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G.R. No.

L-15270 September 30, 1961


JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.
Angel A. Sison for petitioners.
Jaime Agloro for respondent.


CONCEPCION, J .:
Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a
decision of the Court of Tax Appeals affirming that of the Board of Assessment
Appeals of Quezon City, which held that certain properties of said petitioners are
subject to assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned decision of the Court of
Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals authorized the
petitioners to establish and operate the "St. Catherine's Hospital", located at
58 D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR
rec.). On or about January 3, 1953, the petitioners sent a letter to the Quezon
City Assessor requesting exemption from payment of real estate tax on the
lot, building and other improvements comprising the hospital stating that the
same was established for charitable and humanitarian purposes and not for
commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of
the premises in question and after a careful study of the case, the exemption
from real property taxes was granted effective the years 1953, 1954 and
1955.
Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p.
65, CTA rec.) the Quezon City Assessor notified the petitioners that the
aforesaid properties were re-classified from exempt to "taxable" and thus
assessed for real property taxes effective 1956, enclosing therewith copies of
Tax Declarations Nos. 19321 to 19322 covering the said properties. The
petitioners appealed the assessment to the Quezon City Board of Assessment
Appeals, which, in a decision dated March 31, 1956 and received by the
former on May 17, 1956, affirmed the decision of the City Assessor. A
motion for reconsideration thereof was denied on March 8, 1957. From this
decision, the petitioners instituted the instant appeal.1awphl.nt
The building involved in this case is principally used as a hospital. It is
mainly a surgical and orthopedic hospital with emphasis on obstetrical cases,
the latter constituting 90% of the total number of cases registered therein.
The hospital has thirty-two (32) beds, of which twenty (20) are for charity-
patients and twelve (12) for pay-patients. From the evidence presented by
petitioners, it is made to appear that there are two kinds of charity patients
(a) those who come for consultation only ("out-charity patients"); and (b)
those who remain in the hospital for treatment ("lying-in-patients"). The out-
charity patients are given free consultation and prescription, although
sometimes they are furnished with free medicines which are not costly like
aspirin, sulfatiazole, etc. The charity lying-in-patients are given free medical
service and medicine although the food served to the pay-patients is very
much better than that given to the former. Although no condition is imposed
by the hospital on the admission of charity lying-in-patients, they however,
usually give donations to the hospital. On the other hand, the pay-patients
are required to pay for hospital services ranging from the minimum charge
of P5.00 to the maximum of P40.00 for each day of stay in the hospital. The
income realized from pay-patients is spent for the improvement of the
charity wards. The hospital personnel is composed of three nurses, two
graduate midwives, a resident physician receiving a salary of P170.00 a
month and the petitioner, Dr. Ester Ochangco Herrera, as directress. As such
directress, the latter does not receive any salary.
Petitioners also operate within the premises of the hospital the "St.
Catherine's School of Midwifery" which was granted government
recognition by the Secretary of Education on February 1, 1955 (Exhibit "F-
3", p. 10, BIR rec.) This school has an enrollment of about two hundred
students. The students are charged a matriculation fee of P300.00 for 1-
years, plus P50.00 a month for board and lodging, which includes
transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also
owned by the petitioners. A separate set of accounting books is maintained
by the school for midwifery distinct from that kept by the hospital. The
petitioners alleged that the accounts of the school are not included in
Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which
relate to the hospital only. However, the petitioners have refused to submit a
separate statement of accounts of the school. A brief tabulation indicating
the amount of income of the hospital for the years 1954, 1955 and 1956, and
its operational expenses, is as follows:

1 9 5 4

Income Expenses Deficit
Charity Ward
Pay Ward
P14,779.50
P 5,280.04
P10,803.26

P16,083.30
P1,303.80
(Exhibits "A", "A-1" and "A-2")

1 9 5 5

Income Expenses Deficit
Charity Ward
Pay Ward
P17,433.30
P 6,859.32
14,038.92

P20,898.24
P3,464.94
(Exhibits "B", "B-1" and "B-2")

1 9 5 6

Income Expenses Deficit
Charity Ward
Pay Ward
P21,467.40
P 5,559.89
16,249.04

P21,809.93
P 341.53
(Exhibits "C", "C-1" and "C-2")
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that
they also own lands and coconut plantations in Quezon Province, and other real
estate in the City of Manila consisting of apartments for rent. The petitioner, Jose
V. Herrera, is an architect, actively engaged in the practice of his profession, with
office at Tuason Building, Escolta, Manila. He was formerly Chairman, Board of
Examiners for Architects and Chairman, Board of Architects connected with the
United Nations. He was also connected with the Allied Technologists which
constructed the Veterans Hospital in Quezon City.
The only issue raised, is whether or not the lot, building and other improvements
occupied by the St. Catherine Hospital are exempt from the real property tax. The
resolution of this question boils down to the corollary issue as to whether or not the
said properties are used exclusively for charitable or educational purposes.
(Petitioners' brief, pp. 24-29).
The Court of Tax Appeals decided the issue in the negative, upon the ground that
the St. Catherine's Hospital "has a pay ward for ... pay-patients, who are charged
for the use of the private rooms, operating room, laboratory room, delivery room,
etc., like other hospitals operated for profit" and that "petitioners and their family
occupy a portion of the building for their residence." With respect to petitioners'
claim for exemption based upon the operation of the school of midwifery, the
Court conceded that "the proposition might be proper if the property used for the
school of midwifery were separate and distinct from the hospital." It added,
however, that, "in the instant case, the portions of the building used for classrooms
of the school of midwifery have not been shown to be exclusively for school
purposes"; that said portions "rather ... have a dual use, i.e., for classroom and for
hospital use, the latter not being a purpose that renders the property tax exempt;"
that part of the building and lot in question "is used as a hospital, part as residence
of the petitioners, part as garage, part as dormitory and part as school"; and that
"the portion dedicated to educational and charitable purposes can not be identified
from those destined to other uses; and the building is itself an indivisible unit of
property."
It should be noted, however, that, according to the very statement of facts made in
the decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20)
are for charity-patients; that "the income realized from pay-patients is spent for
improvement of the charity wards;" and that "petitioners, Dr. Ester Ochangco
Herrera, as directress" of said hospital, "does not receive any salary," although its
resident physician gets a monthly salary of P170.00. It is well settled, in this
connection, that the admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted "exclusively to the maintenance
of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607;
Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other words,
where rendering charity is its primary object, and the funds derived from payments
made by patients able to pay are devoted to the benevolent purposes of the
institution, the mere fact that a profit has been made will not deprive the hospital of
its benevolent character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du
Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).
Thus, we have held that the U.S.T. Hospital was not established for profit-making
purposes, although it had 140 paying beds maintained only to partly finance the
expenses of the free wards, containing 203 beds for charity patients (U.S.T.
Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May
24, 1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitable
educational and religious purposes" can not be considered as engaged in business
merely because its pharmacy department charges paying patients the cost of their
medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of
charge to charity patients (Collector of Internal Revenue vs. St. Paul's Hospital of
Iloilo, L-12127, May 25, 1959), and that the amendment of the original articles of
incorporation of the University of Visayas to convert it from a non-stock to a stock
corporation and the increase of its assets from P9,000 to P50,000, distributed
among the members of the original non-stock corporation in terms of shares of
stock, as well as the subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00 in property, besides
good-will, which was not carried out, does not justify the inference that the
corporation has become one for business and profit, none of its profits having
inured to the benefit of any stockholder or individual (Collector of Internal
Revenue vs. University of Visayas, L-13554, February 28, 1961).
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is "not limited to property actually indispensable" therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are
"incidental to and reasonably necessary for" the accomplishment of said purposes,
such as, in the case of hospitals, "a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities
for student nurses, interns and residents" (84 C.J.S., 621), such as "athletic fields,"
including "a farm used for the inmates of the institution" (Cooley on Taxation, Vol.
2, p. 1430).
Within the purview of the Constitutional exemption from taxation, the St.
Catherine's Hospital is, therefore, a charitable institution, and the fact that it admits
pay-patients does not bar it from claiming that it is devoted exclusively to
benevolent purposes, it being admitted that the income derived from pay-patients is
devoted to the improvement of the charity wards, which represent almost two-
thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients"
who come only for consultation.
Again, the existence of "St. Catherine's School of Midwifery", with an enrollment
of about 200 students, who practice partly in St. Catherine's Hospital and partly in
St. Mary's Hospital, which, likewise, belongs to petitioners herein, does not, and
cannot, affect the exemption to which St. Catherine's Hospital is entitled under our
fundamental law. On the contrary, it furnishes another ground for exemption.
Seemingly, the Court of Tax Appeals was impressed by the fact that the size of
said enrollment and the matriculation fee charged from the students of midwifery,
aside from the amount they paid for board and lodging, including transportation to
St. Mary's Hospital, warrants the belief that petitioners derive a substantial profit
from the operation of the school aforementioned. Such factor is, however,
immaterial to the issue in the case at bar, for "all lands, building and improvements
used exclusively for religious, charitable or educational purposes shall be exempt
from taxation," pursuant to the Constitution, regardless of whether or not material
profits are derived from the operation of the institutions in question. In other
words, Congress may, if it deems fit to do so, impose taxes upon such "profits", but
said "lands, buildings and improvements" are beyond its taxing power.
Similarly, the garage in the building above referred to which was obviously
essential to the operation of the school of midwifery, for the students therein
enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's
Hospital, and were entitled to transportation thereto for Mrs. Herrera received
no compensation as directress of St. Catherine's Hospital were incidental to the
operation of the latter and of said school, and, accordingly, did not affect the
charitable character of said hospital and the educational nature of said school.
WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the
Assessment Board of Appeals of Quezon City, are hereby reversed and set aside,
and another one entered declaring that the lot, building and improvements
constituting the St. Catherine's Hospital are exempt from taxation under the
provisions of the Constitution, without special pronouncement as to costs. It is so
ordered.



G.R. No. L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial
Assessor, petitioner,
vs.
HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of
Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF
BANGUED, INC., represented by Bishop Odilo etspueler and Reverend Felipe
Flores, respondents.



FERNANDO, C.J.:

On the face of this certiorari and mandamus petition filed by the Province of Abra,
1 it clearly appears that the actuation of respondent Judge Harold M. Hernando of
the Court of First Instance of Abra left much to be desired. First, there was a denial
of a motion to dismiss 2 an action for declaratory relief by private respondent
Roman Catholic Bishop of Bangued desirous of being exempted from a real estate
tax followed by a summary judgment 3 granting such exemption, without even
hearing the side of petitioner. In the rather vigorous language of the Acting
Provincial Fiscal, as counsel for petitioner, respondent Judge "virtually ignored the
pertinent provisions of the Rules of Court; ... wantonly violated the rights of
petitioner to due process, by giving due course to the petition of private respondent
for declaratory relief, and thereafter without allowing petitioner to answer and
without any hearing, adjudged the case; all in total disregard of basic laws of
procedure and basic provisions of due process in the constitution, thereby
indicating a failure to grasp and understand the law, which goes into the
competence of the Honorable Presiding Judge." 4

It was the submission of counsel that an action for declaratory relief would be
proper only before a breach or violation of any statute, executive order or
regulation. 5 Moreover, there being a tax assessment made by the Provincial
Assessor on the properties of respondent Roman Catholic Bishop, petitioner failed
to exhaust the administrative remedies available under Presidential Decree No. 464
before filing such court action. Further, it was pointed out to respondent Judge that
he failed to abide by the pertinent provision of such Presidential Decree which
provides as follows: "No court shall entertain any suit assailing the validity of a tax
assessed under this Code until the taxpayer, shall have paid, under protest, the tax
assessed against him nor shall any court declare any tax invalid by reason of
irregularities or informalities in the proceedings of the officers charged with the
assessment or collection of taxes, or of failure to perform their duties within this
time herein specified for their performance unless such irregularities, informalities
or failure shall have impaired the substantial rights of the taxpayer; nor shall any
court declare any portion of the tax assessed under the provisions of this Code
invalid except upon condition that the taxpayer shall pay the just amount of the tax,
as determined by the court in the pending proceeding." 6

When asked to comment, respondent Judge began with the allegation that there "is
no question that the real properties sought to be taxed by the Province of Abra are
properties of the respondent Roman Catholic Bishop of Bangued, Inc." 7 The very
next sentence assumed the very point it asked when he categorically stated:
"Likewise, there is no dispute that the properties including their procedure are
actually, directly and exclusively used by the Roman Catholic Bishop of Bangued,
Inc. for religious or charitable purposes." 8 For him then: "The proper remedy of
the petitioner is appeal and not this special civil action." 9 A more exhaustive
comment was submitted by private respondent Roman Catholic Bishop of
Bangued, Inc. It was, however, unable to lessen the force of the objection raised by
petitioner Province of Abra, especially the due process aspect. it is to be admitted
that his opposition to the petition, pressed with vigor, ostensibly finds a semblance
of support from the authorities cited. It is thus impressed with a scholarly aspect. It
suffers, however, from the grave infirmity of stating that only a pure question of
law is presented when a claim for exemption is made.

