting.
The essence of a partnership is that the partners share in the profits and
losses. Each has the right to demand an accounting as long as the partnership
exists. We have allowed a scenario wherein [i]f excellent relations exist among the
partners at the start of the business and all the partners are more
24
25
26
27
28
29
30
_______________
24
REVISED RULES ON EVIDENCE, Rule 133, Sec. 1.
25
TSN, June 23, 1990, p. 9.
26
TSN, January 28, 1993, p. 85.
27
TSN, July 1, 1993, p. 13; TSN, July 8, 1993, p. 4.
28
Navarro v. Court of Appeals, 222 SCRA 675, 679 (1993); CIVIL CODE, Art. 1769.
29
Moran v. Court of Appeals, 133 SCRA 88, 95 (1984).
30
Fue Lung v. Intermediate Appellate Court, 169 SCRA 746, 755 (1989).
756
756

interested in seeing the firm grow rather than get immediate returns, a deferment
of sharing in the profits is perfectly plausible. But in the situation in the case at
bar, the deferment, if any, had gone on too long to be plausible. A person is
presumed to take ordinary care of his concerns. As we explained in another case:
31
32
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second
place, she did not furnish any help or intervention in the management of the theatre. In the
third place, it does not appear that she has even demanded from defendant any accounting
of the expenses and earnings of the business. Were she really a partner, her first concern
should have been to find out how the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to
any of the acts that a partner should have done; all that she did was to receive her share of
P3,000.00 a month, which cannot be interpreted in any manner than a payment for the use
of the premises which she had leased from the owners. Clearly, plaintiff had always acted in
accordance with the original letter of defendant of June 17, 1945 (Exh. A), which shows
that both parties considered this offer as the real contract between them. [italics supplied]
33
A demand for periodic accounting is evidence of a partnership. During his lifetime,

Tan Eng Kee appeared never to have made any such demand for accounting from
his brother, Tang Eng Lay.
This brings us to the matter of Exhibits 4 to 4-U for private respondents,
consisting of payrolls purporting to show that Tan Eng Kee was an ordinary
employee of Benguet Lumber, as it was then called. The authenticity of these
documents was questioned by petitioners, to the extent that they filed criminal
charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal
cases were dismissed for insufficiency of evidence. Exhibits 4 to 4-U in fact shows
that Tan Eng Kee received sums as wages of an employee. In connection therewith,
Article 1769 of the Civil Code provides:
34
_______________
31
Id., at 754.
32
1997 RULES OF CIVIL PROCEDURE, Rule 131, Sec. 3, Par. (d).
33
Yulo v. Yang Chiao Seng, 106 Phil. 110, 117 (1959).
34
Estanislao, Jr. v. Court of Appeals, 160 SCRA 830, 837 (1988).
757

757
In determining whether a partnership exists, these rules shall apply:

1. (1)Except as provided by Article 1825, persons who are not partners as to each other
are not partners as to third persons;
2. (2)Co-ownership or co-possession does not of itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
3. (3)The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property which the returns are derived;
4. (4)The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be drawn
if such profits were received in payment:
1. (a)As a debt by installment or otherwise;
2. (b)As wages of an employee or rent to a landlord;
3. (c)As an annuity to a widow or representative of a deceased partner;
4. (d)As interest on a loan, though the amount of payment vary with the profits of the
business;
5. (e)As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was
only an employee, not a partner. Even if the payrolls as evidence were discarded,
petitioners would still be back to square one, so to speak, since they did not present
and offer evidence that would show that Tan Eng Kee received amounts of money
allegedly representing his share in the profits of the enterprise. Petitioners failed to
show how much their father, Tan Eng Kee, received, if any, as his share in the
profits of Benguet Lumber Company for any particular period. Hence, they failed to
prove that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the
business between themselves, which is one of the essential features of a
partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged
existence of a partnership from this set of circumstances: that Tan Eng Lay and Tan
Eng Kee were commanding the employees; that both were supervising the
employees; that both
758
758

were the ones who determined the price at which the stocks were to be sold; and
that both placed orders to the suppliers of the Benguet Lumber Company. They also
point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at
the Benguet Lumber Company compound, a privilege not extended to its ordinary
employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers
and privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in
Benguet Lumber for the following reasons:
1. (i)even a mere supervisor in a company, factory or store gives orders and directions
to his subordinates. So long, therefore, that an employees position is higher in
rank, it is not unusual that he orders around those lower in rank.
2. (ii)even a messenger or other trusted employee, over whom confidence is reposed by
the owner, can order materials from suppliers for and in behalf of Benguet Lumber.
Furthermore, even a partner does not necessarily have to perform this particular
task. It is, thus, not an indication that Tan Eng Kee was a partner.
3. (iii)although Tan Eng Kee, together with his family, lived in the lumber compound
and this privilege was not accorded to other employees, the undisputed fact remains
that Tan Eng Kee is the brother of Tan Eng Lay. Naturally, close personal relations
existed between them. Whatever privileges Tan Eng Lay gave his brother, and
which were not given the other employees, only proves the kindness and-generosity
of Tan Eng Lay towards a blood relative.
4. (iv)and even if it is assumed that Tan Eng Kee was quarrelling with Tan Eng Lay in
connection with the pricing of stocks, this does not adequately prove the existence
of a partnership relation between them. Even highly confidential employees and the
owners of a company sometimes argue with respect to certain matters which, in no
way indicates that they are partners as to each other.
35
In the instant case, we find private respondents arguments to be well-taken. Where

circumstances taken singly may be inadequate to prove the intent to form a
partnership, nevertheless, the
_______________
35
Private Respondents Memorandum, Rollo, p. 390.
759

759
collective effect of these circumstances may be such as to support a finding of the

existence of the parties intent. Yet, in the case at bench, even the aforesaid
circumstances when taken together are not persuasive indicia of a partnership.
They only tend to show that Tan Eng Kee was involved in the operations of Benguet
Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a
member of the family, he occupied a niche above the rank-and-file employees. He
would have enjoyed liberties otherwise unavailable were he not kin, such as his
residence in the Benguet Lumber Company compound. He would have moral, if not
actual, superiority over his fellow employees, thereby entitling him to exercise
powers of supervision. It may even be that among his duties is to place orders with
suppliers. Again, the circumstances proffered by petitioners do not provide a logical
nexus to the conclusion desired; these are not inconsistent with the powers and
duties of a manager, even in a business organized and run as informally as Benguet
Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or
liquidation to speak of. Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the
Court of Appeals is hereby AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Quisumbing andBuena, JJ ., concur.
36
Petition denied, judgment affirmed in toto.
Notes.A general professional partnership, unlike an ordinary business

partnership, is not itself an income taxpayer, as the income tax is imposed not on
the professional partnership but on the partners themselves in their individual
capacity. (Tan vs. Del Rosario, Jr., 237 SCRA 324 [1994])
_______________
G.R. Nos. 166299-300. December 13, 2005.

