Case Digest: Francis vs. IAC, G.R. No. 67649

Francis vs. IAC, G.R. No. 67649, June 28, 1988

Subject: Obligations and Contracts

FACTS

Petitioner Engracio Francia owned a lot which was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. The expropriation payment was deposited with the Philippine National Bank but Francia did not withdraw the proceeds.

Francia failed to pay his real estate taxes for 14 years from 1963 to 1977. To satisfy the tax delinquency of P2,400.00, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code. However, he was not present during the auction sale wherein Ho Fernandez was the highest bidder for the property.

ISSUE

Whether or not his tax delinquency of P2,400.00 has been extinguished by legal compensation as the government owed him P4,116.00 when a portion of his land was expropriated.

RULING

No. Internal Revenue Taxes cannot be the subject of set-off or compensation.

Under the law (Art 1278, NCC), compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

In this case, the government and taxpayer are not mutually creditors and debtors of each and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Legal compensation requires that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other and that the two debts be due. Taxes are not in the nature of contracts. Thus, his tax delinquency cannot be extinguished by legal compensation.