G.R. No. 45701 ; April 18, 1939
TIRSO GARCIA, as liquidator of the Mercantile Bank of China, plaintiff-appellant, vs. TY CAMCO SOBRINO, defendant. THE GOVERNMENT OF THE PHILIPPINE ISLANDS and THE PROVINCIAL GOVERNMENT OF LEYTE, intervenors-appellees.

FACTS

The Mercantile Bank of China (represented by its liquidator, Tirso Garcia) filed a complaint for the foreclosure of two mortgages executed by Ty Camco Sobrino to secure his debts. The Government of the Philippine Islands (later the Commonwealth) intervened, claiming a superior lien for unpaid merchants’ sales taxes from 1926-1928. The Provincial Government of Leyte also intervened, claiming ownership of the mortgaged property due to confiscation for non-payment of land taxes, but this claim was later withdrawn as the land taxes were paid from the sale proceeds. The mortgaged properties were sold. After satisfying the provincial land taxes, a balance remained, which was claimed by both the bank (for the mortgage credit) and the Commonwealth (for the sales taxes).

ISSUE

Whether the lien of the Commonwealth for unpaid merchants’ sales taxes is superior and preferred to the mortgage lien of the bank.

RULING

Yes. The Supreme Court affirmed the lower court’s decision, holding that the government’s lien for merchants’ sales taxes is superior to a mortgage lien. The Court applied Section 1588 of the Revised Administrative Code, as amended, and cited jurisprudence establishing that tax liens on properties used in the business upon which the tax is assessed take precedence. The sales tax is fixed by law, and the taxpayer has a duty to pay it without need for prior assessment. Since the remaining balance was insufficient to cover the sales tax debt, no ruling was made on the income tax lien. In a Resolution on Rehearing, the Court amended its decision to also order the defendant, Ty Camco Sobrino, to pay personally the full mortgage debt to the plaintiff-appellant.

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