AURELIO K. LITONJUA, JR., petitioner, vs. EDUARDO K. LITONJUA, SR.,
ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K.
LITONJUA SHIPPING CO., INC., LITONJUA SECURITIES, INC. (formerly E. K.
Litonjua Sec), LUNETA THEATER, INC., E & L REALTY, (formerly E & L INTL
SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT
DEV. REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC.,
3D CORP., L DEV. CORP, LCM THEATRICAL ENTERPRISES, INC., LITONJUA
SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP., SARATOGA
REALTY, INC., ACT THEATER INC. (formerly General Theatrical & Film
Exchange, INC.), AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF
PHILIPPINES, INC., (Formerly VF PHILIPPINES), respondents.
*
Actions; Civil Law; Partnership; Words and Phrases; A contract of partnership is

defined by the Civil Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits
among themselves.A partnership exists when two or more persons agree to place their
money, effects, labor, and skill in lawful commerce or business, with the understanding that
there shall be a proportionate sharing of the profits and losses between them. A contract of
partnership is defined by the Civil Code as one where two or more persons bound
themselves to contribute money, property, or industry to a common fund with the intention
of dividing the profits among themselves. A joint venture, on the other hand, is hardly
distinguishable from, and may be likened to, a partnership since their elements are
similar, i.e., community of interests in the business and sharing of profits and losses. Being
a form of partnership, a joint venture is generally governed by the law on partnership.
Same; Same; Same; Petitioners complaint does not state a valid cause of action because
not all the essential elements of a cause of action are present.Given the foregoing
perspective, what the appellate court wrote
_______________
THIRD DIVISION
577
VOL. 477, DECEMBER 13, 2005

Litonjua, Jr. vs. Litonjua, Sr.
577
in its assailed Decision about the probative value and legal effect of Annex A-1
commends itself for concurrence: Considering that the allegations in the complaint showed
that [petitioner] contributed immovable properties to the alleged partnership, the
Memorandum (Annex A of the complaint) which purports to establish the said
partnership/joint venture is NOT a public instrument and there was NO inventory of the
immovable property duly signed by the parties. As such, the said Memorandum . . . is null
and void for purposes of establishing the existence of a valid contract of partnership.
Indeed, because of the failure to comply with the essential formalities of a valid contract,
the purported partnership/joint venture is legally inexistent and it produces no effect
whatsoever. Necessarily, a void or legally inexistent contract cannot be the source of any
contractual or legal right. Accordingly, the allegations in the complaint, including the
actionable document attached thereto, clearly demonstrates that [petitioner] has NO valid
contractual or legal right which could be violated by the [individual respondents] herein. As
a consequence, [petitioners] complaint does NOT state a valid cause of action because NOT
all the essential elements of a cause of action are present.
Same; Same; Same; Statute of Frauds; By force of the statute of frauds, an agreement
that by its terms is not to be performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or memorandum thereof, be in
writing and subscribed by the party charged.It is at once apparent that what respondent
Eduardo imposed upon himself under the above passage, if he indeed wrote Annex A-1, is
a promise which is not to be performed within one year from contract execution on June
22, 1973. Accordingly, the agreement embodied in Annex A-1 is covered by the Statute of
Frauds andergo unenforceable for non-compliance therewith. By force of the statute of
frauds, an agreement that by its terms is not to be performed within a year from the
making thereof shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party charged. Corollarily, no
action can be proved unless the requirement exacted by the statute of frauds is complied
with.
Same; Same; Same; Same; A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is dismissible for
failure to state a cause of action.Per the Courts own count, petitioner used in his
complaint the mixed words joint venture/partnership nineteen (19) times and the term
partner four (4) times. He made reference to the law of joint venture/partnership [being
applicable] to the business relationship . . . between [him], Eduardo and
578
578

Litonjua, Jr. vs. Litonjua, Sr.
Bobby [Yang] and to his rights in all specific properties of their joint
venture/partnership. Given this consideration, petitioners right of action against
respondents Eduardo and Yang doubtless pivots on the existence of the partnership
between the three of them, as purportedly evidenced by the undated and unsigned
Annex A-1. A void Annex A-1, as an actionable document of partnership, would strip
petitioner of a cause of action under the premises. A complaint for delivery and accounting
of partnership property based on such void or legally non-existent actionable document is
dismissible for failure to state of action. So, in gist, said the Court of Appeals. The Court
agrees.
Appeals.
Antonio R. Bautista & Partners for petitioner.
Emmanuel P.J. Tamase for respondent Robert T. Yang.
Ferrer & Balayan Law Offices for private respondent except Robert T. Yang.
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K.
Litonjua, Jr. seeks to nullify and set aside the Decision of the Court of Appeals (CA)
dated March 31, 2004 in consolidated cases C.A. G.R. Sp. No. 76987 and C.A. G.R.
SP. No 78774 and its Resolution dated December 07, 2004, denying petitioners
motion for reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K.
Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started when,
on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio filed
a suit against his brother Eduardo and herein respondent Robert T. Yang (Yang)
and several corporations for specific performance and accounting. In his
complaint, docketed asCivil Case No. 69235 and eventually raffled to Branch 68 of
the court, Aurelio alleged that, since June 1973, he and Eduardo are into a joint
venture/partnership arrangement in the Odeon Theater business which had
expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon
Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner
of lands and buildings, among other corporations. Yang is described in the
1
complaint as petitioners and Eduardos partner in their Odeon Theater

investment. The same complaint also contained the following material averments:
5
1. 3.01On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint
venture/partnership for the continuation of their family business and
common family funds . . . .
2. 3.01.1This joint venture/[partnership] agreement was contained in a
memorandum addressed by Eduardo to his siblings, parents and other
relatives. Copy of this memorandum is attached hereto and made an integral
part as Annex A and the portion referring to [Aurelio] submarked
as Annex A-1.
3. 3.02It was then agreed upon between [Aurelio] and Eduardo that in
consideration of [Aurelios] retaining his share in the remaining family
businesses (mostly, movie theaters, shipping and land development) and
contributing his industry to the continued operation of these businesses,
[Aurelio] will be given P1 Million or 10% equity in all these businesses and
those to be subsequently acquired by them whichever is greater. . . .
4. 4.01. . . from 22 June 1973 to about August 2001, or [in] a span of 28 years,
[Aurelio] and Eduardo had accumulated in their joint venture/partnership
various assets including but not limited to the corporate defendants and
[their] respective assets.
5. 4.02In addition . . . the joint venture/partnership . . . had also acquired
[various other assets], but Eduardo caused to be registered in the names of
other parties.
6. x x x
xxx
xxx
4.04 The substantial assets of most of the corporate defendants consist of real
properties . . . . A list of some of these real properties is attached hereto and made an
integral part as Annex B.
xxx
xxx
xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that
[Aurelio] requested for an accounting and liquidation of his share in the joint
venture/partnership [but these demands for complete accounting and liquidation were not
heeded].
xxx
xxx
xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the
corporate defendants as well as Bobby [Yang], are transferring . . . various real properties of
the corporations belonging to the joint venture/partnership to other parties in fraud of
[Aurelio]. In consequence, [Aurelio] is therefore causing at this time the annotation on the
titles of these real properties. . . a notice of lis pendens . . . . (Emphasis in the original;
italics and words in bracket added.)
For ease of reference, Annex A-1 of the complaint, which petitioner asserts to have
been meant for him by his brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:

