G.R. No. L-23041, July 31, 1969
E. RODRIGUEZ, INC., petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner E. Rodriguez, Inc. owned land expropriated by the Republic of the Philippines under Republic Act No. 333 for the new capital city site. The Court of First Instance of Rizal (Quezon City Branch) rendered a decision on February 21, 1950, fixing just compensation. Subsequently, the parties entered into a compromise agreement dated May 11, 1950, approved by the court on May 12, 1950. Under this agreement, petitioner waived interest on the adjudged value, made certain land donations, and agreed to accept payment as follows: P625,315.90 in government bonds issued under Republic Act No. 333 (payable within five years at not less than 3% per annum), P300,000 to be applied to its mortgage indebtedness with the Philippine National Bank, and the balance in cash. The government paid petitioner a total of P1,238,204.00, of which P625,315.90 was in bonds.
For the taxable year 1950, petitioner filed an income tax return showing a loss of P17,982.06 and did not include the amount received from the expropriation, believing it was tax-exempt. The Collector of Internal Revenue assessed a deficiency income tax of P63,880.00, computed by including the gain from the expropriation (P410,924.18, derived from the total payment of P1,238,204.00 minus the land cost of P827,279.82) in petitioner’s net income. Petitioner protested, and after its compromise offer was rejected, it appealed to the Court of Tax Appeals, which affirmed the assessment. Hence, this petition for review.

ISSUE

Whether the portion of the profit from the expropriation of petitioner’s property, corresponding to the payment made in tax-exempt bonds issued under Republic Act No. 333, is subject to income tax.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals, holding petitioner liable for the deficiency income tax. The Court ruled that the tax exemption provided in Section 9 of Republic Act No. 333 applies only to the bonds themselves (i.e., exemption from documentary stamp tax and tax on interest derived from such bonds) and not to the income or gain realized from the exchange of property for these bonds. The exemption clause states: “Said bonds shall be exempt from taxation by the Government of the Republic of the Philippines or by any political or municipal subdivisions thereof,” which pertains to the bonds as property or the interest income therefrom, not to the transaction involving their acquisition.
The Court rejected petitioner’s arguments: (1) that the parties intended the bonds to be “tax-free” in the sense of exempting the gain from income tax, as such intent cannot override the clear statutory language; (2) that the legislative history of the Act indicated an intent to exempt the gain, as no such express provision exists compared to other laws like Republic Act No. 1400, which explicitly states that the purchase price paid for land acquisition shall not be considered as income for tax purposes; and (3) that the tax exemption was an inducement to accept bonds instead of cash, as the exemption on the bonds themselves (from documentary and interest taxes) was sufficient inducement.
The gain from the expropriation constitutes taxable income under the National Internal Revenue Code, as it is derived from a sale or exchange of property. The mode of payment (whether in cash or bonds) does not alter the taxable nature of the gain. Therefore, the Collector of Internal Revenue correctly included the entire gain (including the portion paid in bonds) in petitioner’s net income for 1950.