Department of Public Works and Highways (DPWH) v. Spouses Salvador (Capital Gains Tax; Expropriation Proceedings)

Department of Public Works and Highways (DPWH) v. Spouses Salvador

GR No. 205428, June 7, 2017

FACTS:

The case rooted from a verified complaint filed with the RTC-Valenzuela by the Department of Public Works and Highways (DPWH) on 9 November 2011 for the expropriation of the 83 out of 229 square meters parcel of land owned by herein Respondents spouses Senando Salvador and Josefina Salvador (Respondents, for brevity), for the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9).

On 10 February 2012, Respondents posed no objection on the said expropriation and manifested that they already received 2 checks from DPWH amounting in total to P685,349.22 representing the full zonal value of the subject property and the cost of the house erected thereon.

On 23 August 2012, the RTC rendered judgment in favour of the Republic but directed the latter to pay Respondents consequential damages equivalent to the capital gains tax and other taxes necessary for the transfer of the subject property to Republic’s name.

DPWH moved for partial reconsideration but was denied for having been belatedly filed and for having no justifiable basis. Hence, this case.

ISSUE: Whether or not the capital gains tax on the transfer of the expropriated property can be considered as consequential damages?

RULING:

The Court ruled NO.

The Court stated that just compensation is the full and fair equivalent of the property sought to be expropriated and the measure is not the taker’s gain but the owner’s loss. While it is true that the determination of the amount of just compensation is within the court’s jurisdiction, it should not be done arbitrarily or capriciously.

The Court furthered that in this case, the RTC’s consideration of the capital gains tax that should be paid by the Republic was clearly an error. The Court stressed that it is settled that the transfer of property through expropriation proceedings is a sale or exchange within the meaning of the NIRC, and profit from the transaction constitutes capital gain. Since capital gains tax is a tax on passive income, it is the seller, which in this case, the Respondents, who are liable to shoulder the same.

Moreover, in BIR Ruling No. 476-2013, the BIR constituted the DPWH as a withholding agent tasked to withhold the 6% withholding tax in the expropriation of real properties for infrastructure projects. Thus, as far as the government is concerned, the capital gains tax in expropriation proceedings remains a liability of the seller (Respondent).