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SUPREME COURT REPORTS ANNOTATED VOLUME 162

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Case Title:
ENGRACIO FRANCIA, petitioner, vs.
INTERMEDIATE APPELLATE COURT
and HO FERNANDEZ, respondents. VOL. 162, JUNE 28, 1988 753
Citation: 162 SCRA 753 Francia vs. Intermediate Appellate Court
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No. L-67649. June 28, 1988.
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ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and
HO FERNANDEZ, respondents.

Taxation; Obligations; Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil
Code; Case at bar.·Francia contends that his tax delinquency of P2,400.00 has been
extinguished by legal compensation. He claims that the government owed him P4,116.00 when
a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been
set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By
legal compensation, obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished

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* THIRD DIVISION.

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754 SUPREME COURT REPORTS ANNOTATED

Francia vs. Intermediate Appellate Court

(Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided
by Article 1279, to wit: „(1) that each one of the obligors be bound principally and that he be at
the same time a principal creditor of the other; xxx xxx xxx „(3) that the two debts be due. xxx
xxx xxx.
Taxation; Same; Internal Revenue Taxes can not be subject of setoff or compensation.·This
principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber
Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off
or compensation. We stated that: „A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly,
in the light of public policy, to exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction sued on.
x x x (80 C.J.S., 73-74). ÂThe general rule based on grounds of public policy is well-settled that
no set-off is admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of individual taxpayer
is not required. x x xÊ ‰
Same; Same; Same; Auction Sale; Purchaser has the burden of proof to show that all
prescribed requisites for tax sale were complied with.·We agree with the petitionerÊs claim that
Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there
was compliance with all the prescribed requisites for a tax sale. The case of Valencia v. Jimenez
(11 Phil. 492) laid down the doctrine that: xxx xxx xxx „x x x [D]ue process of law to be followed
in tax proceedings must be established by proof and the general rule is that the purchaser of a
tax title is bound to take upon himself the burden of showing the regularity of all proceedings
leading up to the sale.‰ (Italics supplied). There is no presumption of the regularity of any
administrative action which results in depriving a taxpayer of his property through a tax sale.
(Camo v. Riosa Boyco, 29 Phil. 437; Denoga v. Insular Government, 19 Phil. 261). This is
actually an

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VOL. 162, JUNE 28, 1988 755

Francia vs. Intermediate Appellate Court

exception to the rule that administrative proceedings are presumed to be regular. But even if
the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the
auction sale. The records sustain the lower courtÊs finding that: „[T]he plaintiff claimed that it
was illegal and irregular. He insisted that he was not properly notified of the auction sale.
Surprisingly, however, he admitted in his testimony that he received the letter dated November
21, 1977 (Exhibit „I‰) as shown by his signature (Exhibit „I-A‰) thereof. He claimed further that
he was not present on December 5, 1977 the date of the auction sale because he went to Iligan
City. As long as there was substantial compliance with the requirements of the notice, the
validity of the auction sale can not be assailed. x x x.‰
Same; Same; Same; Same; General Rule that gross inadequacy of price is not material.·
PetitionerÊs third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that „alleged
gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is
for the owner to effect redemption.‰ In Velasquez v. Coronel, (5 SCRA 985), this Court held: „x x
x [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for reasons of
equity a transaction may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks oneÊs conscience as to justify the courts to interfere, such does not follow
when the law gives to the owner the right to redeem, as when a sale is made at public auction,
upon the theory that the lesser the price the easier it is for the owner to effect the redemption.
And so it was aptly said: ÂWhen there is the right to redeem, inadequacy of price should not be
material, because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price obtained at
the auction sale.‰

PETITION to review the decision of the Intermediate Appellate Court.

The facts are stated in the opinion of the Court.

756

756 SUPREME COURT REPORTS ANNOTATED

Francia vs. Intermediate Appellate Court

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision
of the Intermediate Appellate Court, to set aside the auction sale of his property which
took place on December 5, 1977, and to allow him to recover a 203 square meter lot
which was sold at public auction to Ho Fernandez and ordered titled in the latterÊs
name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City,
Metro Manila. The lot, with an area of about 328 square meters, is described and
covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of
Pasay City.
On October 15, 1977, a 125 square meter portion of FranciaÊs property 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. Since
1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, 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 in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P „In
re: Petition for Entry of New Certificate of Title‰ filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate
of title. Upon verification through his lawyer, Francia discovered that a Final Bill of
Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11,
1978. The auction sale and the final bill of sale were both annotated at the back of
TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
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VOL. 162, JUNE 28, 1988 757

Francia vs. Intermediate Appellate Court

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which
reads:

„WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

„(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor
of the defendant Ho Fernandez over the parcel of land including the improvements
thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.
„(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorneyÊs fees.‰
(p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of
law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF

LAW IN NOT HOLDING THAT PETITIONERÊS OBLIGATION TO PAY P2,400.00 FOR
SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH
THE GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND

SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A

SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE
PRICE OF P2,400.00 PAID BY RESPONDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONEÊS CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION

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758 SUPREME COURT REPORTS ANNOTATED