You have now your own life to live after having been married. . . . .
I am trying my best to mold you the way I work so you can follow the pattern . . . . You
will be the only one left with the company, among us brothers and I will ask you to stay as I
want you to run this office every time I am away. I want you to run it the way I am trying to
run it because I will be all alone and I will depend entirely to you (sic). My sons will not be
ready to help me yet until about maybe 15/20 years from now. Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten
percent (10%) equity, whichever is greater. We two will gamble the whole thing of what I
have and what you are entitled to. . . . . It will be you and me alone on this. If ever I pass
away, I want you to take care of all of this. You keep my share for my two sons are ready
take over but give them the chance to run the company which I have built.
xxx
xxx
xxx
Because you will need a place to stay, I will arrange to give you first ONE HUNDRED
THOUSANDS PESOS: (P100,000.00) in cash or asset, like Lt. Artiaga so you can live better
there. The rest I will give you in form of stocks which you can keep. This stock I assure you
is good and saleable. I will also gladly give you the share of Wack-Wack . . . and Valley
Golf . . . because you have been good. The rest will be in stocks from all the corporations
which I repeat, ten percent (10%) equity.
6
On December 20, 2002, Eduardo and the corporate respondents, as defendants a

quo, filed a joint ANSWER With Compulsory Counterclaim denying under oath the
material allegations of the complaint, more particularly that portion thereof
depicting petitioner and Eduardo as having entered into a contract of partnership.
As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional matter,
alleged that the complaint states no cause of action, since no cause of action may be
derived from the actionable document, i.e., Annex A-1, being void under the terms
of Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further
alleged that whatever undertaking Eduardo agreed to do, if any, under Annex A-1,
are unenforceable under the provisions of the Statute of Frauds.
For his part, Yangwho was served with summons long after the other
defendants submitted their answermoved to dismiss on the ground, inter alia,
that, as to him, petitioner has no cause of action and the complaint does not state
any. Petitioner opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative
Defenses. To this motion, petitioner interposed an Opposition with ex-Parte Motion
to Set the Case for Pre-trial.
Acting on the separate motions immediately adverted to above, the trial court, in
an Omnibus Order dated March 5, 2003, denied the affirmative defenses and, except
for Yang, set the case for pre-trial on April 10, 2003.
In another Omnibus Order of April 2, 2003, the same court denied the motion of
Eduardo, et al., for reconsideration and Yangs motion to dismiss. The following
then transpired insofar as Yang is concerned:
7
10
11
12
1. 1.On April 14, 2003, Yang filed his ANSWER, but expressly reserved the
right to seek reconsideration of the April 2, 2003 Omnibus Order and to
pursue his failed motion to dismiss to its full resolution.
13
2. 2.On April 24, 2003, he moved for reconsideration of the Omnibus Order of
April 2, 2003, but his motion was denied in an Order of July 4, 2003.
14
3. 3.On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorari under Rule 65 of the Rules of Court, docketed as CA-G.R. SP
No. 78774, to nullify the separate orders of the trial court, the first denying
15
his motion to dismiss the basic complaint and, the second, denying his
motion for reconsideration.
Earlier, Eduardo and the corporate defendants, on the contention that grave abuse
of discretion and injudicious haste attended the issuance of the trial courts
aforementioned Omnibus Orders dated March 5, and April 2, 2003, sought relief
from the CA via similar recourse. Their petition for certiorari was docketed
as CA G.R. SP No. 76987.
Per its resolution dated October 2, 2003, the CAs 14th Division ordered the
consolidation of CA-G.R.-SP No. 78774with CA-G.R. SP No. 76987.
16
Following the submission by the parties of their respective Memoranda of

Authorities, the appellate court came out with the herein assailed Decision dated
March 31, 2004, finding for Eduardo and Yang, as lead petitioners therein, disposing
as follows:
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari
in these consolidated cases annulling, reversing and setting aside the assailed orders of the
court a quo dated March 5, 2003, April 2, 2003 and July 4, 2003 and the complaint filed by
private respondent [now petitioner Aurelio] against all the petitioners [now herein
respondents Eduardo, et al.] with the court a quo is hereby dismissed.
SO ORDERED. (Emphasis in the original; words in bracket added.)
17
Explaining its case disposition, the appellate court stated,inter alia, that the alleged
partnership, as evidenced by the actionable documents, Annex A and A-1
attached to the complaint, and upon which petitioner solely predicates his right/s
allegedly violated by Eduardo, Yang and the corporate defendants a quo is void or
legally inexistent.
In time, petitioner moved for reconsideration but his motion was denied by the
CA in its equally assailedResolution of December 7, 2004.
Hence, petitioners present recourse, on the contention that the CA erred:
18
1. A.When it ruled that there was no partnership created by the actionable

document because this was not a public instrument and immovable
properties were contributed to the partnership.
2. B.When it ruled that the actionable document did not create a demandable
right in favor of petitioner.
3. C.When it ruled that the complaint stated no cause of action against
[respondent] Robert Yang; and
1. D.When it ruled that petitioner has changed his theory on appeal when all
that Petitioner had done was to support his pleaded cause of action by
another legal perspective/argument.
The petition lacks merit.
Petitioners demand, as defined in the petitory portion of his complaint in the
trial court, is for delivery or payment to him, as Eduardos and Yangs partner, of his
partnership/joint venture share, after an accounting has been duly conducted of

what he deems to be partnership/joint venture property.
A partnership exists when two or more persons agree to place their money,
effects, labor, and skill in lawful commerce or business, with the understanding that
there shall be a proportionate sharing of the profits and losses between them. A
contract of partnership is defined by the Civil Code as one where two or more
persons bound themselves to contribute money, property, or industry to a common
fund with the intention of dividing the profits among themselves. A joint venture,
on the other hand, is hardly distinguishable from, and may be likened to, a
partnership since their elements are similar, i.e., community of interests in the
business and sharing of profits and losses. Being a form of partnership, a joint
venture is generally governed by the law on partnership.
The underlying issue that necessarily comes to mind in this proceedings is
whether or not petitioner and respondent Eduardo are partners in the theatre,
shipping and realty business, as one claims but which the other denies. And the
issue bearing on the first assigned error relates to the question of what legal
provision is applicable under the premises, petitioner seeking, as it were, to enforce
the actionable documentAnnex A-1which he depicts in his complaint to be the
19
20
21
22
contract of partnership/joint venture between himself and Eduardo. Clearly, then, a

