G.R. No. L-14532 and L-14533; May 26, 1965.
JOSE LEON GONZALES, petitioner-appellant, vs. THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE, respondents-appellees. / JUANA G. GONZALES and FORTUNATO DE LEON, petitioners-appellants, vs. THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE, respondents-appellees.

FACTS

Jose Leon Gonzales and Juana F. Gonzales (married to Fortunato de Leon) were co-heirs and co-owners (one-sixth each) of a tract of land inherited from their mother. This property in Caloocan, Rizal, was expropriated by the Government. In May 1954, the Supreme Court fixed the just compensation at P1.50 per square meter and ordered payment of 6% legal interest from January 25, 1947 (the date the Government took possession) until payment, which was made on October 31, 1954. The total compensation paid to the six heirs was P1,307,973.00. After deducting a prior deposit of P28,850.00, the interest on the remaining P1,279,123.00 amounted to P535,587.70. Each heir, therefore, received a capital gain share of P213,328.82 and an interest share of P89,309.61.
The Collector of Internal Revenue assessed each petitioner an income tax of P86,166.00 for 1954, treating the P213,328.82 as capital gain and the P89,309.61 as ordinary income. The People’s Homesite and Housing Corporation, upon the Collector’s request, withheld and turned over P516,007.00 to the Bureau of Internal Revenue, crediting each petitioner with P86,166.00 as tax payment on November 19, 1954.
On February 29, 1956, Juana F. Gonzales wrote the Collector requesting a refund of P24,426.00, contending the interest should have been taxed as capital gain, not ordinary income. Jose Leon Gonzales made a similar request on November 5, 1956. The Collector denied Juana’s claim on November 12, 1956. The petitioners filed separate petitions with the Court of Tax Appeals (CTA) on November 16, 1956, seeking a refund of the full P86,166.00 each. On November 24, 1956, Atty. Fortunato de Leon wrote the Collector, stating they were claiming a refund of the entire P86,166.00, treating the Collector’s denial as applicable to the full amount. The CTA denied the refund claims.

ISSUE

1. Whether the petitioners’ claim for a refund of the total tax of P86,166.00 each may be properly entertained given procedural requirements.
2. Whether the sum of P89,309.61 received as interest on the expropriated property is taxable as ordinary income or as capital gain.

RULING

1. No, the claim for a refund of the full P86,166.00 cannot be entertained. The written claims for refund filed by the petitioners within the two-year prescriptive period were specifically for P24,426.00 only, based solely on the ground that the interest should be taxed as capital gain. The claim for the full amount was first made in the letter of November 24, 1956, which was filed beyond the two-year period from the tax payment date of November 19, 1954. Furthermore, this letter pertained only to Juana F. Gonzales and did not constitute a proper written claim for Jose Leon Gonzales. The requirement under the Tax Code to file a detailed written claim for refund with the Collector before suing in court and within two years from payment is mandatory and jurisdictional. Failure to comply bars the action.
2. Yes, the interest received is taxable as ordinary income. The interest paid by the Government as part of the just compensation for the expropriated property constitutes income from the use or forbearance of money, not an increment to the value of the capital asset. The transaction is akin to a sale where title passed in January 1947, and the subsequent interest earnings accrued to the owners. Such interest, when paid, is ordinary income under the Tax Code’s definition of gross income, which includes income from interests derived from any source whatever. The involuntary nature of the expropriation does not alter the character of the interest as ordinary income.
The decision of the Court of Tax Appeals is affirmed.