The petition must be granted.

1. Respondent Judge would not have erred so grievously had he merely
compared the provisions of the present Constitution with that appearing in the
1935 Charter on the tax exemption of "lands, buildings, and improvements." There
is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, or educational purposes
shall be exempt from taxation." 10 The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and required that for the
exemption of ":lands, buildings, and improvements," they should not only be
"exclusively" but also "actually and "directly" used for religious or charitable
purposes. 11 The Constitution is worded differently. The change should not be
ignored. It must be duly taken into consideration. Reliance on past decisions would
have sufficed were the words "actually" as well as "directly" not added. There must
be proof therefore of the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be exempt from taxation.
According to Commissioner of Internal Revenue v. Guerrero: 12 "From 1906, in
Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting
Commissioner of Customs, it has been the constant and uniform holding that
exemption from taxation is not favored and is never presumed, so that if granted it
must be strictly construed against the taxpayer. Affirmatively put, the law frowns
on exemption from taxation, hence, an exempting provision should be construed
strictissimi juris." 13 In Manila Electric Company v. Vera, 14 a 1975 decision,
such principle was reiterated, reference being made to Republic Flour Mills, Inc. v.
Commissioner of Internal Revenue; 15 Commissioner of Customs v. Philippine
Acetylene Co. & CTA; 16 and Davao Light and Power Co., Inc. v. Commissioner
of Customs. 17

2. Petitioner Province of Abra is therefore fully justified in invoking the
protection of procedural due process. If there is any case where proof is necessary
to demonstrate that there is compliance with the constitutional provision that
allows an exemption, this is it. Instead, respondent Judge accepted at its face the
allegation of private respondent. All that was alleged in the petition for declaratory
relief filed by private respondents, after mentioning certain parcels of land owned
by it, are that they are used "actually, directly and exclusively" as sources of
support of the parish priest and his helpers and also of private respondent Bishop.
18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the
objection was based primarily on the lack of jurisdiction, as the validity of a tax
assessment may be questioned before the Local Board of Assessment Appeals and
not with a court. There was also mention of a lack of a cause of action, but only
because, in its view, declaratory relief is not proper, as there had been breach or
violation of the right of government to assess and collect taxes on such property. It
clearly appears, therefore, that in failing to accord a hearing to petitioner Province
of Abra and deciding the case immediately in favor of private respondent,
respondent Judge failed to abide by the constitutional command of procedural due
process.

WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set
aside. Respondent Judge, or who ever is acting on his behalf, is ordered to hear the
case on the merit. No costs.

Barredo, Concepcion, Jr., and De Castro, JJ., concur.





ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA,
petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M.
CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal
Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE, respondents.



PARAS, J.:

This is a petition for review on certiorari of the decision * of the defunct Court of
First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No.
656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia,
plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque
as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the
decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra,
the Provincial Treasurer of said province against the lot and building of the Abra
Valley Junior College, Inc., represented by Director Pedro Borgonia located at
Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all
back taxes in the amount of P5,140.31 and back taxes and penalties from the
promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the
trial, be confiscated to apply for the payment of the back taxes and for the
redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents the
plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before
the trial must be returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff.

SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly
incorporated with the Securities and Exchange Commission in 1948, filed a
complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare;
Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the
"Notice of Seizure' and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties amounting to
P5,140.31. Said "Notice of Seizure" of the college lot and building covered by
Original Certificate of Title No. Q-83 duly registered in the name of petitioner,
plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the satisfaction of the said
taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by
the respondent treasurers on July 8, 1972 for the sale at public auction of said
college lot and building, which sale was held on the same date. Dr. Paterno
Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of
P6,000.00 which was duly accepted. The certificate of sale was correspondingly
issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through
counstel a motion to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer,
through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of
Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the
complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp.
101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5,"
ibid; Rollo, pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public
auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance
of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents
provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of
the auction sale. Hence, on December 14, 1972, petitioner, through Director
Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB
Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the
complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title No.
0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued,
Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of
Seizure on the property of said school under Original Certificate of Title No. 0-83
for the satisfaction of real property taxes thereon, amounting to P5,140.31; the
Notice of Seizure being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College,
Inc. was sold at public auction for the satisfaction of the unpaid real property taxes
thereon and the same was sold to defendant Paterno Millare who offered the
highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the
defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by this
stipulation of facts will be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and
admit this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes
Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

Sgd. Loreto Roldan
Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre
Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the
following: (a) that the school is recognized by the government and is offering
Primary, High School and College Courses, and has a school population of more
than one thousand students all in all; (b) that it is located right in the heart of the
town of Bangued, a few meters from the plaza and about 120 meters from the
Court of First Instance building; (c) that the elementary pupils are housed in a two-
storey building across the street; (d) that the high school and college students are
housed in the main building; (e) that the Director with his family is in the second
floor of the main building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed
by the parties, is whether or not the lot and building in question are used
exclusively for educational purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon.
Eustaquio Z. Montero, filed a Memorandum for the Government on March 25,
1974, and a Supplemental Memorandum on May 7, 1974, wherein they opined
"that based on the evidence, the laws applicable, court decisions and jurisprudence,
the school building and school lot used for educational purposes of the Abra Valley
College, Inc., are exempted from the payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).


Nonetheless, the trial court disagreed because of the use of the second floor by the
Director of petitioner school for residential purposes. He thus ruled for the
government and rendered the assailed decision.

After having been granted by the trial court ten (10) days from August 6, 1974
within which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of
Petition; Rollo, p. 57) petitioner instead availed of the instant petition for review on
certiorari with prayer for preliminary injunction before this Court, which petition
was filed on August 17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE
COURSE to the petition (Rollo, p. 58). Respondents were required to answer said
petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

I

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE
AND SALE OF THE COLLEGE LOT AND BUILDING USED FOR
EDUCATIONAL PURPOSES OF THE PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY
FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE
PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM
PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS
REALTY TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE
P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT
OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used
exclusively for educational purposes."

Petitioner contends that the primary use of the lot and building for educational
purposes, and not the incidental use thereof, determines and exemption from
property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence,
the seizure and sale of subject college lot and building, which are contrary thereto
as well as to the provision of Commonwealth Act No. 470, otherwise known as the
Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in
question which were subjected to seizure and sale to answer for the unpaid tax are
used: (1) for the educational purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his
family including the in-laws and grandchildren; and (3) for commercial purposes
because the ground floor of the college building is being used and rented by a
commercial establishment, the Northern Marketing Corporation (See photograph
attached as Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the
case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine
Constitution, which expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious, charitable or educational
purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended
by Republic Act No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific or
educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is
the basic and controlling guide, norm and standard to determine tax exemption,
and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil.
217 [1916], this Court ruled that while it may be true that the YMCA keeps a
lodging and a boarding house and maintains a restaurant for its members, still these
do not constitute business in the ordinary acceptance of the word, but an institution
used exclusively for religious, charitable and educational purposes, and as such, it
is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51
Phil. 352 [1972], this Court included in the exemption a vegetable garden in an
adjacent lot and another lot formerly used as a cemetery. It was clarified that the
term "used exclusively" considers incidental use also. Thus, the exemption from
payment of land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to the incidental use
of the parish priest. The lot which is not used for commercial purposes but serves
solely as a sort of lodging place, also qualifies for exemption because this
constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by
this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals, 3
SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus

Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is 'not limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purposes, such as in
the case of hospitals, "a school for training nurses, a nurses' home, property use to
provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns,
and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for
the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71
Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-
restrictive interpretation of the phrase "exclusively used for educational purposes"
as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment
of the main purposes. Otherwise stated, the use of the school building or lot for
commercial purposes is neither contemplated by law, nor by jurisprudence. Thus,
while the use of the second floor of the main building in the case at bar for
residential purposes of the Director and his family, may find justification under the
concept of incidental use, which is complimentary to the main or primary
purposeeducational, the lease of the first floor thereof to the Northern Marketing
Corporation cannot by any stretch of the imagination be considered incidental to
the purpose of education.

It will be noted however that the aforementioned lease appears to have been raised
for the first time in this Court. That the matter was not taken up in the to court is
really apparent in the decision of respondent Judge. No mention thereof was made
in the stipulation of facts, not even in the description of the school building by the
trial judge, both embodied in the decision nor as one of the issues to resolve in
order to determine whether or not said properly may be exempted from payment of
real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such
fact was not disputed even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up
for the first time on appeal. Nonetheless, as an exception to the rule, this Court has
held that although a factual issue is not squarely raised below, still in the interest of
substantial justice, this Court is not prevented from considering a pivotal factual
matter. "The Supreme Court is clothed with ample authority to review palpable
errors not assigned as such if it finds that their consideration is necessary in
arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that
the school building as well as the lot where it is built, should be taxed, not because
the second floor of the same is being used by the Director and his family for
residential purposes, but because the first floor thereof is being used for
commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school
involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra,
Branch I, is hereby AFFIRMED subject to the modification that half of the
assessed tax be returned to the petitioner.

SO ORDERED.

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City,
respondents.
D E C I S I O N
CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-
G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its hospital
building constructed thereon are subject to assessment for purposes of real property
tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is
the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-
3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road,
Central District, Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of
Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital
known as the Lung Center of the Philippines. A big space at the ground floor is
being leased to private parties, for canteen and small store spaces, and to medical
or professional practitioners who use the same as their private clinics for their
patients whom they charge for their professional services. Almost one-half of the
entire area on the left side of the building along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the corner of Quezon Avenue and Elliptical
Road, is being leased for commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical
services to out-patients, both paying and non-paying. Aside from its income from
paying patients, the petitioner receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City Assessor
of Quezon City.[3] Accordingly, Tax Declaration Nos. C-021-01226 (16-2518)
and C-021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.[4] On August 25, 1993, the petitioner filed a Claim for Exemption[5]
from real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioners request was denied, and a petition was,
thereafter, filed before the Local Board of Assessment Appeals of Quezon City
(QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor.
The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution,
the property is exempt from real property taxes. It averred that a minimum of 60%
of its hospital beds are exclusively used for charity patients and that the major
thrust of its hospital operation is to serve charity patients. The petitioner contends
that it is a charitable institution and, as such, is exempt from real property taxes.
The QC-LBAA rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.[6]

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board
of Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that
the petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not
entitled to real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.[8]

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT,
ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section
28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties, and
rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out that
for the years 1995 to 1999, 100% of its out-patients were charity patients and of
the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity
patients. It asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that the exclusivity
required in the Constitution does not necessarily mean solely. Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives
income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends
that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a
charitable entity. The petitioners real property is not exempt from the payment of
real estate taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the said property
is actually, directly and exclusively used for charitable purposes. The respondents
noted that in a newspaper report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its administrative officer, and
Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13 square meters of the property in 1990
for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on March 13, 1995
for a monthly rental of only P24,000. They assert that the petitioner uses the
subsidies granted by the government for charity patients and uses the rest of its
income from the property for the benefit of paying patients, among other purposes.
They aver that the petitioner failed to adduce substantial evidence that 100% of its
out-patients and 170 beds in the hospital are reserved for indigent patients. The
respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay a certain amount as deposit.
That even if a patient is living below the poverty line, he is charged with high
hospital bills. And, without these bills being first settled, the poor patient cannot
be allowed to leave the hospital or be discharged without first paying the hospital
bills or issue a promissory note guaranteed and indorsed by an influential agency
or person known only to the Center; that even the remains of deceased poor
patients suffered the same fate. Moreover, before a patient is admitted for
treatment as free or charity patient, one must undergo a series of interviews and
must submit all the requirements needed by the Center, usually accompanied by
endorsement by an influential agency or person known only to the Center. These
facts were heard and admitted by the Petitioner LCP during the hearings before the
Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent
patients, instead of seeking treatment with the Center, they prefer to be treated at
the Quezon Institute. Can such practice by the Center be called charitable?[10]

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and
1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether
the real properties of the petitioner are exempt from real property taxes.