look at the legal provisions determinative of the existence, or defining the formal
requisites, of a partnership is indicated. Foremost of these are the following
provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be recorded in
the Office of the Securities and Exchange Commission.
Failure to comply with the requirement of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed
thereto, if an inventory of said property is not made, signed by the parties, and attached to
the public instrument.
Annex A-1, on its face, contains typewritten entries, personal in tone, but is
unsigned and undated. As an unsigned document, there can be no quibbling that
Annex A-1 does not meet the public instrumentation requirements exacted under
Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to
a partnership involving more than P3,000.00 in money or property, Annex A-1
cannot be presented for notarization, let alone registered with the Securities and
Exchange Commission (SEC), as called for under the Article 1772 of the Code. And
inasmuch as the inventory requirement under the succeeding Article 1773 goes into
the matter of validity when immovable property is contributed to the partnership,
the next logical point of inquiry turns on the nature of petitioners contribution, if
any, to the supposed partnership.
The CA, addressing the foregoing query, correctly stated that petitioners
contribution consisted of immovables and real rights. Wrote that court:
A further examination of the allegations in the complaint would show that [petitioners]
contribution to the so-called partnership/joint venture was his supposed share in the
family business that is consisting of movie theaters, shipping and land development under
paragraph 3.02 of the complaint. In other words, his contribution as a partner in the alleged
partnership/joint venture consisted of immovable properties and real rights. . . .
23
Significantly enough, petitioner matter-of-factly concurred with the appellate courts

observation that, prescinding from what he himself alleged in his basic complaint,
his contribution to the partnership consisted of his share in the Litonjua family
businesses which owned variable immovable properties. Petitioners assertion in his
motion for reconsideration of the CAs decision, that what was to be contributed to
the business [of the partnership] was [petitioners] industry and his share in the
family [theatre and land development] business leaves no room for speculation as to
what petitioner contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under
Article 1773 of the Civil Code applies as long real property or real rights are
initially brought into the partnership. In short, it is really of no moment which of
the partners, or, in this case, who between petitioner and his brother Eduardo,
contributed immovables. In context, the more important consideration is that real
property was contributed, in which case an inventory of the contributed property
duly signed by the parties should be attached to the public instrument, else there is
legally no partnership to speak of.
Petitioner, in an obvious bid to evade the application of Article 1773, argues that
the immovables in question were not contributed, but were acquired after the
formation of the supposed partnership. Needless to stress, the Court cannot accord
cogency to this specious argument. For, as earlier stated, petitioner himself
admitted contributing his share in the supposed shipping, movie theatres and realty
development family businesses which already owned immovables even before Annex
A-1 was allegedly executed.
24
Considering thus the value and nature of petitioners alleged contribution to the
purported partnership, the Court, even if so disposed, cannot plausibly extend
Annex A-1 the legal effects that petitioner so desires and pleads to be given. Annex
A-1, in fine, cannot support the existence of the partnership sued upon and sought
to be enforced. The legal and factual milieu of the case calls for this disposition. A
partnership may be constituted in any form, save when immovable property or real
rights are contributed thereto or when the partnership has a capital of at least
P3,000.00, in which case a public instrument shall be necessary. And if only to
stress what has repeatedly been articulated, an inventory to be signed by the
parties and attached to the public instrument is alsoindispensable to the validity of
the partnership whenever immovable property is contributed to it.
Given the foregoing perspective, what the appellate court wrote in its assailed
Decision about the probative value and legal effect of Annex A-1 commends itself
25
26
for concurrence:
Considering that the allegations in the complaint showed that [petitioner] contributed
immovable properties to the alleged partnership, the Memorandum (Annex A of the
complaint) which purports to establish the said partnership/joint venture is NOT a public
instrument and there was NO inventory of the immovable property duly signed by the
parties. As such, the said Memorandum . . . is null and void for purposes of establishing
the existence of a valid contract of partnership. Indeed, because of the failure to comply
with the essential formalities of a valid contract, the purported partnership/joint venture
is legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally
inexistent contract cannot be the source of any contractual or legal right. Accordingly, the
allegations in the complaint, including the actionable document attached thereto, clearly
demonstrates that [petitioner] has NO valid contractual or legal right which could be
violated by the [individual respondents] herein. Likewise well-taken are the following
complementary excerpts from the CAs equally assailed Resolution of December 7,

2004 denying petitioners motion for reconsideration:
27
Further, We conclude that despite glaring defects in the allegations in the complaint as
well as the actionable document attached thereto (Rollo, p. 191), the [trial] court did not
appreciate and apply the legal provisions which were brought to its attention by herein
[respondents] in the their pleadings. In our evaluation of [petitioners] complaint, the latter
alleged inter alia to have contributed immovable properties to the alleged partnership but
the actionable document is not a public document and there was no inventory of immovable
properties signed by the parties. Both the allegations in the complaint and the actionable
documents considered, it is crystal clear that [petitioner] has no valid or legal right which
could be violated by [respondents]. (Words in bracket added.)
Under the second assigned error, it is petitioners posture that Annex A-1,
assuming its inefficacy or nullity as a partnership document, nevertheless created
demandable rights in his favor. As petitioner succinctly puts it in this petition:
1. 43.Contrariwise, this actionable document, especially its above-quoted
provisions, established an actionable contract even though it may not be a
partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).
2. 44.It may not be a contract of loan, or a mortgage or whatever, but surely the
contract does create rights and obligations of the parties and which rights
and obligations may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically labeled or
pigeonholed into a category of nominate contract does not mean it is void or
unenforceable.
Petitioner has thus thrusted the notion of an innominate contract on this Court
and earlier on the CA after he experienced areversal of fortune thereatas an
afterthought. The appellate court, however, cannot really be faulted for not yielding
to petitioners dubious stratagem of altering his theory of joint venture/partnership
to an innominate contract. For, at bottom, the appellate courts certiorari
jurisdiction was circumscribed by what was alleged to have been the order/s issued
by the trial court in grave abuse of discretion. As respondent Yang pointedly
observed, since the parties basic position had been well-defined, that of petitioner
being that the actionable document established a partnership/joint venture, it is on
those positions that the appellate court exercised its certiorari jurisdiction.
Petitioners act of changing his original theory is an impermissible practice and
constitutes, as the CA aptly declared, an admission of the untenability of such
theory in the first place.
28
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now
contended that the actionable instrument may be considered an innominate contract. x x
x Verily, this now changes [petitioners] theory of the case which is not only prohibited by
the Rules but also is an implied admission that the very theory he himself . . . has adopted,
filed and prosecuted before the respondent court is erroneous.
Be that as it may . . . . . We hold that this new theory contravenes [petitioners] theory of
the actionable document being a partnership document. If anything, it is so obvious we do
have to test the sufficiency of the cause of action on the basis of partnership law x x
x. (Emphasis in the original; Words in bracket added).
29
But even assuming in gratia argumenti that Annex A-1 partakes of a perfected
innominate contract, petitioners complaint would still be dismissible as against
Eduardo and, more so, against Yang. It cannot be over-emphasized that petitioner
points to Eduardo as the author of Annex A-1. Withal, even on this consideration
alone, petitioners claim against Yang is doomed from the very start.
As it were, the only portion of Annex A-1 which could perhaps be remotely
regarded as vesting petitioner with a right to demand from respondent Eduardo the
observance of a determinate conduct, reads:
x x x You will be the only one left with the company, among us brothers and I will ask you
to stay as I want you to run this office everytime I am away. I want you to run it the way I
am trying to run it because I will be alone and I will depend entirely to you, My sons will
not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten
percent (10%) equity, whichever is greater. (Italics added)
It is at once apparent that what respondent Eduardo imposed upon himself under
the above passage, if he indeed wrote Annex A-1, is a promise which is not to be
performed within one year from contract execution on June 22, 1973. Accordingly,
the agreement embodied in Annex A-1 is covered by the Statute of Frauds
and ergounenforceable for non-compliance therewith. By force of the statute of
frauds, an agreement that by its terms is not to be performed within a year from the
making thereof shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribedby the party charged. Corollarily,
no action can be proved unless the requirement exacted by the statute of frauds is
complied with.
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or
10% equity of the family businesses supposedly promised by Eduardo to give in the
near future. Any suggestion that the stated amount or the equity component of the
promise was intended to go to a common fund would be to read something not
written inAnnex A-1. Thus, even this angle alone argues against the very idea of
30
31
a partnership, the creation of which requires two or more contracting minds

