G.R. No. 25369 , September 29, 1926
THE CHINA BANKING CORPORATION, plaintiff-appellee, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

FACTS

The Collector of Internal Revenue assessed and collected from China Banking Corporation (CBC) a tax on the average daily balances it owed to other local banks. These balances resulted from interbank clearing transactions (e.g., checks drawn on one bank and deposited in another). CBC paid the tax under protest and filed an action for recovery, arguing these balances were not taxable “deposits” under the law. The Court of First Instance ruled in favor of CBC, ordering a refund. The Collector appealed.

ISSUE

Are the average daily balances resulting from interbank clearing transactions considered “deposits of money subject to payment by check or draft” and thus taxable under paragraph (b), Section 1499 of the Administrative Code (Act No. 2711)?

RULING

NO. The Supreme Court AFFIRMED the lower court’s decision, holding that the interbank clearing balances are not taxable deposits.

The tax under paragraph (b), Section 1499 applies to “deposits of money, subject to payment by check or draft, or represented by certificates of deposit or otherwise.” The Court reasoned that the balances in question arise from provisional accounting entries during the clearing process. For example, when a check drawn on Bank A is deposited in Bank B, the amount is not immediately transferred. Bank B’s deposits are not increased until the check is presented and paid by Bank A the following business day. Until settlement, the same fund is still considered a deposit in Bank A. Taxing the provisional credit in Bank B would result in double taxation of the same fund, as it would also be taxed as a deposit in Bank A. The law cannot be construed to permit such double taxation. Therefore, these interbank clearing balances do not constitute the kind of “deposits” contemplated by the tax provision.

DISSENTING OPINION (Justice Malcolm):
Justice Malcolm dissented, arguing that the majority’s interpretation was too narrow. He emphasized that in modern banking, the deposit of a check is functionally equivalent to a deposit of money. The statutory phrase “or otherwise” indicates a legislative intent to give “deposits of money” the broadest possible meaning, covering all forms of bank credits regardless of origin. He noted that the tax had been collected on such balances for over 22 years without challenge, and overturning this practice created an unintended exemption.