The Courts Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the
context of the 1973 and 1987 Constitutions. To determine whether an enterprise is
a charitable institution/entity or not, the elements which should be considered
include the statute creating the enterprise, its corporate purposes, its constitution
and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.[11]

In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or otherwise lessening the
burden of government.[12] It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.[13] The word charitable is
not restricted to relief of the poor or sick.[14] The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or
not is whether it exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office
of the President of the Philippines with the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison detre for the creation of the petitioner is
stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having
been the leading cause of illness and death in the Philippines, comprising more
than 45% of the total annual deaths from all causes, thus, exacting a tremendous
toll on human resources, which ailments are likely to increase and degenerate into
serious lung diseases on account of unabated pollution, industrialization and
unchecked cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt
and intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on the cure and prevention of
lung diseases, through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult and
problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for
the welfare and benefit of the Filipino people.[15]

The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as
follows:

1. To construct, establish, equip, maintain, administer and conduct an
integrated medical institution which shall specialize in the treatment, care,
rehabilitation and/or relief of lung and allied diseases in line with the concern of
the government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people of
the Philippines and in pursuance of the policy of the State to secure the well-being
of the people by providing them specialized health and medical services and by
minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the
prevention of lung or pulmonary ailments and the care of lung patients, including
the holding of a series of relevant congresses, conventions, seminars and
conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the
biological, demographic, social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to collect and publish the
findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information
on lung consciousness or awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the general purposes or objects
aforesaid, especially in human lung requirements, general health and physical
fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social
workers and medical and technical personnel in the practical and scientific
implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung
diseases, to encourage advanced training in matters of the lung and related fields
and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and activities for
the purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;

9. To extend, whenever possible and expedient, medical services to the public
and, in general, to promote and protect the health of the masses of our people,
which has long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor
and needy, all without regard to or discrimination, because of race, creed, color or
political belief of the persons helped; and to enable them to obtain treatment when
such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and
carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the Center
shall, from time to time, deem proper and best, under the particular circumstances,
to serve its general and non-profit purposes and objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.[16]

Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy
without discrimination. After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity.[17]

As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution.[18] In
Congregational Sunday School, etc. v. Board of Review,[19] the State Supreme
Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able
to pay are required to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in favor of charitable institutions
are based is the benefit conferred upon the public by them, and a consequent relief,
to some extent, of the burden upon the state to care for and advance the interests of
its citizens.[20]

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
Association of South Dakota v. Baker:[21]

[T]he fact that paying patients are taken, the profits derived from attendance
upon these patients being exclusively devoted to the maintenance of the charity,
seems rather to enhance the usefulness of the institution to the poor; for it is a
matter of common observation amongst those who have gone about at all amongst
the suffering classes, that the deserving poor can with difficulty be persuaded to
enter an asylum of any kind confined to the reception of objects of charity; and that
their honest pride is much less wounded by being placed in an institution in which
paying patients are also received. The fact of receiving money from some of the
patients does not, we think, at all impair the character of the charity, so long as the
money thus received is devoted altogether to the charitable object which the
institution is intended to further.[22]

The money received by the petitioner becomes a part of the trust fund and must be
devoted to public trust purposes and cannot be diverted to private profit or
benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner
does not lose its character as a charitable institution simply because the gift or
donation is in the form of subsidies granted by the government. As held by the
State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:[24]

Second, the government subsidy payments are provided to the project. Thus,
those payments are like a gift or donation of any other kind except they come from
the government. In both Intermountain Health Care and the present case, the crux
is the presence or absence of material reciprocity. It is entirely irrelevant to this
analysis that the government, rather than a private benefactor, chose to make up the
deficit resulting from the exchange between St. Marks Tower and the tenants by
making a contribution to the landlord, just as it would have been irrelevant in
Intermountain Health Care if the patients income supplements had come from
private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing
is by the government rather than private charitable contributions does not dictate
the denial of a charitable exemption if the facts otherwise support such an
exemption, as they do here.[25]

In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients and
for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from
its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the
second issue, that those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the law too plain to
be mistaken.[26] As held in Salvation Army v. Hoehn:[27]

An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any
other reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed strictly
against the property owner and in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation . [28]

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock
corporation organized primarily to help combat the high incidence of lung and
pulmonary diseases in the Philippines, all donations, contributions, endowments
and equipment and supplies to be imported by authorized entities or persons and by
the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use
and benefit of the Lung Center, shall be exempt from income and gift taxes, the
same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal
Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for the
Lung Center.[29]

It is plain as day that under the decree, the petitioner does not enjoy any property
tax exemption privileges for its real properties as well as the building constructed
thereon. If the intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in
the familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways.
One variation of the rule is principle that what is expressed puts an end to that
which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its
terms, is expressly limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon ones own voluntary act
and not upon that of others. They proceed from the premise that the legislature
would not have made specified enumeration in a statute had the intention been not
to restrict its meaning and confine its terms to those expressly mentioned.[30]

The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant at
all, and that unless the privilege is limited to the very terms of the statute the favor
would be intended beyond what was meant.[31]

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.[32]

The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.[34]

Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991)
as follows:

SECTION 234. Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]

We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt
from taxation.[36] However, under the 1973 and the present Constitutions, for
lands, buildings, and improvements of the charitable institution to be considered
exempt, the same should not only be exclusively used for charitable purposes; it
is required that such property be used actually and directly for such
purposes.[37]

In light of the foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals
which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.[38] As this Court held in Province of Abra v.
Hernando:[39]

Under the 1935 Constitution: Cemeteries, churches, and parsonages or
convents appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable, or educational purposes shall be exempt from
taxation. The present Constitution added charitable institutions, mosques, and
non-profit cemeteries and required that for the exemption of lands, buildings,
and improvements, they should not only be exclusively but also actually and
directly used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words
actually as well as directly not added. There must be proof therefore of the
actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
Exclusive is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and exclusively is defined, in a
manner to exclude; as enjoying a privilege exclusively.[40] If real property is
used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.[41] The words dominant use or
principal use cannot be substituted for the words used exclusively without
doing violence to the Constitutions and the law.[42] Solely is synonymous with
exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to
the purposes for which the charitable institution is organized. It is not the use of
the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its real
property is actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the dispensation
of medical services to them, whether paying or non-paying, other portions thereof
are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise
under the business name Elliptical Orchids and Garden Center. Indeed, the
petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991 and
P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from such
taxes.[45] On the other hand, the portions of the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED.
The respondent Quezon City Assessor is hereby DIRECTED to determine, after
due hearing, the precise portions of the land and the area thereof which are leased
to private persons, and to compute the real property taxes due thereon as provided
for by law.

SO ORDERED.

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.
Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No.
34100) ordering it to pay to plaintiff Republic of the Philippines the sum of
P4,802.37 with 6% interest thereon from the date of the filing of the complaint
until fully paid, plus costs, defendant Mambulao Lumber Company interposed the
present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows:
(a) under the first cause of action, for forest charges covering the period from
September 10, 1952 to May 24, 1953, defendants admitted that they have a liability
of P587.37, which liability is covered by a bond executed by defendant General
Insurance & Surety Corporation for Mambulao Lumber Company, jointly and
severally in character, on July 29, 1953, in favor of herein plaintiff; (b) under the
second cause of action, both defendants admitted a joint and several liability in
favor of plaintiff in the sum of P296.70, also covered by a bond dated November
27, 1953; and (c) under the third cause of action, both defendants admitted a joint
and several liability in favor of plaintiff for P3,928.30, also covered by a bond
dated July 20, 1954. These three liabilities aggregate to P4,802.37. If the liability
of defendants in favor of plaintiff in the amount already mentioned is admitted,
then what is the defense interposed by the defendants? The defense presented by
the defendants is quite unusual in more ways than one. It appears from Exh. 3 that
from July 31, 1948 to December 29, 1956, defendant Mambulao Lumber Company
paid to the Republic of the Philippines P8,200.52 for 'reforestation charges' and for
the period commencing from April 30, 1947 to June 24, 1948, said defendant paid
P927.08 to the Republic of the Philippines for 'reforestation charges'. These
reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act
115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the
National Internal Revenue Code, the amount of P0.50 on each cubic meter of
timber... cut out and removed from any public forest for commercial purposes. The
amount collected shall be expended by the director of forestry, with the approval of
the secretary of agriculture and commerce, for reforestation and afforestation of
watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount
of the reforestation charges paid by Mambulao Lumber Company is P9,127.50,
and it is the contention of the defendant Mambulao Lumber Company that since
the Republic of the Philippines has not made use of those reforestation charges
collected from it for reforesting the denuded area of the land covered by its license,
the Republic of the Philippines should refund said amount, or, if it cannot be
refunded, at least it should be compensated with what Mambulao Lumber
Company owed the Republic of the Philippines for reforestation charges. In line
with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said
defendant requested "that our account with your bureau be credited with all the
reforestation charges that you have imposed on us from July 1, 1947 to June 14,
1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao
Lumber Company was answered by the director of forestry on March 12, 1957,
marked Exh. 2, in which the director of forestry quoted an opinion of the secretary
of justice, to the effect that he has no discretion to extend the time for paying the
reforestation charges and also explained why not all denuded areas are being
reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid
by defendant-appellant company to plaintiff-appellee as reforestation charges from
1947 to 1956 may be set off or applied to the payment of the sum of P4,802.37 as
forest charges due and owing from appellant to appellee. It is appellant's contention
that said sum of P9,127.50, not having been used in the reforestation of the area
covered by its license, the same is refundable to it or may be applied in
compensation of said sum of P4,802.37 due from it as forest charges.1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115,
provides:

SECTION 1. There shall be collected, in addition to the regular forest charges
provided for under Section two hundred and sixty-four of Commonwealth Act
Numbered Four Hundred Sixty-six, known as the National Internal Revenue Code,
the amount of fifty centavos on each cubic meter of timber for the first and second
groups and forty centavos for the third and fourth groups cut out and removed from
any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources (commerce), for reforestation and afforestation
of watersheds, denuded areas and cogon and open lands within forest reserves,
communal forest, national parks, timber lands, sand dunes, and other public forest
lands, which upon investigation, are found needing reforestation or afforestation,
or needing to be under forest cover for the growing of economic trees for timber,
tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of
necessary plans and estimate of costs and for reconnaisance survey of public forest
lands and for such other expenses as may be deemed necessary for the proper
carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived
from plantations as herein provided shall constitute a fund to be known as
Reforestation Fund, to be expended exclusively in carrying out the purposes
provided for under this Act. All provincial or city treasurers and their deputies
shall act as agents of the Director of Forestry for the collection of the revenues or
incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation
charges from a timber licenses or concessionaire shall constitute a fund to be
known as the Reforestation Fund, and that the same shall be expended by the
Director of Forestry, with the approval of the Secretary of Agriculture and Natural
Resources for the reforestation or afforestation, among others, of denuded areas
which, upon investigation, are found to be needing reforestation or afforestation.
Note that there is nothing in the law which requires that the amount collected as
reforestation charges should be used exclusively for the reforestation of the area
covered by the license of a licensee or concessionaire, and that if not so used, the
same should be refunded to him. Observe too, that the licensee's area may or may
not be reforested at all, depending on whether the investigation thereof by the
Director of Forestry shows that said area needs reforestation. The conclusion
seems to be that the amount paid by a licensee as reforestation charges is in the
nature of a tax which forms a part of the Reforestation Fund, payable by him
irrespective of whether the area covered by his license is reforested or not. Said
fund, as the law expressly provides, shall be expended in carrying out the purposes
provided for thereunder, namely, the reforestation or afforestation, among others,
of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the
new Civil Code2 is applicable, such that the sum of P9,127.50 paid by it as
reforestation charges may compensate its indebtedness to appellee in the sum of
P4,802.37 as forest charges. But in the view we take of this case, appellant and
appellee are not mutually creditors and debtors of each other. Consequently, the
law on compensation is inapplicable. On this point, the trial court correctly
observed: .

Under Article 1278, NCC, compensation should take place when two persons in
their own right are creditors and debtors of each other. With respect to the forest
charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and the
government does not owe anything, crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the
forest charges in question, can be the subject of set-off or compensation.

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. ... (80 C.J.S. 73-74. ) .