mutually agreeing to contribute money, property or industry to a common fund with
the intention of dividing the profits between or among themselves.
In sum then, the Court rules, as did the CA, that petitioners complaint for
specific performance anchored on an actionable document of partnership which is
legally inexistent or void or, at best, unenforceable does not state a cause of action
as against respondent Eduardo and the corporate defendants. And if no of action
32
can successfully be maintained against respondent Eduardo because no valid

partnership existed between him and petitioner, the Court cannot see its way clear
on how the same action could plausibly prosper against Yang. Surely, Yang could not
have become a partner in, or could not have had any form of business relationship
with, an inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide the logical nexus
that would tie Yang to him as his partner. In fact, attendant circumstances would
indicate the contrary. Consider:
1. 1.Petitioner asserted in his complaint that his so-called joint
venture/partnership with Eduardo was for the continuation of their family
business and common family funds which were theretofore being mainly
managed by Eduardo. But Yang denies kinship with the Litonjua family
and petitioner has not disputed the disclaimer.
33
2. 2.In some detail, petitioner mentioned what he had contributed to the joint
venture/partnership with Eduardo and what his share in the businesses will
be. No allegation is made whatsoever about what Yang contributed, if any,
let alone his proportional share in the profits. But such allegation cannot,
however, be made because, as aptly observed by the CA, the actionable
document did not contain such provision, let alone mention the name of
Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even
mention his name.
3. 3.Petitioner states in par. 2.01 of the complaint that [he] and Eduardo are
business partners in the [respondent] corporations, while Bobby is his and
Eduardos partner in their Odeon Theater investment (par. 2.03). This
means that the partnership between petitioner and Eduardo came first;
Yang became their partner in their Odeon Theater investment thereafter.
Several paragraphs later, however, petitioner would contradict himself by
alleging that his investment and that of Eduardo and Yang in the Odeon
theater business has expanded through a reinvestment of profit income and
direct investments in several corporation including but not limited to [six]
corporate respondents This simply means that the Odeon Theatre
business came before the corporate respondents. Significantly enough,
petitioner refers to the corporate respondents as progeny of the Odeon

Theatre business.
34
Needless to stress, petitioner has not sufficiently established in his complaint the
legal vinculum whence he sourced his right to drag Yang into the fray. The Court of
Appeals, in its assailed decision, captured and formulated the legal situation in the
following wise:
[Respondent] Yang, . . . is impleaded because, as alleged in the complaint, he is a partner

of [Eduardo] and the [petitioner] in the Odeon Theater Investment which expanded through
reinvestments of profits and direct investments in several corporations, thus:
xxx
xxx
xxx
Clearly, [petitioners] claim against . . . Yang arose from his alleged partnership with
petitioner and the respondent. However, there was NO allegation in the complaint which
directly alleged how the supposed contractual relation was created between [petitioner]
and . . .Yang. More importantly, however, the foregoing ruling of this Court that the
purported partnership between [Eduardo] is void and legally inexistent directly affects said
claim against . . . Yang. Since [petitioner] is trying to establish his claim against . . . Yang
by linking him to the legally inexistent partnership . . . such attempt had become futile
because there was NOTHING that would contractually connect [petitioner] and . . . Yang.
To establish a valid cause of action, the complaint should have a statement of fact upon
which to connect [respondent] Yang to the alleged partnership between [petitioner] and
respondent [Eduardo], including their alleged investment in the Odeon Theater. A
statement of facts on those matters is pivotal to the complaint as they would constitute the
ultimate facts necessary to establish the elements of a cause of action against . . . Yang.
35
Pressing its point, the CA later stated in its resolution denying petitioners motion
for reconsideration the following:
x x x Whatever the complaint calls it, it is the actionable document attached to the
complaint that is controlling. Suffice it to state, We have not ignored the actionable
document . . . As a matter of fact, We emphasized in our decision . . . that insofar as [Yang]
is concerned, he is not even mentioned in the said actionable document. We are therefore
puzzled how a person not mentioned in a document purporting to establish a partnership
could be considered a partner. (Words in bracket ours).
36
The last issue raised by petitioner, referring to whether or not he changed his theory
of the case, as peremptorily determined by the CA, has been discussed at length
earlier and need not detain us long. Suffice it to say that after the CA has ruled that
the alleged partnership is inexistent, petitioner took a different tack. Thus, from a
joint venture/partnership theory which he adopted and consistently pursued in his
complaint, petitioner embraced the innominate contract theory. Illustrative of this
shift is petitioners statement in par. #8 of his motion for reconsideration of the CAs
decision combined with what he said in par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership, joint venture, or

whatever, is a legal matter. What is determinative for purposes of sufficiency of the
complainants allegations, is whether the actionable document bears out an actionable
contractbe it a partnership, a joint venture or whatever or some innominate contract . . .
It may be noted that one kind of innominate contract is what is known as du ut facias(I give
that you may do).
43. Contrariwise, this actionable document, especially its above-quoted provisions,
established an actionable contract even though it may not be a partnership. This actionable
contract is what is known as an innominate contract (Civil Code, Article 1307).
37
38
Springing surprises on the opposing party is offensive to the sporting idea of fair
play, justice and due process; hence, the proscription against a party shifting from
one theory at the trial court to a new and different theory in the appellate
court. On the same rationale, an issue which was neither averred in the complaint
cannot be raised for the first time on appeal. It is not difficult, therefore, to agree
with the CA when it made short shrift of petitioners innominate contract theory on
the basis of the foregoing basic reasons.
Petitioners protestation that his act of introducing the concept of innominate
contract was not a case of changing theories but of supporting his pleaded cause of
actionthat of the existence of a partnershipby another legal
perspective/argument, strikes the Court as a strained attempt to rationalize an
untenable position. Paragraph 12 of his motion for reconsideration of the CAs
decision virtually relegates partnership as a fall-back theory. Two paragraphs later,
in the same notion, petitioner faults the appellate court for reading, with myopic
eyes, the actionable document solely as establishing a partnership/joint venture.
Verily, the cited paragraphs are a study of a party hedging on whether or not to
pursue the original cause of action or altogether abandoning the same, thus:
39
40
12. Incidentally, assuming that the actionable document created a partnership between
[respondent] Eduardo, Sr. and [petitioner], no immovables were contributed to this
partnership. x x x
14. All told, the Decision takes off from a false premise that the actionable document
attached to the complaint does not establish a contractual relationship between [petitioner]
and Eduardo, Sr. and Roberto T Yang simply because his document does not create a
partnership or a joint venture. This is . . . a myopic reading of the actionable document.
Per the Courts own count, petitioner used in his complaint the mixed words joint
venture/partnership nineteen (19) times and the term partner four (4) times. He
made reference to thelaw of joint venture/partnership [being applicable] to the

business relationship . . . between [him], Eduardo and Bobby [Yang] and to
his rights in all specific properties of their joint venture/partnership. Given this
consideration, petitioners right of action against respondents Eduardo and Yang
doubtless pivots on the existence of the partnership between the three of them, as
purportedly evidenced by the undated and unsigned Annex A-1. A void Annex A1, as an actionable document of partnership, would strip petitioner of a cause of
action under the premises. A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is
dismissible for failure to state of action. So, in gist, said the Court of Appeals. The
Court agrees.
WHEREFORE, the instant petition is DENIED and the impugned Decision and
Resolution of the Court of Appeals AFFIRMED.
Cost against the petitioner.
SO ORDERED.
G.R. No. 148187.April 16, 2008.*

