G.R. No. L-35238. April 21, 1989.
REPUBLIC OF THE PHILIPPINES, petitioner, vs. HON. JUDGE VICENTE G. ERICTA and SAMPAGUITA PICTURES, INC., respondents.

FACTS

Sampaguita Pictures, Inc. delivered sixteen back pay negotiable certificates of indebtedness, with an aggregate face value of P16,763.60, to the Municipal Treasurer of Bocaue, Bulacan on June 9, 1961, in payment of its and Vera-Perez Corporation’s tax liabilities totaling P10,268.41. Official receipts were issued. However, on June 22, 1961, the BIR advised that the acceptance was erroneous, as the certificates were not acceptable for tax payment per a 1959 circular, and demanded cash payment. After no compliance, the Republic, through the Solicitor General, filed a collection suit against Sampaguita on June 9, 1969.
The Republic’s complaint alleged the payment was void, citing the doctrine in de Borja v. Gella that only original holders of back pay certificates could use them to pay their own taxes, and Sampaguita was a mere assignee. Sampaguita admitted the facts but argued prescription, good faith prior to the 1963 de Borja ruling, and that the obligations were extinguished by legal compensation, as the Republic’s debt on the matured certificates offset the tax debt. It also counterclaimed for the face value of the certificates.

ISSUE

Whether the Republic’s claim for unpaid taxes is offset by Sampaguita’s counterclaim for the redemption value of the back pay certificates.

RULING

The Supreme Court affirmed the trial court’s dismissal of both the complaint and counterclaim. The legal logic proceeds as follows: First, the Court upheld the application of de Borja v. Gella, confirming that Sampaguita’s tender of the certificates, as an assignee, did not constitute valid tax payment. Therefore, the tax obligation remained unpaid. Second, however, the Court recognized that Sampaguita, as a legitimate assignee, succeeded to the right to demand payment from the Republic for the certificates’ face value. The certificates stated they were “redeemable on June 18, 1958,” and the law provided for redemption within ten years from issuance. By 1969, when the suit was filed, this period had long expired, making the Republic’s obligation to redeem both due and demandable.
Consequently, while the Republic had a valid claim for taxes, Sampaguita had an equally valid counterclaim for a liquidated debt of the same amount from the Republic. The Court rejected the petitioner’s argument that legal compensation could not apply against the Government for tax claims, clarifying that the trial court did not technically apply compensation but rather rendered off-setting judgments. The ultimate result was a practical offset, achieving equity without formally decreeing compensation against the state. The Court also dismissed the Republic’s quibble over the precise redeemability date, holding it absurd to argue the debt was not yet demandable after the ten-year period had clearly lapsed.