The 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 a 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. ... If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a
claim against the governmental body which is not included in the tax levy, it is
plain that some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and abide the
result of a lawsuit, and meanwhile the financial affairs of the government will be
thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in
all respects, with costs against the defendant-appellant. So ordered.\



MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of
First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J .:
This is a petition for certiorari and mandamus against the Judge of the Court of
First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul
certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the estate
of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-
14674, January 30, 1960, this Court declared as final and executory the order for
the payment by the estate of the estate and inheritance taxes, charges and penalties,
amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special
proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter
Scott Price." In order to enforce the claims against the estate the fiscal presented a
petition dated June 21, 1961, to the court below for the execution of the judgment.
The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the
amount of P262,200. The orders of the court below dated August 20, 1960 and
September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.
Price, Administratrix of the estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956
and acknowledged before Notary Public Salvador V. Esguerra, legal adviser
in Malacaang to Executive Secretary De Leon dated December 14, 1956,
the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral
Survey, Inc., represented by the administratrix Simeona K. Price, as directed
in the above note of the President. Considering these facts, the Court orders
that the payment of inheritance taxes in the sum of P40,058.55 due the
Collector of Internal Revenue as ordered paid by this Court on July 5, 1960
in accordance with the order of the Supreme Court promulgated July 30,
1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00
due and payable to the Administratrix Simeona K. Price, in this estate, the
balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and
it orders that the payment of the claim of the Collector of Internal Revenue
be deferred until the Government shall have paid its accounts to the
administratrix herein amounting to P262,200.00. It may not be amiss to
repeat that it is only fair for the Government, as a debtor, to its accounts to
its citizens-creditors before it can insist in the prompt payment of the latter's
account to it, specially taking into consideration that the amount due to the
Government draws interests while the credit due to the present state does not
accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution
of the claim of the Government against the estate must be denied for lack of merit.
The ordinary procedure by which to settle claims of indebtedness against the estate
of a deceased person, as an inheritance tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to pay the
amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of
the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of
Court for the payment of debts and expenses of administration. The proper
procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and
Rule 90, section 2. And when sale or mortgage of real estate is to be made,
the regulations contained in Rule 90, section 7, should be complied
with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement
and payment of the debts and expenses of administration and it is later
ascertained that there are such debts and expenses to be paid, in which case
"the court having jurisdiction of the estate may, by order for that purpose,
after hearing, settle the amount of their several liabilities, and order how
much and in what manner each person shall contribute, and mayissue
execution if circumstances require" (Rule 89, section 6; see also Rule 74,
Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to
the estate are under the jurisdiction of the court and such jurisdiction continues
until said properties have been distributed among the heirs entitled thereto. During
the pendency of the proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the
amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the
court having jurisdiction of the estate had found that the claim of the estate against
the Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under
the above circumstances, both the claim of the Government for inheritance taxes
and the claim of the intestate for services rendered have already become overdue
and demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290
of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts
to the concurrent amount, eventhough the creditors and debtors are not
aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment
for taxes against the estate of the deceased Walter Scott Price. Furthermore, the
petition for certiorari and mandamus is not the proper remedy for the petitioner.
Appeal is the remedy.
The petition is, therefore, dismissed, without costs.


G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.



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 latter's 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 Francia's 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.

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
attorney's 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:

I

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A
GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S 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
RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION 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 petitioner's
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, 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. ... (80 C.J.S., 7374). "The 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. ..."

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 Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' 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 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. ... 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 ... .(Petition for Review, Rollo p. 18;
emphasis supplied)

We agree with the petitioner's 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

... [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. (emphasis 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 court's
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 ... .

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.

Petitioner's 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:

... [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 one's 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: "When 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: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." 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 petitioner's 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 petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the 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.




CALTEX PHILIPPINES, INC., petitioner,
vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE
COMMISSIONER BARTOLOME C. FERNANDEZ and HONORABLE
COMMISSIONER ALBERTO P. CRUZ, respondents.



DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1
questioning the authority of the Commission on Audit (COA) in disallowing
petitioner's claims for reimbursement from the Oil Price Stabilization Fund (OPSF)
and seeking the reversal of said Commission's decision denying its claims for
recovery of financing charges from the Fund and reimbursement of underrecovery
arising from sales to the National Power Corporation, Atlas Consolidated Mining
and Development Corporation (ATLAS) and Marcopper Mining Corporation
(MAR-COPPER), preventing it from exercising the right to offset its remittances
against its reimbursement vis-a-vis the OPSF and disallowing its claims which are
still pending resolution before the Office of Energy Affairs (OEA) and the
Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the
Constitutional Commissions 3 may be brought to this Court on certiorari by the
aggrieved party within thirty (30) days from receipt of a copy thereof. The
certiorari referred to is the special civil action for certiorari under Rule 65 of the
Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no
respect for the findings and rulings of the administrator of the fund itself and in
disallowing a claim which is still pending resolution at the OEA level, and (b)
"grave abuse of discretion and completely without jurisdiction" 5 in declaring that
petitioner cannot avail of the right to offset any amount that it may be required
under the law to remit to the OPSF against any amount that it may receive by way
of reimbursement therefrom are sufficient to bring this petition within Rule 65 of
the Rules of Court, and, considering further the importance of the issues raised, the
error in the designation of the remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential
Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As
amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of
the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for
the purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be sourced from any of
the following:

a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions
of government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the
resources of the Fund through an appropriate Order that may be issued by the
Board of Energy requiring payment by persons or companies engaged in the
business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the
Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in
world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as
a result of the reduction of domestic prices of petroleum products. The magnitude
of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without
the corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government
mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in
cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.

The material operative facts of this case, as gathered from the pleadings of the
parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI),
hereinafter referred to as Petitioner, directing the latter to remit to the OPSF its
collection, excluding that unremitted for the years 1986 and 1988, of the additional
tax on petroleum products authorized under the aforesaid Section 8 of P.D. No.
1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from
the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial
verification with the OEA showed that the grand total of its unremitted collections
of the above tax is P1,287,668,820.00, broken down as follows:

1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty
(60) days from receipt of the letter; advising it that the COA will hold in abeyance
the audit of all its claims for reimbursement from the OPSF; and directing it to
desist from further offsetting the taxes collected against outstanding claims in 1989
and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its
reimbursement certificates from the OPSF covering claims with the Office of
Energy Affairs since June 1987 up to March 1989, invoking in support thereof
COA Circular No. 89-299 on the lifting of pre-audit of government transactions of
national government agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early
release of the reimbursement certificates from the OPSF and repeated its earlier
directive to petitioner to forward payment of the latter's unremitted collections to
the OPSF to facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA
a proposal for the payment of the collections and the recovery of claims, since the
outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the
processing of said claims against the OPSF will cause a very serious impairment of
its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of
payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to
preclude further accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down
Decision No. 921 accepting the above-stated proposal but prohibiting petitioner
from further offsetting remittances and reimbursements for the current and ensuing
years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President,
Petron Corporation, and Mr. Francis Ablan, President and Managing Director,
Caltex (Philippines) Inc., for reconsideration of this Commission's adverse action
embodied in its letters dated February 2, 1989 and March 9, 1989, the former
directing immediate remittance to the Oil Price Stabilization Fund of collections
made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987,
and the latter reiterating the same directive but further advising the firms to desist
from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement
from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy
Regulatory Board, the aforenamed oil companies were allowed to offset the
amounts due to the Oil Price Stabilization Fund against their outstanding claims
from the said Fund for the calendar years 1987 and 1988, pending with the then
Ministry of Energy, the government entity charged with administering the OPSF.
This Commission, however, expressing serious doubts as to the propriety of the
offsetting of all types of reimbursements from the OPSF against all categories of
remittances, advised these oil companies that such offsetting was bereft of legal
basis. Aggrieved thereby, these companies now seek reconsideration and in
support thereof clearly manifest their intent to make arrangements for the
remittance to the Office of Energy Affairs of the amount of collections equivalent
to what has been previously offset, provided that this Commission authorizes the
Office of Energy Affairs to prepare the corresponding checks representing
reimbursement from the OPSF. It is alleged that the implementation of such an
arrangement, whereby the remittance of collections due to the OPSF and the
reimbursement of claims from the Fund shall be made within a period of not more
than one week from each other, will benefit the Fund and not unduly jeopardize the
continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this
Commission perceives no further objectionable feature in the proposed
arrangement, provided that 15% of whatever amount is due from the Fund is
retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without prejudice to similar
future retentions to answer for any deficiency in such surcharges, and provided
further that no offsetting of remittances and reimbursements for the current and
ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to
Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31,
1989, as well as its outstanding claims against the Oil Price Stabilization Fund
(OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex
(Philippines), Inc. shall be required to remit to OPSF an amount of
P1,505,668,906, representing remittances to the OPSF which were offset against
its claims reimbursements (net of unsubmitted claims). In addition, the
Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex, representing claims initially allowed in
audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled
P387,683,535, which included P130,420,235 representing those claims disallowed
by OEA, details of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

P257,263,300

Disallowances of OEA 130,420,235

Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate
that recovery of financing charges by oil companies is not among the items for
which the OPSF may be utilized. Therefore, it is our view that recovery of
financing charges has no legal basis. The mechanism for such claims is provided in
DOF Circular 1-87.

b. Product Sales Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order
No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that
(sic) oil companies should pay OPSF impost on export sales of petroleum products.
Effective February 7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity date of the
resolution from February 7, 1987 to October 20, 1987 as covered by subsequent
ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to
include in their domestic sales volumes to international vessels/airlines and claim
the corresponding reimbursements from OPSF during the period. It is our opinion
that the effectivity of the said resolution should be February 7, 1987.

c. Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions
including the related BLA agreement, as they affect the claims for reimbursements
of ad valorem taxes. We observed that oil companies immediately settle ad
valorem taxes for BLA transaction (sic). Loan balances therefore are not tax paid
inventories of Caltex subject to reimbursements but those of the borrower. Hence,
we recommend reduction of the claim for July, August, and November, 1987
amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges whether
direct or indirect due and payable by the copper mining companies in distress to
the national and local governments." It is our opinion that LOI 1416 which
implements the exemption from payment of OPSF imposts as effected by OEA has
no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the
amount as herein authorized shall be subject to availability of funds of OPSF as of
May 31, 1989 and applicable auditing rules and regulations. With regard to the
disallowances, it is further informed that the aggrieved party has 30 days within
which to appeal the decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration
of the decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING
RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF
EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND
ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE
RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS
AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT,
REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus
Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with
Commissioner Fernandez dissenting in part, handed down Decision No. 1171
affirming the disallowance for recovery of financing charges, inventory losses, and
sales to MARCOPPER and ATLAS, while allowing the recovery of product sales
or those arising from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the
.authority to recover financing charges from the OPSF on the basis of Department
of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil
companies to "recover cost of financing working capital associated with crude oil
shipments," and provided a schedule of reimbursement in terms of peso per barrel.
It appears that on November 6, 1989, the DOF issued a memorandum to the
President of the Philippines explaining the nature of these financing charges and
justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were
authorized) to refinance their imports of crude oil and petroleum products from the
normal trade credit of 30 days up to 360 days from date of loading . . .
Conformably . . ., the oil companies deferred their foreign exchange remittances
for purchases by refinancing their import bills from the normal 30-day payment
term up to the desired 360 days. This refinancing of importations carried additional
costs (financing charges) which then became, due to government mandate, an
inherent part of the cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges
increased oil costs and the schedule of reimbursement rate in peso per barrel
(Exhibit 1) used to support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the same formula which the
DOF used in arriving at the reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were
obtained from CPI (CALTEX) Management and can easily be verified from our
records.

