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 the fixed tax as a road contractor for 1949-1952, percentage taxes on gross receipts, and surcharges. The assessment included: a 2% tax on P81,417.39 (with a 25% surcharge for late payment); a 2% tax on P76,945.24; a 3% tax on P376,035.68; and a 75% surcharge on the total 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 50% fraud surcharge was not collectible and that the 25% surcharges had prescribed, except for one relating to the second quarter of 1949. The Court confirmed assessments totaling P16,078.97. Both parties appealed.

ISSUE

1. Whether the partnership’s gross receipts from contracts for the construction of rehabilitation projects funded under the 1947 Agreement between the Republic of the Philippines and the United States 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, justifying the imposition of a 50% fraud surcharge and preventing the prescription of the 25% surcharges.

RULING

1. No, the gross receipts are not exempt. The exemption clause in the 1947 Agreement (Article XIV) covers “funds or property… owned by the Public Roads Administration” and “funds, materials, supplies and equipment imported… for use in connection with such purposes.” 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 its own 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 terms, 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 of P43,750.00 constitutes taxable gross receipts. Although not actually received, this sum was part of the contract price to which the partnership was entitled and was credited to it. The retention by the government as damages involved a constructive receipt by the partnership followed by a return to the government. 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 mere failure to file a return and the practice of posting receipts on the books on the first day of the month following actual receipt are insufficient to prove fraud. These acts could constitute an error. The partnership could have acted in good faith under a belief that receipts from U.S.-funded projects were tax-exempt. The presumption of good faith was not rebutted.
The decision of the Court of Tax Appeals is affirmed in toto.