PHILEX
MINING
CORPORATION,
INTERNAL REVENUE, respondent.
petitioner, vs.COMMISSIONER
OF
Partnership; Joint Ventures; Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves; While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its charter, it has been held
that it may enter into a joint venture which is akin to a particular partnership.An
examination of the Power of Attorney reveals that a partnership or joint venture was
indeed intended by the parties. Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves. While a corporation, like petitioner, cannot
generally enter into a contract of partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture which is akin to a particular partnership:
temporary purpose. x x x It is in fact hardly distinguishable from the partnership, since
their elements are similarcommunity of interest in the business, sharing of profits and
losses, and a mutual right of control. x x x The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. x x x This observation is not entirely
accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. x x x
It would seem therefore that under Philippine law, a joint venture is a form of partnership
and should be governed by the law of partnerships. The Supreme Court has however
corporation cannot
_______________
* THIRD DIVISION.
429
VOL. 551, APRIL 16, 2008
429
Philex Mining Corporation vs. Commissioner of Internal

Revenue
enter into a partnership contract, it may however engage in a joint venture with others.
x x x (Citations omitted)
Same; Agency; Words and Phrases; In an agency coupled with interest, it is the agency
that cannot be revoked or withdrawn by the principal due to an interest of a third party that
depends upon it, or the mutual interest of both principal and agent.There is no merit to
petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances
should not be taken as an indication that it had entered into a partnership with Baguio
Gold; that the stipulation only showed that what the parties entered into was actually a
contract of agency coupled with an interest which is not revocable at will and not a
partnership. In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends upon it, or the
mutual interest of both principal and agent. In this case, the non-revocation or nonwithdrawal under paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract. Thus, it cannot be inferred
from the stipulation that the parties relation under the agreement is one of agency coupled
with an interest and not a partnership.
Same; Same; The essence of an agency, even one that is coupled with interest, is the
agents ability to represent his principal and bring about business relations between the
latter and third persons.It should be stressed that the main object of the Power of
Attorney was not to confer a power in favor of petitioner to contract with third persons on
behalf of Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through the parties
mutual contribution of material resources and industry. The essence of an agency, even one
that is coupled with interest, is the agents ability to represent his principal and bring
about business relations between the latter and third persons. Where representation for
and in behalf of the principal is merely incidental or necessary for the proper discharge of
ones paramount undertaking under a contract, the latter may not necessarily be a contract
of agency, but some other agreement depending on the ultimate undertaking of the parties.
In this case, the totality of the circumstances and the stipulations in the parties agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and
Baguio Gold.e receipt by a person of a share in the profits of a business is prima facie
evidence that he is a partner in the business.Article 1769 (4) of the Civil Code explicitly
provides that the receipt by a person of a share in the profits of a business is prima
facie evidence that he is a partner in the business. Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio project was in
the nature of compensation or wages of an employee, under the exception provided in
Article 1769 (4) (b). On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid wages pursuant to an employer-employee
relationship. To begin with, petitioner was the manager of the project and had put
substantial sums into the venture in order to ensure its viability and profitability. By
pegging its compensation to profits, petitioner also stood not to be remunerated in case the
mine had no income. It is hard to believe that petitioner would take the risk of not being
paid at all for its services, if it were truly just an ordinary employee. Consequently, we find
that petitioners compensation under paragraph 12 of the agreement actually constitutes
its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an
equal share in the income of the mine if it were just an employee of Baguio Gold. It is not
surprising that petitioner was to receive a 50% share in the net profits, considering that the
Power of Attorney also provided for an almost equal contribution of the parties to the St.
Nino mine. The compensation agreed upon only serves to reinforce the notion that the
parties relations were indeed of partners and not employer-employee.
Same; Taxation; Bad Debt Deductions; Deductions for income tax purposes partake of
the nature of tax exemptions and are strictly construed against the taxpayer, who must prove
by convincing evidence that he is entitled to the deduction claimed.The lower courts did
not err in treating petitioners advances as investments in a partnership known as the Sto.
Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the
latter was under no unconditional obligation to return the same to the former under the
Power of Attorney. As for the amounts that petitioner paid as guarantor to Baguio Golds
creditors, we find no reason to depart from the tax courts factual finding that Baguio Golds
debts were not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record. In sum, petitioner cannot claim the
advances as a bad debt deduction from its gross income. Deductions for income tax purposes
partake of the nature of tax exemptions and are strictly construed against the taxpayer, who
must prove by convincing evidence that he is entitled to the deduction claimed. In this case,
petitioner failed to substantiate its assertion that the advances were subsisting debts of
Baguio Gold that could be deducted from its gross income. Consequently, it could not claim
the advances as a valid bad debt deduction.
Appeals.

Roco, Kapunan, Migallos, Perez & Luna and Baniqued & Baniqued for
petitioner.
The Solicitor General for respondent.
YNARES-SANTIAGO,J.:
This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision 2 of the
Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3, 2001
Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered
into an agreement4 with Baguio Gold Mining Company (Baguio Gold) for the
former to manage and operate the latters mining claim, known as the Sto. Nino
mine, located in Atok and Tublay, Benguet Province. The parties agreement was
denominated as Power of Attorney and provided for the following terms:
4.Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO.
NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for
internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owners account.
5.Whenever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the MANAGERS
account.
(b)The total of the MANAGERS account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be added to the MANAGERS
account.
(c)The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
(d)The MANAGERS account shall not accrue interest. Since it is the desire of
the PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation
of property, upon a projected termination of this Agency, the ratio which the
MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will
be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property originally transferred by them to the
Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to
the MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of
the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall pay
income tax on their compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS
compensation.
xxxx
16.The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and,
in the future, may incur other obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL in
favor of the MANAGERS is outstanding, inclusive of the MANAGERS account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in
full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the
MANAGERS.
17.Notwithstanding any agreement or understanding between the PRINCIPAL and