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such
surtax on inventory losses because these are paid to BIR and not OPSF, in view of
which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are
entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17,
1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the
CPI (CALTEX) has no authority to claim reimbursement for this uncollected
OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed
mining companies from "all taxes, duties, import fees and other charges" was
issued when OPSF was not yet in existence and could not have contemplated
OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was
not created to aid distressed mining companies but rather to help the domestic oil
industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present
petition wherein it imputes to the COA the commission of the following errors: 16

I

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF
FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING
FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR
REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM
EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES
AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

V

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS
WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE
DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment
on the petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz,
assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and
required the parties to file their respective Memoranda within twenty (20) days
from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays
that the Comment filed on 6 September 1990 be considered as the Memorandum
for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support
thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No.
137, which added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a
result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without
the corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government
mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in
cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now
Department) of Finance may include financing charges for "in essence, financing
charges constitute unrecovered cost of acquisition of crude oil incurred by the oil
companies," as explained in the 6 November 1989 Memorandum to the President
of the Department of Finance; they "directly translate to cost underrecovery in
cases where the money market placement rates decline and at the same time the tax
on interest income increases. The relationship is such that the presence of
underrecovery or overrecovery is directly dependent on the amount and extent of
financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis;
it was filed on the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated
with crude oil shipments, the following guidelines on the utilization of the Oil
Price Stabilization Fund pertaining to the payment of the foregoing (sic) exchange
risk premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one
(1) percent for the first (6) months and 1/32 of one percent per month thereafter up
to a maximum period of one year, to be applied on crude oil' shipments from
January 1, 1987. Shipments with outstanding financing as of January 1, 1987 shall
be charged on the basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be
allowed to recover financing charges directly from the OPSF per barrel of crude oil
based on the following schedule:

Financing Period Reimbursement Rate
Pesos per Barrel

Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty
days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February
1987, advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February
5, 1987 and subsequent discussions held by the Price Review committee on
February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price
Stabilization Fund (OPSF). Such a reduction would allow the industry to recover
partly associated financing charges on crude oil imports. Accordingly, the OPSF
foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6)
months plus 1/32% of 1% per month thereafter up to a maximum period of one
year, effective January 1, 1987. In addition, since the prevailing company take
would still leave unrecovered financing charges, reimbursement may be secured
from the OPSF in accordance with the provisions of the attached Department of
Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which
contains the guidelines for the computation of the foreign exchange risk fee and the
recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from
the OPSF for both crude and product shipments loaded after January 1, 1987 based
on the following rates:

Financing Period Reimbursement Rate
(PBbl.)

Less than 180 days None
180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88
imposing further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the
claim on peso cost differential for a particular shipment and duly certified
supporting documents provided for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate
(Annex A) to be issued by the Office of Energy Affairs. The said certificate may
be used to offset against amounts payable to the OPSF. The oil companies may
also redeem said certificates in cash if not utilized, subject to availability of funds.
25

The OEA disseminated this Circular to all oil companies in its Memorandum
Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of
the laws in the light of the determination of executive agencies. The determination
by the Department of Finance and the OEA that financing charges are recoverable
from the OPSF is entitled to great weight and consideration. 27 The function of the
COA, particularly in the matter of allowing or disallowing certain expenditures, is
limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable.
Additionally, COA's claim that petitioner is gaining, instead of losing, from the
extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular
or unnecessary government expenditures and as the monetary claims of petitioner
are not allowed by law, the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing
charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-
87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do
not likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy,
We find the theory of petitioner that such does not extend to the disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or
use of government funds and properties, but only to the promulgation of
accounting and auditing rules for, among others, such disallowance to be
untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of,
and expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such non-governmental
entities receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit to such
audit as a condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and
appropriate to correct the deficiencies. It shall keep the general accounts, of the
Government and, for such period as may be provided by law, preserve the
vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in
this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and auditing
rules and regulations, including those for the prevention and disallowance of
irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or
uses of government funds and properties.

These present powers, consistent with the declared independence of the
Commission, 30 are broader and more extensive than that conferred by the 1973
Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities including government-owned or
controlled corporations, keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or
uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the
COA's precursor, the General Auditing Office, were, unfortunately, limited; its
very role was markedly passive. Section 2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including trust funds
derived from bond issues; and audit, in accordance with law and administrative
regulations, all expenditures of funds or property pertaining to or held in trust by
the Government or the provinces or municipalities thereof. He shall keep the
general accounts of the Government and the preserve the vouchers pertaining
thereto. It shall be the duty of the Auditor General to bring to the attention of the
proper administrative officer expenditures of funds or property which, in his
opinion, are irregular, unnecessary, excessive, or extravagant. He shall also
perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or
extravagant expenditures or uses of funds, the 1935 Constitution did not grant the
Auditor General the power to issue rules and regulations to prevent the same. His
was merely to bring that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs. Aquino, 33 are no longer controlling as the two (2)
were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under
the 1935 Constitution and the Commission on Audit under the 1973 Constitution
authorized them to disallow illegal expenditures of funds or uses of funds and
property. Our present Constitution retains that same power and authority, further
strengthened by the definition of the COA's general jurisdiction in Section 26 of
the Government Auditing Code of the Philippines 34 and Administrative Code of
1987. 35 Pursuant to its power to promulgate accounting and auditing rules and
regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA
Circular No. 77-55. Since the COA is responsible for the enforcement of the rules
and regulations, it goes without saying that failure to comply with them is a ground
for disapproving the payment of the proposed expenditure. As observed by one of
the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas:
37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary,
excessive or extravagant" expenditures of public funds but could only "bring [the
matter] to the attention of the proper administrative officer," under the 1987
Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures or uses of government funds and properties." Hence,
since the Commission on Audit must ultimately be responsible for the enforcement
of these rules and regulations, the failure to comply with these regulations can be a
ground for disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA
a more active role and invested it with broader and more extensive powers, they
did not intend merely to make the COA a toothless tiger, but rather envisioned a
dynamic, effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of
Finance Circular No. 1-87, Department of Finance Circular No. 4-88 and the
implementing circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as
amended by E.O. No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis,
financing charges are not included in "cost underrecovery" and, therefore, cannot
be considered as one of the "other factors." Section 8 of P.D. No. 1956, as
amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is.
It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without
the corresponding reduction in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government
mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in
cost underrecovery.

These "other factors" can include only those which are of the same class or nature
as the two specifically enumerated in subparagraphs (i) and (ii). A common
characteristic of both is that they are in the nature of government mandated price
reductions. Hence, any other factor which seeks to be a part of the enumeration, or
which could qualify as a cost underrecovery, must be of the same class or nature as
those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department
of Finance broad and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an
enumeration of persons or things, by words of a particular and specific meaning,
such general words are not to be construed in their widest extent, but are held to be
as applying only to persons or things of the same kind or class as those specifically
mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they do
not have a common characteristic. The first relates to price reduction as directed by
the Board of Energy while the second refers to reduction in internal ad valorem
taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these
subparagraphs. What should be considered for purposes of determining the "other
factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section
which explicitly allows cost underrecovery only if such were incurred as a result of
the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost
underrecovery in the sense that such were incurred as a result of the inability to
fully offset financing expenses from yields in money market placements, they do
not, however, fall under the foregoing provision of P.D. No. 1956, as amended,
because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is
further amended by Congress, this Court can do nothing. The duty of this Court is
not to legislate, but to apply or interpret the law. Be that as it may, this Court
wishes to emphasize that as the facts in this case have shown, it was at the behest
of the Government that petitioner refinanced its oil import payments from the
normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial
institution which refinanced said payments charged a higher interest, thereby
resulting in higher financing expenses for the petitioner. It would appear then that
equity considerations dictate that petitioner should somehow be allowed to recover
its financing losses, if any, which may have been sustained because it
accommodated the request of the Government. Although under Section 29 of the
National Internal Revenue Code such losses may be deducted from gross income,
the effect of that loss would be merely to reduce its taxable income, but not to
actually wipe out such losses. The Government then may consider some positive
measures to help petitioner and others similarly situated to obtain substantial relief.
An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the
part of the Department of Finance to determine or define "other factors" is to
uphold an undue delegation of legislative power, it clearly appearing that the
subject provision does not provide any standard for the exercise of the authority. It
is a fundamental rule that delegation of legislative power may be sustained only
upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of
the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is
rendered irrelevant by reason of the foregoing disquisitions. It may nevertheless be
stated that petitioner failed to disprove COA's claim that it had in fact gained in the
process. Otherwise stated, petitioner failed to sufficiently show that it incurred a
loss. Such being the case, how can petitioner claim for reimbursement? It cannot
have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We
find for the petitioner. The respondents themselves admit in their Comment that
underrecovery arising from sales to NPC are reimbursable because NPC was
granted full exemption from the payment of taxes; to prove this, respondents trace
the laws providing for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which
provides, in part, "that the tax and duty exemption privileges of the National Power
Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products . . . are restored effective March 10, 1987." In a Memorandum
issued on 5 October 1987 by the Office of the President, NPC's tax exemption was
confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of
petroleum products to the NPC is evident in the recently passed Republic Act No.
6952 establishing the Petroleum Price Standby Fund to support the OPSF. 41 The
pertinent part of Section 2, Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting from
foreign exchange rate adjustments and/or increases in world market prices of crude
oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National
Power Corporation (NPC); and (c) other cost underrecoveries incurred as may be
finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to
the National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and
MARCOPPER, petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July
1984, which ordered the suspension of payments of all taxes, duties, fees and other
charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No.
84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation
and Marcopper Mining Corporation are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA,
in its 18 August 1989 letter to Executive Director Wenceslao R. de la Paz, states
that "it is our opinion that LOI 1416 which implements the exemption from
payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its
Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to
claim reimbursement for this uncollected impost because LOI 1416 dated July 17,
1984, . . . was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation." 43 It is further stated
that: "Moreover, it is evident that OPSF was not created to aid distressed mining
companies but rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could
not have intended to exempt said distressed mining companies from the payment
of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D.
1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137,
amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies
in line with the government's effort to prevent the collapse of the copper industry.
P.D No. 1956, as amended, was issued for the purpose of minimizing frequent
price changes brought about by exchange rate adjustments and/or changes in world
market prices of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the Notional and Local Governments . . ." On the other
hand, OPSF dues are not payable by (sic) distressed copper companies but by oil
companies. It is to be noted that the copper mining companies do not pay OPSF
dues. Rather, such imposts are built in or already incorporated in the prices of oil
products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by
distressed mining companies, it does not accord petitioner the same privilege with
respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons,
however, it is apparent that LOI 1416 was never published in the Official Gazette
45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official
Gazette all unpublished presidential issuances which are of general application,
and unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its
Resolution promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin
fifteen days after publication unless a different effectivity date is fixed by the
legislature.

Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly
delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall
immediately upon their approval, or as soon thereafter as possible, be published in
full in the Official Gazette, to become effective only after fifteen days from their
publication, or on another date specified by the legislature, in accordance with
Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the
Official Gazette after its issuance or at any time after the decision in the
abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No.
200, issued on 18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general circulation in
the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general
circulation pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect,
petitioner's claim must still fail. Tax exemptions as a general rule are construed
strictly against the grantee and liberally in favor of the taxing authority. 48 The
burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed. The party claiming exemption must
therefore be expressly mentioned in the exempting law or at least be within its
purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of
its sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF
under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper
mining companies, it does not give petitioner the same privilege with respect to the
payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner
maintains that the Department of Finance has still to issue a final and definitive
ruling thereon; accordingly, it was premature for COA to disallow it. By doing so,
the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend
that said amount was already disallowed by the OEA for failure to substantiate it.
50 In fact, when OEA submitted the claims of petitioner for pre-audit, the
abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or
substantiate its contention that the amount of P130,420,235.00 is still pending
before the OEA and the DOF. Additionally, We find no reason to doubt the
submission of respondents that said amount has already been passed upon by the
OEA. Hence, the ruling of respondent COA disapproving said claim must be
upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to
the OPSF from petitioner may be offset against petitioner's outstanding claims
from said fund. Petitioner contends that it should be allowed to offset its claims
from the OPSF against its contributions to the fund as this has been allowed in the
past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New
Civil Code on compensation and Section 21, Book V, Title I-B of the Revised
Administrative Code which provides for "Retention of Money for Satisfaction of
Indebtedness to Government." 52 Petitioner also mentions communications from
the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend
that there can be no offsetting of taxes against the claims that a taxpayer may have
against the government, as taxes do not arise from contracts or depend upon the
will of the taxpayer, but are imposed by law. Respondents also allege that
petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the
COA to withhold payment of a government indebtedness to a person who is also
indebted to the government and apply the government indebtedness to the
satisfaction of the obligation of the person to the government, like authority or
right to make compensation is not given to the private person." 54 The reason for
this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that
money due the government, either in the form of taxes or other dues, is its
lifeblood and should be collected without hindrance. Thus, instead of giving
petitioner a reason for compensation or set-off, the Revised Administrative Code
makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do
not arise as a result of taxation because "P.D. 1956, amended, did not create a
source of taxation; it instead established a special fund . . .," 56 and that the OPSF
contributions do not go to the general fund of the state and are not used for public
purpose, i.e., not for the support of the government, the administration of law, or
the payment of public expenses. This alleged lack of a public purpose behind
OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia
case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund
to support the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay
any oil company which has an outstanding obligation to the Government without
said obligation being offset first, subject to the requirements of compensation or
offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for
a public purpose because they go to a special fund of the government. Taxation is
no longer envisioned as a measure merely to raise revenue to support the existence
of the government; taxes may be levied with a regulatory purpose to provide means
for the rehabilitation and stabilization of a threatened industry which is affected
with public interest as to be within the police power of the state. 57 There can be
no doubt that the oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices could hurt the
lives of a majority of the people and cause economic crisis of untold proportions. It
would have a chain reaction in terms of, among others, demands for wage
increases and upward spiralling of the cost of basic commodities. The stabilization
then of oil prices is of prime concern which the state, via its police power, may
properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the
source of OPSF is taxation. No amount of semantical juggleries could dim this
fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may
have against the government. 58 Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the
oil companies merely act as agents for the Government in the latter's collection
since the taxes are, in reality, passed unto the end-users the consuming public.
In that capacity, the petitioner, as one of such companies, has the primary
obligation to account for and remit the taxes collected to the administrator of the
OPSF. This duty stems from the fiduciary relationship between the two; petitioner
certainly cannot be considered merely as a debtor. In respect, therefore, to its
collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is
likewise legally feasible. Firstly, the Government and the petitioner cannot be said
to be mutually debtors and creditors of each other. Secondly, there is no proof that
petitioner's claim is already due and liquidated. Under Article 1279 of the Civil
Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent.
Such a practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil
companies to offset their claims against their OPSF contributions. Instead, it
prohibits the government from paying any amount from the Petroleum Price
Standby Fund to oil companies which have outstanding obligations with the
government, without said obligation being offset first subject to the rules on
compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered
AFFIRMING the challenged decision of the Commission on Audit, except that
portion thereof disallowing petitioner's claim for reimbursement of underrecovery
arising from sales to the National Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.






