FIRST DIVISION Appeals.

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[G.R. Nos. 28502-03. April 18, 1989.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESSO STANDARD EASTERN, INC. and The facts are simple enough and are quite quickly recounted.
THE COURT TAX APPEALS, Respondents.
ESSO overpaid its 1959 income tax by P221,033.00. It was accordingly granted a tax credit in
SYLLABUS this amount by the Commissioner on August 5, 1964. However, ESSO’s payment of its income
1. TAXATION; INCOME TAX; OVERPAYMENT THEREOF BY MISTAKE; RIGHT OF PAYOR TO tax for 1960 was found to be short by P367,994.00. So, on July 10, 1964, the Commissioner
REIMBURSEMENT ARISES FROM THE MOMENT PAYMENT IS MADE AND NOT FROM THE wrote to ESSO demanding payment of the deficiency tax, together with interest thereon for
TIME THAT THE PAYEE ADMITS THE OBLIGATION TO REIMBURSE. — As early as July 15, the period from April 18, 1961 to April 18, 1964. On August 10, 1964, ESSO paid under
1960, the Government already had in its hands the sum of P221,033.00 representing excess protest the amount alleged to be due, including the interest as reckoned by the
income tax payment. Having been paid and received by mistake, that sum unquestionably Commissioner. It protested the computation of interest, contending it was more than. that
belonged to ESSO, and the Government had the obligation to return it to ESSO. That properly due. It claimed that it should not have been required to pay interest on the total
acknowledgment of the erroneous payment came some four (4) years afterwards in nowise amount of the deficiency tax, P367,994.00, but only on the amount of P146,961.00 —
negates or detracts from its actuality. The obligation to return money mistakenly paid arises representing the difference between said deficiency, P367,994.00, and ESSO’s earlier
from the moment that payment is made, and not from the time that the payee admits the overpayment of P221,033.00 (for which it had been granted a tax credit). ESSO thus asked for
obligation to reimburse. The obligation of the payee to reimburse an amount paid to him a refund.
results from the mistake, not from the payee’s confession of the mistake or recognition of
the obligation to reimburse. In other words, since the amount of P221,033.00 belonging to The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court
ESSO was already in the hands of the Government as of July, 1960, although the latter hand of Tax Appeals. As aforestated, that Court ordered payment to ESSO of its "refund-claim x x in
not right whatever to the amount and indeed was bound to return it to ESSO, it was neither the amount of P39,787.94 as overpaid interest. Hence, this appeal by the Commissioner.
legally nor logically possible for ESSO thereafter to be considered a debtor of the
Government in that amount of P221,033.00; and whatever other obligation ESSO might The CTA justified its award of the refund as follows
subsequently incur in favor of the Government would have to be reduced by that sum, in
respect of which no interest could be charged. ". . . In the letter of August 5, 1964, . . . (the Commissioner) admitted that . . (ESSO) had
2. ID.; TAX LAWS; INTERPRETATION THEREOF; LEGISLATIVE INTENT PREVAILS WHERE overpaid its 1959 income tax by P221,033.00. Accordingly . . (the Commissioner) granted
LITERAL INTERPRETATION OF THE STATUTE RESULTS IN ABSURDITY. — In Interpreting a to . . (ESSO) a tax credit of P221,033.00. In short, the said sum of P221,033.00 of (ESSO’s)
statute, "Nothing is better settled than that courts are not to give words a meaning which money was in the Government’s hands at the latest on July 15, 1960 when it (ESSO) paid in
would lead to absurd or unreasonable consequences. That is a principle that goes back to In full its second installment of income tax for 1959. On July 10, 1964 x x (the Commissioner)
re Allen (2 Phil. 630) decided on October 29, 1903, where it was held that a literal claimed that for 1960, . . . (ESSO) underpaid its income tax by P367,994.00. However, instead
interpretation is to be rejected if it would be unjust or lead to absurd results." "Statutes of deducting from P367,994.00 the tax credit of P221,033.00 which . . . (the Commissioner)
should receive a sensible construction, such as will give effect to the legislative intention and had already admitted was due . . . (ESSO), . . . (the Commissioner) still insists in collecting the
so as to avoid an unjust or absurd conclusion. interest on the full amount of P367,994.00 for the period April 18, 1961 to April 18, 1964
DECISION when the Government had already in its hands the sum of P221,033.00 of . . . (ESSO’s) money
NARVASA, J.: even before the latter’s income tax for 1960 was due and payable. If the imposition of
In two (2) cases appealed to it 1 by the private respondent, hereafter simply referred to as interest does not amount to a penalty but merely a just compensation to the State for the
ESSO, the Court of Tax Appeals rendered judgment, 2 sustaining the decisions of the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully
Commissioner of Internal Revenue excepted to, save "the refund-claim . . . in the amount of should be in the Government’s hand (Castro v. Collector, G.R. No. L-1274, Dec. 28, 1962), the
P39,787.94 as overpaid interest" which it ordered refunded to ESSO. collection of the interest on the full amount of P367,994.00 without deducting first the tax
credit of P221,033.00, which has long been in the hands of the Government, becomes
Reversal of this decision is sought by the Commissioner by a petition for review erroneous, illegal and arbitrary.
on certiorari filed with this Court. He ascribes to the Tax Court one sole error: "of applying ". . . (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the
the tax credit for overpayment of the 1959 income tax of . . . ESSO, granted by the petitioner deficiency income tax of P367,994.00, for which the State should be compensated by the
(Commissioner), to . . . (ESSO’S) basic 1960 deficiency income tax liability . . . and imposing payment of interest because the said amount of P221,033.00 was already in the coffers of
the 1-1/2% monthly interest 3 only on the remaining balance thereof in the sum of the Government. Neither could . . . (ESSO) be charged for the concomitant use of funds that
