G.R. No. L-11113; September 30, 1959
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ILAGAN AND ALEJANDRINO, respondent. ILAGAN AND ALEJANDRINO, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

FACTS

The registered partnership Ilagan and Alejandrino, engaged as a building and road contractor, paid fixed taxes as a building contractor from 1947 to 1952 and as a road contractor from 1947-1948. On April 27, 1955, the Collector of Internal Revenue assessed the partnership a total of P22,882.04 for unpaid fixed tax as a road contractor for 1949-1952, percentage taxes on gross receipts, and surcharges. The assessments were based on: (1) a 2% tax on P81,417.39 received from various contracts, with a 25% surcharge for late payment; (2) a 2% tax on P76,945.24 and a 3% tax on P376,035.68, which were gross receipts from contracts not declared for taxation, plus a 25% surcharge on these percentage taxes. The Court of Tax Appeals sustained the assessments but found insufficient evidence to support the Collector’s claim that the partnership filed a false or fraudulent return. Consequently, it held that the 25% surcharges on the percentage taxes had prescribed, except for the surcharge on the second quarter of 1949. The Court confirmed assessments totaling P16,078.97, comprising the percentage taxes, specific surcharges, and the fixed tax. Both parties appealed.

ISSUE

1. Whether the partnership’s gross receipts from contracts for the construction of rehabilitation projects under the Philippine-U.S. Agreement of February 14, 1947, are exempt from Philippine percentage taxes.
2. Whether the amount of P43,750.00, deducted from payments due to the partnership as damages for non-performance, constitutes taxable gross receipts.
3. Whether the partnership filed a false or fraudulent return, warranting the imposition of a 50% fraud surcharge and preventing prescription of the 25% surcharge.

RULING

1. No, the gross receipts are not exempt. The exemption clause in Article XIV of the Philippine-U.S. Agreement applies to “funds or property” owned by the U.S. Public Roads Administration and used for the agreement’s purposes, and to imported “funds, materials, supplies and equipment.” The partnership’s gross receipts, once paid to it as a private contractor, cease to be funds or property of the United States and become the partnership’s taxable receipts. The cited U.S. Atomic Energy Act provision is inapplicable as it pertains to activities, whereas the Agreement refers to specific tangible items. Furthermore, under the Agreement’s actual practice, the Philippine Government paid the contractor in pesos and was later reimbursed in dollars by the U.S.; the U.S. Government did not directly pay the contractor.
2. Yes, the deducted amount constitutes taxable gross receipts. The P43,750.00, though retained by the government as damages, was part of the contract price to which the partnership was entitled. It was credited to the partnership, and its retention involved a constructive receipt by the partnership followed by a return to the government as payment for damages. Therefore, it is a legal receipt subject to tax.
3. No, the partnership did not file a false or fraudulent return. Fraud is never presumed; good faith is. The partnership’s failure to file a return for the contractor’s gross receipts and its practice of posting receipts on its books on the first day of the month following actual receipt are insufficient to prove fraud. These circumstances constitute an error, not fraud. The partnership could have acted in good faith, believing its receipts from U.S.-funded rehabilitation projects were tax-exempt. The presumption of good faith was not rebutted. Thus, the 50% fraud surcharge is not warranted, and the 25% surcharges on the percentage taxes (except for the specific 1949 quarter) have prescribed.
The decision of the Court of Tax Appeals is affirmed in toto.