[G.R. No. 125704. August 28, 1998

PHILEX MINING CORPORATION, Petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX
APPEALS, Respondents.

D E C I S I O N

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 369751 affirming the Court of
Tax Appeals decision in CTA Case No. 4872 dated March 16, 19952 ordering it to
pay the amount of P110,677,668.52 as excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code
of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st
and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as
follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL
EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

------------------- ----------------- ----------------- ---------------------

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52

========== ========== =========== ===========3crlwvirtualibrry

In a letter dated August 20, 1992,4 Philex protested the demand for payment of the
tax liabilities stating that it has pending claims for VAT input credit/refund for the
taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the
tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-
Suyoc Mines, Inc.5crlwvirtualibrry

In reply, the BIR, in a letter dated September 7, 1992,6 found no merit in Philexs
position. Since these pending claims have not yet been established or determined
with certainty, it follows that no legal compensation can take place. Hence, he BIR
reiterated its demand that Philex settle the amount plus interest within 30 days
from the receipt of the letter.

In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to the Court
of Tax Appeals on November 6, 1992.7 In the course of the proceedings, the BIR
issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which,
applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered
the latters tax obligation of P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth
Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is
still pending litigation, and still has to be determined by this Court (C.T.A. Case
No. 4707). A fortiori, the liquidated debt of the Petitioner to the government
cannot, therefore, be set-off against the unliquidated claim which Petitioner
conceived to exist in its favor (see Compaia General de Tabacos vs. French and
Unson, No. 14027, November 8, 1918, 39 Phil. 34).8crlwvirtualibrry

Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract.9 The dispositive
portion of the CTA decision10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit
and Petitioner is hereby ORDERED to PAY the Respondent the amount of
P110,677,668.52 representing excise tax liability for the period from the 2 nd
quarter of 1991 to the 2 nd quarter of 1992 plus 20% annual interest from August
6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as
amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-G.R. CV No. 36975.11 Nonetheless, on April 8, 1996, the Court
of Appeals affirmed the Court of Tax Appeals observation. The pertinent portion
of which reads:12crlwvirtualibrry

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED
and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a
Resolution dated July 11, 1996.13crlwvirtualibrry

However, a few days after the denial of its motion for reconsideration, Philex was
able to obtain its VAT input credit/refund not only for the taxable year 1989 to
1991 but also for 1992 and 1994, computed as follows:14

Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities15 since both had already
become due and demandable, as well as fully liquidated;16 hence, legal
compensation can properly take place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.17
There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.18 We find no cogent reason to deviate from the
aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court,19 we
categorically held that taxes cannot be subject to set-off or compensation, thus:

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 tax cannot await the results
of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit,20 which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off.

Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved
by the Commissioner,21 is no longer without any support in statutory law.

It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when
the National Internal Revenue Code of 1977 was enacted, the same provision upon
which the Itogon-Suyoc pronouncement was based was omitted.22 Accordingly,
the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within
the time prescribed was unjustified. Philex posits the theory that it had no
obligation to pay the excise liabilities within the prescribed period since, after all, it
still has pending claims for VAT input credit/refund with
BIR.23crlwvirtualibrry

We fail to see the logic of Philexs claim for this is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.24 Evidently, to countenance
Philexs whimsical reason would render ineffective our tax collection system. Too
simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain.25 Hence, a tax does not
depend upon the consent of the taxpayer.26 If any payer can defer the payment of
taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse
to pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government.27 Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund
with the government is immaterial for the imposition of charges and penalties
prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of
the surcharge is mandatory and the BIR is not vested with any authority to waive
the collection thereof.28 The same cannot be condoned for flimsy reasons,29
similar to the one advanced by Philex in justifying its non-payment of its tax
liabilities.

Finally, Philex asserts that the BIR violated Section 106(e)30 of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days,31 when it took five years for the latter to grant its tax claim for VAT input
credit/refund.32crlwvirtualibrry

In this regard, we agree with Philex. While there is no dispute that a claimant has
the burden of proof to establish the factual basis of his or her claim for tax credit or
refund,33 however, once the claimant has submitted all the required documents, it
is the function of the BIR to assess these documents with purposeful dispatch.
After all, since taxpayers owe honesty to government it is but just that government
render fair service to the taxpayers.34crlwvirtualibrry

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had
the BIR been more diligent and judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that simple justice requires the speedy
refund of wrongly-held taxes.35 Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly held in
Roxas v. Court of Tax Appeals:36crlwvirtualibrry

"The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot
kill the 'hen that lays the golden egg.' And, in the order to maintain the general
public's trust and confidence in the Government this power must be used justly and
not treacherously."

Despite our concern with the lethargic manner by which the BIR handled Philex's
tax claim, it is a settled rule that in the performance of governmental function, the
State is not bound by the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation.37 Again, while we understand Philex's
predicament, it must be stressed that the same is not valid reason for the non-
payment of its tax liabilities.

To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims
are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer's claims for refund, the latter can seek judicial remedy before the Court of
Tax Appeals in the manner prescribed by law.38 Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.

Article 27 of the Civil Code provides:

"Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may
file an action for damages and other relief against the latter, without prejudice to
any disciplinary action that may be taken."

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:

"xxx xxx xxx

(c) wilfully neglecting to give receipts, as by law required for any sum collected in
the performance of duty or wilfully neglecting to perform, any other duties
enjoined by law."

Simply put, both provisions abhor official inaction, willful neglect and
unreasonable delay in the performance of official duties.39 In no uncertain terms
must we stress that every public employee or servant must strive to render service
to the people with utmost diligence and efficiency. Insolence and delay have no
place in government service. The BIR, being the government collecting arm, must
and should do no less. It simply cannot be apathetic and laggard in rendering
service to the taxpayer if it wishes to remain true to its mission of hastening the
country's development. We take judicial notice of the taxpayer's generally negative
perception towards the BIR; hence, it is up to the latter to prove its detractors
wrong.

In sum, while we can never condone the BIR's apparent callousness in performing
its duties, still, the same cannot justify Philex's non-payment of its tax liabilities.
The adage "no one should take the law into his own hands" should have guided
Philex's action.

WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is
hereby AFFIRMED.

SO ORDERED.

COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS
COMPANY, respondents.

Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco
and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.

MONTEMAYOR, J.:

This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which
reversed the assessment and decision of petitioner Collector of Internal Revenue,
later referred to as Collector, assessing and demanding from the respondents
Batangas Transportation Company, later referred to as Batangas Transportation,
and Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of
P54,143.54, supposed to represent the deficiency income tax and compromise for
the years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A., but
before the Collector filed his answer in said court, was increased to P148,890.14.

The following facts are undisputed: Respondent companies are two distinct and
separate corporations engaged in the business of land transportation by means of
motor buses, and operating distinct and separate lines. Batangas Transportation
was organized in 1918, while Laguna Bus was organized in 1928. Each company
now has a fully paid up capital of Pl,000,000. Before the last war, each company
maintained separate head offices, that of Batangas Transportation in Batangas,
Batangas, while the Laguna Bus had its head office in San Pablo Laguna. Each
company also kept and maintained separate books, fleets of buses, management,
personnel, maintenance and repair shops, and other facilities. Joseph Benedict
managed the Batangas Transportation, while Martin Olson was the manager of the
Laguna Bus. To show the connection and close relation between the two
companies, it should be stated that Max Blouse was the President of both
corporations and owned about 30 per cent of the stock in each company. During
the war, the American officials of these two corporations were interned in Santo
Tomas, and said companies ceased operations. They also lost their respective
properties and equipment. After Liberation, sometime in April, 1945, the two
companies were able to acquire 56 auto buses from the United States Army, and
the two companies diveded said equipment equally between themselves,registering
the same separately in their respective names. In March, 1947, after the resignation
of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then
managing the Batangas Transportation, was appointed Manager of both companies
by their respective Board of Directors. The head office of the Laguna Bus in San
Pablo City was made the main office of both corporations. The placing of the two
companies under one sole mangement was made by Max Blouse, President of both
companies, by virtue of the authority granted him by resolution of the Board of
Directors of the Laguna Bus on August 10, 1945, and ratified by the Boards of the
two companies in their respective resolutions of October 27, 1947.

According to the testimony of joint Manager Joseph Benedict, the purpose of the
joint management, which was called, "Joint Emergency Operation", was to
economize in overhead expenses; that by means of said joint operation, both
companies had been able to save the salaries of one manager, one assistant
manager, fifteen inspectors, special agents, and one set of office of clerical force,
the savings in one year amounting to about P200,000 or about P100,000 for each
company. At the end of each calendar year, all gross receipts and expenses of both
companies were determined and the net profits were divided fifty-fifty, and
transferred to the book of accounts of each company, and each company "then
prepared its own income tax return from this fifty per centum of the gross receipts
and expenditures, assets and liabilities thus transferred to it from the `Joint
Emergency Operation' and paid the corresponding income taxes thereon
separately".

Under the theory that the two companies had pooled their resources in the
establishment of the Joint Emergency Operation, thereby forming a joint venture,
the Collector wrote the bus companies that there was due from them the amount of
P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949,
inclusive. Since the Collector caused to be restrained, seized, and advertized for
sale all the rolling stock of the two corporations, respondent companies had to file
a surety bond in the same amount of P422,210.89 to guarantee the payment of the
income tax assessed by him.

After some exchange of communications between the parties, the Collector, on
January 8, 1955, informed the respondents "that after crediting the overpayment
made by them of their alleged income tax liabilities for the aforesaid years,
pursuant to the doctrine of equitable recoupment, the income tax due from the
`Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the total
amount of P54,143.54." The respondent companies appealed from said assessment
of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the
Collector set aside his original assessment of P54,143.54 and reassessed the
alleged income tax liability of respondents of P148,890.14, claiming that he had
later discovered that said companies had been "erroneously credited in the last
assessment with 100 per cent of their income taxes paid when they should in fact
have been credited with only 75 per cent thereof, since under Section 24 of the Tax
Code dividends received by them from the Joint Operation as a domestic
corporation are returnable to the extent of 25 per cent". That corrected and
increased reassessment was embodied in the answer filed by the Collector with the
Court of Tax Appeals.