Francia vs. Intermediate Appellate Court

SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitionerÊs
allegations that his property was sold at public auction without notice to him and that
the price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at the
loss of his property, the law and the facts militate against the grant of his petition. We
are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax obligation
had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy
the requirements provided by Article 1279, to wit:

„(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;
xxx xxx xxx
„(3) that the two debts be due.
xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled
that Internal Revenue Taxes can not be the subject of set-off or compensation. We
stated that:

„A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off,

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VOL. 162, JUNE 28, 1988 759

Francia vs. Intermediate Appellate Court

which are construed uniformly, in the light of public policy, to exclude the remedy in an action
or any indebtedness of the state or municipality to one who is liable to the state or municipality
for taxes. Neither are they a proper subject of recoupment since they do not arise out of the
contract or transaction sued on. x x x. (80 C.J.S., 73-74). ÂThe general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow out of duty to,
and are the positive acts of the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. x x xÊ ‰

We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the tax
levy.
This rule was reiterated in the case of Cordero v. Gonda (18 SCRA 331) where we
stated that: „x x x internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer Âare not mutually creditors and debtors of each
otherÊ under Article 1278 of the Civil Code and a „claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off.‰
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government for
the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter
to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without reading
it.
Petitioner contends that „the auction sale in question was made without complying
with the mandatory provisions of the
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760 SUPREME COURT REPORTS ANNOTATED

Francia vs. Intermediate Appellate Court

statute governing tax sale. No evidence, oral or otherwise, was presented that the
procedure outlined by law on sales of property for tax delinquency was followed. x x x
Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified x x x.‰
(Petition for Review, Rollo p. 18; italics supplied)
We agree with the petitionerÊs claim that Ho Fernandez, the purchaser at the
auction sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

„x x x [D]ue process of law to be followed in tax proceedings must be established by proof and
the general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale.‰ (italics supplied)

There is no presumption of the regularity of any administrative action which results in

depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil.
437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the
rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he
did receive the notice for the auction sale. The records sustain the lower courtÊs finding
that:

„[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he
received the letter dated November 21, 1977 (Exhibit „I‰) as shown by his signature (Exhibit „I-
A‰) thereof. He claimed further that he was not present on December 5, 1977 the date of the
auction sale because he went to Iligan City. As long as there was substantial compliance with
the requirements of the notice, the validity of the auction sale can not be assailed. x x x.‰

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VOL. 162, JUNE 28, 1988 761

Francia vs. Intermediate Appellate Court

We quote the following testimony of the petitioner on cross-examination, to wit:

„Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified
you that the property in question shall be sold at public auction to the highest
bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the
Court whether you received the original of this letter?
„A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.
„Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?
„A. Yes, sir, as I was in a hurry.
„Q. After you received that original where did you place it?
„A. I placed it in the usual place where I place my mails.‰

Petitioner, therefore, was notified about the auction sale. It was negligence on his part
when he ignored such notice. By his very own admission that he received the notice,
his now coming to court assailing the validity of the auction sale loses its force.
PetitionerÊs third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de
Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91
Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA
388) we held that „alleged gross inadequacy of price is not material when the law gives
the owner the right to redeem as when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for the owner to effect redemption.‰ In
Velasquez v. Coronel (5 SCRA 985), this Court held:

„x x x [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for reasons of
equity a transaction may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks oneÊs conscience as to justify the courts to interfere, such does not follow
when

762

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Francia vs. Intermediate Appellate Court

the law gives to the owner the right to redeem, as when a sale is made at public auction, upon
the theory that the lesser the price the easier it is for the owner to effect the redemption. And
so it was aptly said: ÂWhen there is the right to redeem, inadequacy of price should not be
material, because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price obtained at
the auction sale.‰

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v.
De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

„If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable.
In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: Âwhere land is sold for
taxes, the inadequacy of the price given is not a valid objection to the sale.Ê This rule arises
from necessity, for, if a fair price for the land were essential to the sale, it would be useless to
offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land.‰ (Rothchild Bros. v. Rollinger, 32
Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et
al. (267 P. 555):

„Like most cases of this character there is here a certain element of hardship from which we
would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are
convinced that the present rules are just, and that they bring hardship only to those who have
invited it by their own neglect.‰

We are inclined to believe the petitionerÊs claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square
meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer
the petitionerÊs claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the
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VOL. 162, JUNE 28, 1988 763

Francia vs. Intermediate Appellate Court

petitioner on equitable grounds, there are no strong considerations of substantial

justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading
it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount
sufficient to pay for the back taxes. The petitioner did not pay attention to another
notice sent by the City Treasurer on November 3, 1978, during the period of
redemption, regarding his tax delinquency. There is furthermore no showing of bad
faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner has
no standing to invoke equity in his attempt to regain the property by belatedly asking
for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is
DISMISSED. The decision of the respondent court is affirmed.
SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortés, JJ., concur.

Petition dismissed. Decision affirmed.

Notes.·Relinquishment of tax powers is strictly construed against taxpayer. (Phil.

Telegraph and Telephone Corporation vs. COA, 146 SCRA 190.)
Property initially classified as capital asset may later become an ordinary asset or
vice-versa. (Calasang vs. Comm. of Internal Revenue, 144 SCRA 664.)

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