P146,961.00" 4 (instead of the full amount of the 1960 deficiency liability in the amount of rightfully belong to the Government because as early as July 15, 1960, it was the Government
P367,994.00). 5 Reversal of the same judgment of the Court of Tax Appeals is also sought by that was using . . . (ESSO’s) funds of P221,033.00. In the circumstances, we find it unfair and
ESSO in its own appeal (docketed as G.R. Nos. L-28508-09); but in the brief filed by it in this unjust for . . . (the Commissioner) to exact the interest on the said sum of P221,033.00 which,
case, it indicates that it will not press its appeal in the event that "the instant petition for after all, was paid to and received by the Government even before the incidence of the
review be denied and that judgment be rendered affirming the decision of the Court of Tax deficiency income tax of P367,994.00. (Itogon-Suyoc Mines, Inc. v. Commissioner, C.T.A. Case
No. 1327, Sept. 30, 1965). On the contrary, the Government should be the first to blaze the Government had the obligation to return it to ESSO. That acknowledgment of the erroneous
trail and set the example of fairness and honest dealing in the administration of tax laws. payment came some four (4) years afterward in nowise negates or detracts from its actuality.
The obligation to return money mistakenly paid arises from the moment that payment is
"Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be deducted made, and not from the time that the payee admits the obligation to reimburse. The
from the basic deficiency tax of P367,994.00 for 1960 and the resulting difference of obligation of the payee to reimburse an amount paid to him results from the mistake, not
P146,961.00 would be subject to the 18% interest prescribed by Section 51 (d) of the from the payee’s confession of the mistake or recognition of the obligation to reimburse. In
Revenue Code. According to the prayer of . . . (ESSO) . . . (the Commissioner) is hereby other words, since the amount of P221,033.00 belonging to ESSO was already in the hands of
ordered to refund to . . . (ESSO) the amount of P39,787.94 as overpaid interest in the the Government as of July, 1960, although the latter hand not right whatever to the amount
settlement of its 1960 income tax liability. However, as the collection of the tax was not and indeed was bound to return it to ESSO, it was neither legally nor logically possible for
attended with arbitrariness because . . . (ESSO) itself followed . . . (the Commissioner’s) ESSO thereafter to be considered a debtor of the Government in that amount of
manner of computing the tax in paying the sum of P213,189.93 on August 10, 1964, the P221,033.00; and whatever other obligation ESSO might subsequently incur in favor of the
prayer of . . . (ESSO) that it be granted the legal rate of interest on its overpayment of Government would have to be reduced by that sum, in respect of which no interest could be
P39,787.94 from August 10, 1964 to the time it is actually refunded is denied. (See Collector charged. To interpret the words of the statute in such a manner as to subvert these truisms
of Internal Revenue v. Binalbagan Estate, Inc., G.R. No. L-12752, Jan. 30, 1965)." simply can not and should not be countenanced. "Nothing is better settled than that courts
are not to give words a meaning which would lead to absurd or unreasonable consequences.
The Commissioner’s position is that income taxes are determined and paid on an annual That is a principle that goes back to In re Allen (2 Phil. 630) decided on October 29, 1903,
basis, and that such determination and payment of annual taxes are separate and where it was held that a literal interpretation is to be rejected if it would be unjust or lead to
independent transactions; and that a tax credit could not be so considered until it has been absurd results." 6 "Statutes should receive a sensible construction, suck as will give effect to
finally approved and the taxpayer duly notified thereof. Since in this case, he argues, the tax the legislative intention and so as to avoid an unjust or absurd conclusion." 7
credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in
reduction of ESSO’s earlier tax deficiency for the year 1960; as of that year, 1960, there was WHEREFORE, the petition for review is DENIED, and the Decision of the Court of Tax Appeals
as yet no tax credit to speak of, which would reduce the deficiency tax liability for 1960. In dated October 28, 1967 subject of the petition is AFFIRMED, without pronouncement as to
support of his position, the Commissioner invokes the provisions of Section 51 of the Tax costs.
Code pertinently reading as follows:
Cruz, Gancayco, Griño-Aquino and Medialdea, JJ., concur.
"(c) Definition of deficiency. As used in this Chapter in respect of tax imposed by this Title,
the term `deficiency’ means:chanrob1es virtual 1aw library

(1) The amount by which the tax Imposed by this Title exceeds the amount shown as the tax
by the taxpayer upon his return; but the amount so shown on the return shall first be
increased by the amounts previously assessed (or collected without assessment) as a
deficiency, and decreased by the amount previously abated, credited, returned, or otherwise
in respect of such tax; . . .

x           x          x
(d) Interest on deficiency. — Interest upon the amount determined as deficiency shall be
assessed at the same time as the deficiency and shall be paid upon notice and demand from
the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate
of six per centum per annum from the date prescribed for the payment of the tax (or, if the
tax is paid in installments, from the date prescribed for the payment of the first installment)
to the date the deficiency is assessed; Provided, That the amount that may be collected as
interest on deficiency shall in no case exceed the amount corresponding to a period of three
years, the present provision regarding prescription to the contrary notwithstanding."

The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960,
the Government already had in its hands the sum of P221,033.00 representing excess
payment. Having been paid and received by mistake, as petitioner Commissioner
subsequently acknowledged, that sum unquestionably belonged to ESSO, and the