The theory of the Collector is the Joint Emergency Operation was a corporation
distinct from the two respondent companies, as defined in section 84 (b), and so
liable to income tax under section 24, both of the National Internal Revenue Code.
After hearing, the C.T.A. found and held, citing authorities, that the Joint
Emergency Operation or joint management of the two companies "is not a
corporation within the contemplation of section 84 (b) of the National Internal
Revenue Code much less a partnership, association or insurance company", and
therefore was not subject to the income tax under the provisions of section 24 of
the same Code, separately and independently of respondent companies; so, it
reversed the decision of the Collector assessing and demanding from the two
companies the payment of the amount of P54,143.54 and/or the amount of
P148,890.14. The Tax Court did not pass upon the question of whether or not in
the appeal taken to it by respondent companies, the Collector could change his
original assessment by increasing the same from P54,143.14 to P148,890.14, to
correct an error committed by him in having credited the Joint Emergency
Operation, totally or 100 per cent of the income taxes paid by the respondent
companies for the years 1946 to 1949, inclusive, by reason of the principle of
equitable recoupment, instead of only 75 per cent.

The two main and most important questions involved in the present appeal are: (1)
whether the two transportation companies herein involved are liable to the payment
of income tax as a corporation on the theory that the Joint Emergency Operation
organized and operated by them is a corporation within the meaning of Section 84
of the Revised Internal Revenue Code, and (2) whether the Collector of Internal
Revenue, after the appeal from his decision has been perfected, and after the Court
of Tax Appeals has acquired jurisdiction over the same, but before said Collector
has filed his answer with that court, may still modify his assessment subject of the
appeal by increasing the same, on the ground that he had committed error in good
faith in making said appealed assessment.

The first question has already been passed upon and determined by this Tribunal in
the case of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,*
G.R. No. L-9996, promulgated on October 15, 1957. Considering the views and
rulings embodied in our decision in that case penned by Mr. Justice Roberto
Concepcion, we deem it unnecessary to extensively discuss the point. Briefly, the
facts in that case are as follows: The three Evangelista sisters borrowed from their
father about P59,000 and adding thereto their own personal funds, bought real
properties, such as a lot with improvements for the sum of P100,000 in 1943,
parcels of land with a total area of almost P4,000 square meters with improvements
thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still
another lot for P237,000 in the same year. The relatively large amounts invested
may be explained by the fact that purchases were made during the Japanese
occupation, apparently in Japanese military notes. In 1945, the sisters appointed
their brother to manage their properties, with full power to lease, to collect and
receive rents, on default of such payment, to bring suits against the defaulting
tenants, to sign all letters and contracts, etc. The properties therein involved were
rented to various tenants, and the sisters, through their brother as manager, realized
a net rental income of P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948.

In 1954, the Collector of Internal Revenue demanded of them among other things,
payment of income tax on corporations from the year 1945 to 1949, in the total
amount of P6,157, including surcharge and compromise. Dissatisfied with the said
assessment, the three sisters appealed to the Court of Tax Appeals, which court
decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed
the decision of the Tax Court. We found and held that considering all the facts and
circumstances sorrounding the case, the three sisters had the purpose to engage in
real estate transactions for monetary gain and then divide the same among
themselves; that they contributed to a common fund which they invested in a series
of transactions; that the properties bought with this common fund had been under
the management of one person with full power to lease, to collect rents, issue
receipts, bring suits, sign letters and contracts, etc., in such a manner that the
affairs relative to said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit; and that the said sisters had
the intention to constitute a partnership within the meaning of the tax law. Said
sisters in their appeal insisted that they were mere co-owners, not co-partners, for
the reason that their acts did not create a personality independent of them, and that
some of the characteristics of partnerships were absent, but we held that when the
Tax Code includes "partnerships" among the entities subject to the tax on
corporations, it must refer to organizations which are not necessarily partnerships
in the technical sense of the term, and that furthermore, said law defined the term
"corporation" as including partnerships no matter how created or organized,
thereby indicating that "a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax
on corporations"; that besides, said section 84 (b) provides that the term
"corporation" includes "joint accounts" (cuentas en participacion) and
"associations", none of which has a legal personality independent of that of its
members. The decision cites 7A Merten's Law of Federal Income Taxation.

In the present case, the two companies contributed money to a common fund to
pay the sole general manager, the accounts and office personnel attached to the
office of said manager, as well as for the maintenance and operation of a common
maintenance and repair shop. Said common fund was also used to buy spare parts,
and equipment for both companies, including tires. Said common fund was also
used to pay all the salaries of the personnel of both companies, such as drivers,
conductors, helpers and mechanics, and at the end of each year, the gross income
or receipts of both companies were merged, and after deducting therefrom the
gross expenses of the two companies, also merged, the net income was determined
and divided equally between them, wholly and utterly disregarding the expenses
incurred in the maintenance and operation of each company and of the individual
income of said companies.

From the standpoint of the income tax law, this procedure and practice of
determining the net income of each company was arbitrary and unwarranted,
disregarding as it did the real facts in the case. There can be no question that the
receipts and gross expenses of two, distinct and separate companies operating
different lines and in some cases, different territories, and different equipment and
personnel at least in value and in the amount of salaries, can at the end of each year
be equal or even approach equality. Those familiar with the operation of the
business of land transportation can readily see that there are many factors that enter
into said operation. Much depends upon the number of lines operated and the
length of each line, including the number of trips made each day. Some lines are
profitable, others break above even, while still others are operated at a loss, at least
for a time, depending, of course, upon the volume of traffic, both passenger and
freight. In some lines, the operator may enjoy a more or less exclusive exclusive
operation, while in others, the competition is intense, sometimes even what they
call "cutthroat competition". Sometimes, the operator is involved in litigation, not
only as the result of money claims based on physical injuries ar deaths occassioned
by accidents or collisions, but litigations before the Public Service Commission,
initiated by the operator itself to acquire new lines or additional service and
equipment on the lines already existing, or litigations forced upon said operator by
its competitors. Said litigation causes expense to the operator. At other times,
operator is denounced by competitors before the Public Service Commission for
violation of its franchise or franchises, for making unauthorized trips, for
temporary abandonement of said lines or of scheduled trips, etc. In view of this,
and considering that the Batangas Transportation and the Laguna Bus operated
different lines, sometimes in different provinces or territories, under different
franchises, with different equipment and personnel, it cannot possibly be true and
correct to say that the end of each year, the gross receipts and income in the gross
expenses of two companies are exactly the same for purposes of the payment of
income tax. What was actually done in this case was that, although no legal
personality may have been created by the Joint Emergency Operation,
nevertheless, said Joint Emergency Operation joint venture, or joint management
operated the business affairs of the two companies as though they constituted a
single entity, company or partnership, thereby obtaining substantial economy and
profits in the operation.

For the foregoing reasons, and in the light of our ruling in the Evangelista vs.
Collector of Internal Revenue case, supra, we believe and hold that the Joint
Emergency Operation or sole management or joint venture in this case falls under
the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it
is liable to income tax provided for in section 24 of the same code.

The second important question to determine is whether or not the Collector of
Internal Revenue, after appeal from his decision to the Court of Tax Appeals has
been perfected, and after the Tax Court Appeals has acquired jurisdiction over the
appeal, but before the Collector has filed his answer with the court, may still
modify his assessment, subject of the appeal, by increasing the same. This legal
point, interesting and vital to the interests of both the Government and the
taxpayer, provoked considerable discussion among the members of this Tribunal, a
minority of which the writer of this opinion forms part, maintaining that for the
information and guidance of the taxpayer, there should be a definite and final
assessment on which he can base his decision whether or not to appeal; that when
the assessment is appealed by the taxpayer to the Court of Tax Appeals, the
collector loses control and jurisdiction over the same, the jurisdiction being
transferred automatically to the Tax Court, which has exclusive appellate
jurisdiction over the same; that the jurisdiction of the Tax Court is not revisory but
only appellate, and therefore, it can act only upon the amount of assessment subject
of the appeal to determine whether it is valid and correct from the standpoint of the
taxpayer-appellant; that the Tax Court may only correct errors committed by the
Collector against the taxpayer, but not those committed in his favor, unless the
Government itself is also an appellant; and that unless this be the rule, the
Collector of Internal Revenue and his agents may not exercise due care, prudence
and pay too much attention in making tax assessments, knowing that they can at
any time correct any error committed by them even when due to negligence,
carelessness or gross mistake in the interpretation or application of the tax law, by
increasing the assessment, naturally to the prejudice of the taxpayer who would not
know when his tax liability has been completely and definitely met and complied
with, this knowledge being necessary for the wise and proper conduct and
operation of his business; and that lastly, while in the United States of America, on
appeal from the decision of the Commissioner of Internal Revenue to the Board or
Court of Tax Appeals, the Commissioner may still amend or modify his
assessment, even increasing the same the law in that jurisdiction expressly
authorizes the Board or Court of Tax Appeals to redetermine and revise the
assessment appealed to it.

The majority, however, holds, not without valid arguments and reasons, that the
Government is not bound by the errors committed by its agents and tax collectors
in making tax assessments, specially when due to a misinterpretation or application
of the tax laws, more so when done in good faith; that the tax laws provide for a
prescriptive period within which the tax collectors may make assessments and
reassessments in order to collect all the taxes due to the Government, and that if
the Collector of Internal Revenue is not allowed to amend his assessment before
the Court of Tax Appeals, and since he may make a subsequent reassessment to
collect additional sums within the same subject of his original assessment,
provided it is done within the prescriptive period, that would lead to multiplicity of
suits which the law does not encourage; that since the Collector of Internal
Revenue, in modifying his assessment, may not only increase the same, but may
also reduce it, if he finds that he has committed an error against the taxpayer, and
may even make refunds of amounts erroneously and illegally collected, the
taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals
partakes of a trial de novo and the Tax Court is authorized to receive evidence,
summon witnesses, and give both parties, the Government and the taxpayer,
opportunity to present and argue their sides, so that the true and correct amount of
the tax to be collected, may be determined and decided, whether resulting in the
increase or reduction of the assessment appealed to it. The result is that the ruling
and doctrine now being laid by this Court is, that pending appeal before the Court
of Tax Appeals, the Collector of Internal Revenue may still amend his appealed
assessment, as he has done in the present case.

There is a third question raised in the appeal before the Tax Court and before this
Tribunal, namely, the liability of the two respondent transportation companies for
25 per cent surcharge due to their failure to file an income tax return for the Joint
Emergency Operation, which we hold to be a corporation within the meaning of
the Tax Code. We understand that said 25 per cent surcharge is included in the
assessment of P148,890.14. The surcharge is being imposed by the Collector under
the provisions of Section 72 of the Tax Code, which read as follows:

The Collector of Internal Revenue shall assess all income taxes. In case of willful
neglect to file the return or list within the time prescribed by law, or in case a false
or fraudulent return or list is willfully made the collector of internal revenue shall
add to the tax or to the deficiency tax, in case any payment has been made on the
basis of such return before the discovery of the falsity or fraud, a surcharge of fifty
per centum of the amount of such tax or deficiency tax. In case of any failure to
make and file a return list within the time prescribed by law or by the Collector or
other internal revenue officer, not due to willful neglect, the Collector, shall add to
the tax twenty-five per centum of its amount, except that, when the return is
voluntarily and without notice from the Collector or other officer filed after such
time, it is shown that the failure was due to a reasonable cause, no such addition
shall be made to the tax. The amount so added to any tax shall be collected at the
same time in the same manner and as part of the tax unless the tax has been paid
before the discovery of the neglect, falsity, or fraud, in which case the amount so
added shall be collected in the same manner as the tax.

We are satisfied that the failure to file an income tax return for the Joint
Emergency Operation was due to a reasonable cause, the honest belief of
respondent companies that there was no such corporation within the meaning of
the Tax Code, and that their separate income tax return was sufficient compliance
with the law. That this belief was not entirely without foundation and that it was
entertained in good faith, is shown by the fact that the Court of Tax Appeals itself
subscribed to the idea that the Joint Emergency Operation was not a corporation,
and so sustained the contention of respondents. Furthermore, there are authorities
to the effect that belief in good faith, on advice of reputable tax accountants and
attorneys, that a corporation was not a personal holding company taxable as such
constitutes "reasonable cause" for failure to file holding company surtax returns,
and that in such a case, the imposition of penalties for failure to file holding
company surtax returns, and that in such a case, the imposition of penalties for
failure to file return is not warranted1

In view of the foregoing, and with the reversal of the appealed decision of the
Court of Tax Appeals, judgment is hereby rendered, holding that the Joint
Emergency Operation involved in the present is a corporation within the meaning
of section 84 (b) of the Internal Revenue Code, and so is liable to incom tax under
section 24 of the code; that pending appeal in the Court of Tax Appeals of an
assessment made by the Collector of Internal Revenue, the Collector, pending
hearing before said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may on the basis of the
evidence presented before it, redetermine the assessment; that where the failure to
file an income tax return for and in behalf of an entity which is later found to be a
corporation within the meaning of section 84 (b) of the Tax Code was due to a
reasonable cause, such as an honest belief based on the advice of its attorneys and
accountants, a penalty in the form of a surcharge should not be imposed and
collected. The respondents are therefore ordered to pay the amount of the
reassessment made by the Collector of Internal Revenue before the Tax Court,
minus the amount of 25 per cent surcharge. No costs.

Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and
Felix, JJ., concur.
Reyes, A. J., concurs in the result.












EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA
EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General
Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca
Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive
part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the
income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949,
inclusive, in accordance with the respondent's assessment for the same in the total
amount of P6,878.34, which is hereby affirmed and the petition for review filed by
petitioner is hereby dismissed with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00
which amount together with their personal monies was used by them for the
purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot
with an area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of
land with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a
lot of 4,353 sq. m. including improvements thereon for P108,825.00. This property
has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of
8,371 sq. m. including improvements thereon for P237,234.34. This property has
an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother
Simeon Evangelista to 'manage their properties with full power to lease; to collect
and receive rents; to issue receipts therefor; in default of such payment, to bring
suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for them;

7. That after having bought the above-mentioned real properties the petitioners
had the same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the
total amount collected as rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a net rental income of
P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of
P24,786.30, out of which amount was deducted in the sum of P16,288.27 for
expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the
which amount was deducted the sum of P4,837.65 as expenses, thereby leaving
them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal
Revenue demanded the payment of income tax on corporations, real estate dealer's
fixed tax and corporation residence tax for the years 1945-1949, computed,
according to assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners
on December 3, 1954, whereupon they instituted the present case in the Court of
Tax Appeals, with a prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and that they be absolved
from the payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned
decision for the respondent, and a petition for reconsideration and new trial having
been subsequently denied, the case is now before Us for review at the instance of
the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations
and the real estate dealers fixed tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms "corporation" and "partnership," as used
in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of
the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (compaias colectivas), a tax upon such income
equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations or insurance companies, but does not include duly registered general
copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute
money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide
the same among themselves, because:

1. Said common fund was not something they found already in existence. It
was not property inherited by them pro indiviso. They created it purposely. What is
more they jointly borrowed a substantial portion thereof in order to establish said
common fund.

2. They invested the same, not merely not merely in one transaction, but in a
series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On
April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on
April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation
of the aforementioned common fund or even of the property acquired by the
petitioners in February, 1943. In other words, one cannot but perceive a character
of habitually peculiar to business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one
person, namely Simeon Evangelista, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise
operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over
twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality
independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our Internal
Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said section
84(b), the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" which are possessed of the aforementioned personality have
been expressly excluded by law (sections 24 and 84 [b] from the connotation of the
term "corporation" It may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person even if true, on which we express no
opinion tends to increase the similarity between the nature of their venture and
that corporations, and is, therefore, an additional argument in favor of the
imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed
differently from "partnerships". By specific provisions of said laws, such
"corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned
laws.

. . . in any narrow or technical sense. It includes any organization, created for the
transaction of designed affairs, or the attainment of some object, which like a
corporation, continues notwithstanding that its members or participants change,
and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative
capacity. It is immaterial whether such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It includes a voluntary association, a
joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a
'common law' trust, and 'investment' trust (whether of the fixed or the management
type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name
known) which is not, within the meaning of the Code, a trust or an estate, or a
partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis
supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it
includes not only a partnership as known at common law but, as well, a syndicate,
group, pool, joint venture or other unincorporated organizations which carries on
any business financial operation, or venture, and which is not, within the meaning
of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal
Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income
Taxation, p. 562 Note 63; emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code,
includes these partnerships with the exception only of duly registered general
copartnerships within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act
No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing business in
the Philippines shall pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand pesos, in accordance
with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company,
partnership, joint account (cuentas en participacion), association or insurance
company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section
24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No.
466), and that the latter was approved on June 15, 1939, the day immediately after
the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent
that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the
residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the
properties above mentioned for a period of over twelve years, and that the yearly
gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our
National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to
section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and
holding himself out as a full or part time dealer in real estate or as an owner of
rental property or properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed
with costs against the petitioners herein. It is so ordered.





FLORENCIO REYES and ANGEL REYES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX
APPEALS, respondents.

Jose W. Diokno and Domingo Sandoval for petitioners.
Office of the Solicitor General for respondents.

FERNANDO, J.:

Petitioners in this case were assessed by respondent Commissioner of Internal
Revenue the sum of P46,647.00 as income tax, surcharge and compromise for the
years 1951 to 1954, an assessment subsequently reduced to P37,528.00. This
assessment sought to be reconsidered unsuccessfully was the subject of an appeal
to respondent Court of Tax Appeals. Thereafter, another assessment was made
against petitioners, this time for back income taxes plus surcharge and compromise
in the total sum of P25,973.75, covering the years 1955 and 1956. There being a
failure on their part to have such assessments reconsidered, the matter was likewise
taken to the respondent Court of Tax Appeals. The two cases1 involving as they
did identical issues and ultimately traceable to facts similar in character were heard
jointly with only one decision being rendered.

In that joint decision of respondent Court of Tax Appeals, the tax liability for the
years 1951 to 1954 was reduced to P37,128.00 and for the years 1955 and 1956, to
P20,619.00 as income tax due "from the partnership formed" by petitioners.2 The
reduction was due to the elimination of surcharge, the failure to file the income tax
return being accepted as due to petitioners honest belief that no such liability was
incurred as well as the compromise penalties for such failure to file.3 A
reconsideration of the aforesaid decision was sought and denied by respondent
Court of Tax Appeals. Hence this petition for review.

The facts as found by respondent Court of Tax Appeals, which being supported by
substantial evidence, must be respected4 follow: "On October 31, 1950,
petitioners, father and son, purchased a lot and building, known as the Gibbs
Building, situated at 671 Dasmarias Street, Manila, for P835,000.00, of which
they paid the sum of P375,000.00, leaving a balance of P460,000.00, representing
the mortgage obligation of the vendors with the China Banking Corporation, which
mortgage obligations were assumed by the vendees. The initial payment of
P375,000.00 was shared equally by petitioners. At the time of the purchase, the
building was leased to various tenants, whose rights under the lease contracts with
the original owners, the purchasers, petitioners herein, agreed to respect. The
administration of the building was entrusted to an administrator who collected the
rents; kept its books and records and rendered statements of accounts to the
owners; negotiated leases; made necessary repairs and disbursed payments,
whenever necessary, after approval by the owners; and performed such other
functions necessary for the conservation and preservation of the building.
Petitioners divided equally the income of operation and maintenance. The gross
income from rentals of the building amounted to about P90,000.00 annually."5

From the above facts, the respondent Court of Tax Appeals applying the
appropriate provisions of the National Internal Revenue Code, the first of which
imposes an income tax on corporations "organized in, or existing under the laws of
the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (companias colectivas), ...,"6 a term, which
according to the second provision cited, includes partnerships "no matter how
created or organized, ...,"7 and applying the leading case of Evangelista v.
Collector of Internal Revenue,8 sustained the action of respondent Commissioner
of Internal Revenue, but reduced the tax liability of petitioners, as previously
noted.

Petitioners maintain the view that the Evangelista ruling does not apply; for them,
the situation is dissimilar.1wph1.t Consequently they allege that the reliance
by respondent Court of Tax Appeals was unwarranted and the decision should be
set aside. If their interpretation of the authoritative doctrine therein set forth
commands assent, then clearly what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter. A perusal of the Evangelista
decision is therefore unavoidable.

As noted in the opinion of the Court, penned by the present Chief Justice, the issue
was whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National
Internal Revenue Code, ..."9 After referring to another section of the National
Internal Revenue Code, which explicitly provides that the term corporation
"includes partnerships" and then to Article 1767 of the Civil Code of the
Philippines, defining what a contract of partnership is, the opinion goes on to state
that "the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present
in the case at bar, for, admittedly, petitioners have agreed to and did, contribute
money and property to a common fund. Hence, the issue narrows down to their
intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves,
..."10

In support of the above conclusion, reference was made to the following
circumstances, namely, the common fund being created purposely not something
already found in existence, the investment of the same not merely in one
transaction but in a series of transactions; the lots thus acquired not being devoted
to residential purposes or to other personal uses of petitioners in that case; such
properties having been under the management of one person with full power to
lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts
and to endorse notes and checks; the above conditions having existed for more than
10 years since the acquisition of the above properties; and no testimony having
been introduced as to the purpose "in creating the set up already adverted to, or on
the causes for its continued existence."11 The conclusion that emerged had all the
imprint of inevitability. Thus: "Although, taken singly, they might not suffice to
establish the intent necessary to constitute a partnership, the collective effect of
these circumstances is such as to leave no room for doubt on the existence of said
intent in petitioners herein."12

It may be said that there could be a differentiation made between the circumstances
above detailed and those existing in the present case. It does not suffice though to
preclude the applicability of the Evangelista decision. Petitioners could harp on
these being only one transaction. They could stress that an affidavit of one of them
found in the Bureau of Internal Revenue records would indicate that their intention
was to house in the building acquired by them the respective enterprises, coupled
with a plan of effecting a division in 10 years. It is a little surprising then that while
the purchase was made on October 31, 1950 and their brief as petitioners filed on
October 20, 1965, almost 15 years later, there was no allegation that such division
as between them was in fact made. Moreover, the facts as found and as submitted
in the brief made clear that the building in question continued to be leased by other
parties with petitioners dividing "equally the income ... after deducting the
expenses of operation and maintenance ..."13 Differences of such slight
significance do not call for a different ruling.

It is obvious that petitioners' effort to avoid the controlling force of the Evangelista
ruling cannot be deemed successful. Respondent Court of Tax Appeals acted
correctly. It yielded to the command of an authoritative decision; it recognized its
binding character. There is clearly no merit to the second error assigned by
petitioners, who would deny its applicability to their situation.

The first alleged error committed by respondent Court of Tax Appeals in holding
that petitioners, in acquiring the Gibbs Building, established a partnership subject
to income tax as a corporation under the National Internal Revenue Code is
likewise untenable. In their discussion in their brief of this alleged error, stress is
laid on their being co-owners and not partners. Such an allegation was likewise
made in the Evangelista case.

This is the way it was disposed of in the opinion of the present Chief Justice: "This
pretense was correctly rejected by the Court of Tax Appeals."14 Then came the
explanation why: "To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different from
"partnerships". When our Internal Revenue Code includes "partnerships" among
the entities subject to the tax on "corporations", said Code must allude, therefore,
to organizations which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships", which constitute
precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on corporations.
Again, pursuant to said section 84(b), the term "corporation" includes, among
others, "joint accounts, (cuentas en participacion)" and "associations", none of
which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition
essential to the existence of the partnerships therein referred to. In fact, as above
stated, "duly registered general copartnerships" which are possessed of the
aforementioned personality - have been expressly excluded by law (sections 24 and
84[b]) from the connotation of the term "corporation"."15 The opinion went on to
summarize the matter aptly: "For purposes of the tax on corporations, our National
Internal Revenue Code, include these partnerships with the exception only of
duly registered general co-partnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax
for corporations."16

In the light of the above, it cannot be said that the respondent Court of Tax Appeals
decided the matter incorrectly. There is no warrant for the assertion that it failed to
apply the settled law to uncontroverted facts. Its decision cannot be successfully
assailed. Moreover, an observation made in Alhambra Cigar & Cigarette
Manufacturing Co. v. Commissioner of Internal Revenue,17 is well-worth
recalling. Thus: "Nor as a matter of principle is it advisable for this Court to set
aside the conclusion reached by an agency such as the Court of Tax Appeals which
is, by the very nature of its functions, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the
subject, unless, as did not happen here, there has been an abuse or improvident
exercise of its authority."

WHEREFORE, the decision of the respondent Court of Tax Appeals ordering
petitioners "to pay the sums of P37,128.00 as income tax due from the partnership
formed by herein petitioners for the years 1951 to 1954 and P20,619.00 for the
years 1955 and 1956 within thirty days from the date this decision becomes final,
plus the corresponding surcharge and interest in case of delinquency," is affirmed.
With costs against petitioners.

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