the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held
liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall
be operative in case of the MANAGERS withdrawal.
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the agreement.
However, the mine suffered continuing losses over the years which resulted to
petitioners withdrawal as manager of the mine on January 28, 1982 and in the
eventual cessation of mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a Compromise with
Dation in Payment7 wherein Baguio Gold admitted an indebtedness to petitioner in
the amount of P179,394,000.00 and agreed to pay the same in three segments by
first assigning Baguio Golds tangible assets to petitioner, transferring to the latter
Baguio Golds equitable title in its Philodrill assets and finally settling the
remaining liability through properties that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an Amendment to Compromise with
Dation in Payment8where the parties determined that Baguio Golds indebtedness
to petitioner actually amounted toP259,137,245.00, which sum included liabilities of
Baguio Gold to other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted
by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time,
Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets forP127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the amount
ofP114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to allowances
and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income
the amount ofP112,136,000.00 as loss on settlement of receivables from Baguio
Gold against reserves and allowances. 9 However, the Bureau of Internal Revenue
(BIR) disallowed the amount as deduction for bad debt and assessed petitioner a
deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed
since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a
valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was
charged off within the taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold. The bad debt deduction represented advances made
by petitioner which, pursuant to the management contract, formed part of Baguio
Golds pecuniary obligations to petitioner. It also included payments made by
petitioner as guarantor of Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Golds irreversible losses, it became
evident that it would not be able to recover the advances and payments it had made
in behalf of Baguio Gold. For a debt to be considered worthless, petitioner claimed
that it was neither required to institute a judicial action for collection against the
debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is
enough that a taxpayer exerted diligent efforts to enforce collection and exhausted
all reasonable means to collect.
On October 28, 1994, the BIR denied petitioners protest for lack of legal and
factual basis. It held that the alleged debt was not ascertained to be worthless since
Baguio Gold remained existing and had not filed a petition for bankruptcy; and that
the deduction did not consist of a valid and subsisting debt considering that, under
the management contract, petitioner was to be paid fifty percent (50%) of the
projects net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY

respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995, which is the date after the 20day grace period given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.
11
The CTA rejected petitioners assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan. It instead characterized the advances as
petitioners investment in a partnership with Baguio Gold for the development and
exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney
executed by petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could not be
deducted as a bad debt from petitioners gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan
obligations of Baguio Gold could not be allowed as a bad debt deduction. At the time
the payments were made, Baguio Gold was not in default since its loans were not yet
due and demandable. What petitioner did was to pre-pay the loans as evidenced by
the notice sent by Bank of America showing that it was merely demanding payment
of the installment and interests due. Moreover, Citibank imposed and collected a
pre-termination penalty for the pre-payment.
The Court of Appeals affirmed the decision of the CTA. 12Hence, upon denial of its
motion for reconsideration,13petitioner took this recourse under Rule 45 of the Rules
of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature
of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the
Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the
Sto. Nino Mine notwithstanding the clear absence of any intent on the part of Philex and
Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement when
it construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad
debts write-off.
14
Petitioner insists that in determining the nature of its business relationship with
Baguio Gold, we should not only rely on the Power of Attorney, but also on the
subsequent Compromise with Dation in Payment and Amended Compromise with
Dation in Payment that the parties executed in 1982. These documents, allegedly
evinced the parties intent to treat the advances and payments as a loan and
establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the Power of Attorney is the instrument
that is material in determining the true nature of the business relationship between
petitioner and Baguio Gold. Before resort may be had to the two compromise
agreements, the parties contractual intent must first be discovered from the
expressed language of the primary contract under which the parties business
relations were founded. It should be noted that the compromise agreements were
mere collateral documents executed by the parties pursuant to the termination of
their business relationship created under the Power of Attorney. On the other
hand, it is the latter which established the juridical relation of the parties and
defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered as a
subsequent or contemporaneous act that is reflective of the parties true intent. The
compromise agreements were executed eleven years after the Power of Attorney
and merely laid out a plan or procedure by which petitioner could recover the
advances and payments it made under the Power of Attorney. The parties entered
into the compromise agreements as a consequence of the dissolution of their

business relationship. It did not define that relationship or indicate its real
character.
An examination of the Power of Attorney reveals that a partnership or joint
venture was indeed intended by the parties. Under a contract of partnership, two or
more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves. 15 While a
corporation, like petitioner, cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been held that it may enter into a
joint venture which is akin to a particular partnership:
temporary purpose. x x x It is in fact hardly distinguishable from the partnership, since
their elements are similarcommunity of interest in the business, sharing of profits and
losses, and a mutual right of control. x x x The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. x x x This observation is not entirely
accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. x x x
It would seem therefore that under Philippine law, a joint venture is a form of partnership
and should be governed by the law of partnerships. The Supreme Court has however
corporation cannot enter into a partnership contract, it may however engage in a joint
venture with others. x x x (Citations omitted)
16
Perusal of the agreement denominated as the Power of Attorney indicates that

the parties had intended to create a partnership and establish a common fund for
the purpose. They also had a joint interest in the profits of the business as shown by
a 50-50 sharing in the income of the mine. Under the Power of Attorney, petitioner
and Baguio Gold undertook to contribute money, property and industry to the
common fund known as the Sto. Nio mine. 17 In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties to the
development and operation of the mine. Pursuant to paragraphs 4 and 5 of the
agreement, petitioner and Baguio Gold were to contribute equally to the joint
venture assets under their respective accounts. Baguio Gold would
contribute P11M under its owners account plus any of itsincome that is left in the
project, in addition to its actual mining claim. Meanwhile, petitioners
contribution would consist of its expertise in the management and operation of

mines, as well as the managers account which is comprised of P11M in funds and
property and petitionerscompensation as manager that cannot be paid in cash.
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not bind itself to contribute money or
property to the project; that under paragraph 5 of the agreement, it was only
optional for petitioner to transfer funds or property to the Sto. Nio project
(w)henever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIO MINE.18
The wording of the parties agreement as to petitioners contribution to the
common fund does not detract from the fact that petitioner transferred its funds and
property to the project as specified in paragraph 5, thus rendering effective the
other stipulations of the contract, particularly paragraph 5(c) which prohibits
petitioner from withdrawing the advances until termination of the parties business
relations. As can be seen, petitioner became bound by its contributions once the
transfers were made. The contributions acquired an obligatory nature as soon as
petitioner had chosen to exercise its option under paragraph 5.
There is no merit to petitioners claim that the prohibition in paragraph 5(c)
against withdrawal of advances should not be taken as an indication that it had
entered into a partnership with Baguio Gold; that the stipulation only showed that
what the parties entered into was actually a contract of agency coupled with an
interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends upon
it, or the mutual interest of both principal and agent. 19 In this case, the nonrevocation or non-withdrawal under paragraph 5(c) applies to the advances made
by petitioner who is supposedly the agent and not the principal under the contract.
Thus, it cannot be inferred from the stipulation that the parties relation under the
agreement is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of the parties was one of agency and not a partnership. Although the
said provision states that this Agency shall be irrevocable while any obligation of
the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the
MANAGERS account, it does not necessarily follow that the parties entered into an
agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the Power of Attorney was not to
confer a power in favor of petitioner to contract with third persons on behalf of
Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through the
parties mutual contribution of material resources and industry. The essence of an
agency, even one that is coupled with interest, is the agents ability to represent his
principal and bring about business relations between the latter and third
persons.20 Where representation for and in behalf of the principal is merely
incidental or necessary for the proper discharge of ones paramount undertaking
under a contract, the latter may not necessarily be a contract of agency, but some
other agreement depending on the ultimate undertaking of the parties. 21
In this case, the totality of the circumstances and the stipulations in the parties
agreement indubitably lead to the conclusion that a partnership was formed
between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return
the advances made by petitioner under the agreement. Paragraph 5 (d) thereof
provides that upon termination of the parties business relations, the ratio which
the MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims shall be transferred to petitioner.22 As pointed out by the Court of Tax
Appeals, petitioner was merely entitled to a proportionate return of the mines
assets upon dissolution of the parties business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the advances to
petitioner as would be recognized as an item of obligation or accounts payable for
Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that is
more consistent with a partnership than a creditor-debtor relationship. It should be

pointed out that in a contract of loan, a person who receives a loan or money or any
fungible thing acquires ownership thereof and is bound to pay the creditor an equal
amount of the same kind and quality.23 In this case, however, there was no
stipulation for Baguio Gold to actually repay petitioner the cash and property that it
had advanced, but only the return of an amount pegged at a ratio which the
managers account had to the owners account.
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business relations
over the Sto. Nino Mine. The Power of Attorney clearly provides that petitioner
would only be entitled to the return of a proportionate share of the mine assets to be
computed at a ratio that the managers account had to the owners account. Except
to provide a basis for claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under the compromise
agreements, for any amount over and above the proportion agreed upon in the
Power of Attorney.
Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with
neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for
the advances to become due and demandable, and the manner of payment was
unclear. All these point to the inevitable conclusion that the advances were not
loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto. Nio mine is
the fact that it would receive 50% of the net profits as compensation under
paragraph 12 of the agreement. The entirety of the parties contractual stipulations
simply leads to no other conclusion than that petitioners compensation is actually
its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person
of a share in the profits of a business is prima facie evidence that he is a partner in
the business. Petitioner asserts, however, that no such inference can be drawn
against it since its share in the profits of the Sto. Nio project was in the nature of
compensation or wages of an employee, under the exception provided in Article

1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of
Baguio Gold who will be paid wages pursuant to an employer-employee
relationship. To begin with, petitioner was the manager of the project and had put
substantial sums into the venture in order to ensure its viability and profitability.
By pegging its compensation to profits, petitioner also stood not to be remunerated
in case the mine had no income. It is hard to believe that petitioner would take the
risk of not being paid at all for its services, if it were truly just an ordinary
employee.
Consequently, we find that petitioners compensation under paragraph 12 of the
agreement actually constitutes its share in the net profits of the partnership.
Indeed, petitioner would not be entitled to an equal share in the income of the mine
if it were just an employee of Baguio Gold. 25 It is not surprising that petitioner was
to receive a 50% share in the net profits, considering that the Power of Attorney
also provided for an almost equal contribution of the parties to the Sto. Nino Mine.
The compensation agreed upon only serves to reinforce the notion that the parties
relations were indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as
investments in a partnership known as the Sto. Nino Mine. The advances were not
debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of
Attorney. As for the amounts that petitioner paid as guarantor to Baguio Golds
creditors, we find no reason to depart from the tax courts factual finding that
Baguio Golds debts were not yet due and demandable at the time that petitioner
paid the same. Verily, petitioner pre-paid Baguio Golds outstanding loans to its
bank creditors and this conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its
gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed. 27 In this case,
petitioner failed to substantiate its assertion that the advances were subsisting
debts of Baguio Gold that could be deducted from its gross income. Consequently, it
could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in
CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the Court
of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining
Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the
amount of P62,811,161.31, with 20% delinquency interest computed from February
10, 1995, which is the due date given for the payment of the deficiency income tax,
up to the actual date of payment.
SO ORDERED.
Carpio-Morales,** Chico-Nazario, Nachura and Reyes, JJ., concur.
Petition denied, judgment affirmed.

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246

SUPREME COURT REPORTS ANNOTATED

G.R. No. 127347. November 25, 1999.

VOL. 319, NOVEMBER 25, 1999

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

SUPREME COURT REPORTS ANNOTATED

Exh. A, Folder of Exhibits for the Plaintiff, pp. 1-2.

VOL. 319, NOVEMBER 25, 1999

Aguila, Jr. vs. Court of Appeals

Exh. H, id., pp. 12-13.

Exh. 3, Folder of Exhibits for the Defendant, p. 3.

Exh. 4, Folder of Exhibits for the Defendant, pp. 15-16.

SUPREME COURT REPORTS ANNOTATED

VOL. 319, NOVEMBER 25, 1999

On appeal, the Court of Appeals reversed. It held:

SUPREME COURT REPORTS ANNOTATED

Tan vs. Del Rosario, Jr.

G.R. No. 109446. October 3, 1994.

VOL. 237, OCTOBER 3, 1994

SUPREME COURT REPORTS ANNOTATED

VOL. 237, OCTOBER 3, 1994

SUPREME COURT REPORTS ANNOTATED

income taxpayers on their non-compensation income. There is no evident intention of the

SPECIAL CIVIL ACTIONS in the Supreme Court. Prohibition.

VOL. 237, OCTOBER 3, 1994

SUPREME COURT REPORTS

VOL. 237, OCTOBER 3, 1994

Cooley on Constitutional Limitations.

category of taxable income of the taxpayer.

categories of taxable income of the taxpayer.

SUPREME COURT REPORTS ANNOTATED

do not view this classification to be arbitrary and inappropriate.

Sec. 6. General Professional PartnershipThe general professional partnership (GPP) and

The real objection of petitioners is focused on the administrative interpretation of

VOL. 237, OCTOBER 3, 1994

the questioned implementing regulation of public respondents following the

SUPREME COURT REPORTS ANNOTATED

VOL. 237, OCTOBER 3, 1994

Partnerships are, under the Code, either taxable partnerships or exempt

SUPREME COURT REPORTS ANNOTATED

after the amendatory legislation, to place in an unequal footing or in significant

VOL. 497, JULY 31, 2006

1 CA Rollo, pp. 1058-1072.

SUPREME COURT REPORTS ANNOTATED

3 Id., at pp. 28-37.

5 Id., at pp. 682-683.

VOL. 497, JULY 31, 2006

SUPREME COURT REPORTS ANNOTATED

VOL. 497, JULY 31, 2006

In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated

SUPREME COURT REPORTS ANNOTATED

VOL. 497, JULY 31, 2006

Petitioner denied the charges. He reiterated that he considered the import of

SUPREME COURT REPORTS ANNOTATED

communications was rendered meaningless. The dispositive portion of the

WHEREFORE, premises considered, judgment is hereby rendered ordering herein

VOL. 497, JULY 31, 2006

A.THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE ERROR

The first issue is whether an employer-employee relationship exists between

complaint is not employment but perhaps partnership, co-ownership, or

SUPREME COURT REPORTS ANNOTATED

The property or stock of the partnership forms a community of goods, a common

VOL. 497, JULY 31, 2006