Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of
Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget,
FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of
Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section
21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield
or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of
individual partner in the net profits of taxable partnership, (f) adjusted gross income.
2
Petitioner
3
as taxpayer alleges that by
virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from
the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers.
4
He
characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in character
5
For petitioner,
therefore, there is a transgression of both the equal protection and due process clauses
6
of the Constitution as well as of the
rule requiring uniformity in taxation.
7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an
answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982.
8
The facts as alleged
were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the
petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses."
9
The answer then affirmed:
"Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or
paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired
Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was
called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the
need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the
powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There
are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and
equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to
destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes."
16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could
rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that
runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner
here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on
the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice.
There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a
provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due
process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a
need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity
must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in
the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear
abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority
not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax
measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate
whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the
governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of
hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed.
For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical
are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same
fashion, whatever restrictions cast on some in the group equally binding on the rest."
20
That same formulation applies as well to
taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of the
laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the
very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The
equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are
expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies.
The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the
same."
21
Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in
a leading case of Lutz V. Araneta,
22
this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in
the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'"
23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be
uniform and equitable."
24
This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco,
25
decided in
1940, when the tax "operates with the same force and effect in every place where the subject may be found. "
26
He likewise
added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable."
27
The
problem of classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held:
"Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... .
28
As
clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it
"is not discriminatory within the meaning of this clause and is therefore uniform."
29
There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed
in similar situation."
30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax
rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at
the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough
that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application
of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no
overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is
no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities
by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income.
There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to
show the arbitrary character of the assailed provision;
31
(2) the force of controlling doctrines on due process, equal protection,
and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of
professionals and businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
Equal Protection
Sison assails the validity of BP 135 w/c further amended Sec 21 of the National Internal Revenue Code of 1977. The law provides
that thered be a higher tax impost against income derived from professional income as opposed to regular income earners.
Sison, as a professional businessman, and as taxpayer alleges that by virtue thereof, he would be unduly discriminated against
by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers. He characterizes the above section as arbitrary amounting to class
legislation, oppressive and capricious in character. There is a transgression of both the equal protection and due process
clauses of the Constitution as well as of the rule requiring uniformity in taxation.
ISSUE: Whether the imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
HELD: The SC ruled against Sison. The power to tax, an inherent prerogative, has to be availed of to assure the performance of
vital state functions. It is the source of the bulk of public funds. Taxes, being the lifeblood of the government, their prompt and
certain availability is of the essence. According to the Constitution: The rule of taxation shall be uniform and equitable.
However, the rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. Equality
and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the
differentiation complained of conforms to the practical dictates of justice and equity it is not discriminatory within the
meaning of this clause and is therefore uniform. There is quite a similarity then to the standard of equal protection for all that is
required is that the tax applies equally to all persons, firms and corporations placed in similar situation.
What misled Sison is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal
objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the
applicable tax rate. Taxpayers may be classified into different categories. In the case of the gross income taxation embodied in
BP 135, the discernible basis of classification is the susceptibility of the income to the application of generalized rules removing
all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers
who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers
are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other
hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net
income taxation as regards professional and business income.













Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 195909 September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
D E C I S I O N
CARPIO, J.:
The Case
These are consolidated
1
petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19
November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution
2
of 1 March 2011 in CTA Case No. 6746. This Court
resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its articles of
incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific
hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled persons; provided
that purely medical and surgical services shall be performed by duly licensed physicians and surgeons who may be freely
and individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the community through organized
clinics in such specialties as the facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as well as provide facilities for
scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by the facilities,
personnel, funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both government and private sector; establish rules and
regulations consistent with the highest professional ethics;
x x x x
3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to P76,063,116.06
for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax.
The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA.
4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did
not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of
proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-
profit corporations under Section 26 of the 1997 Tax Code x x x."
5
It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare.
6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits and assets. St.
Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998.
7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients was P218,187,498
or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of P334,642,615.
8
St. Luke's also claimed
that its income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section
30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B) applies to
St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out
of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable
income. The BIR prays that St. Luke's be ordered to pay P57,659,981.19 as deficiency income and expanded withholding tax for
1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its income,
9
as
well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake such a factual review.
Under the Constitution
10
and the Rules of Court,
11
this Court's review power is generally limited to "cases in which only an error
or question of law is involved."
12
This Court cannot depart from this limitation if a party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009 which
held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency
VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN.
However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.
x x x x
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of
P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED.
13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's to prove
that part of its income in 1998 (declared as "Other Income-Net")
14
came from charitable activities. The CTA cancelled the
remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC,
which the CTA En Banc held was not applicable to St. Luke's.
15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the NIRC.
This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-paying. The CTA
reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue,
16
which examined the
primary purposes of St. Luke's under its articles of incorporation and various documents
17
identifying St. Luke's as a charitable
institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City,
18
which states that "a charitable institution does not
lose its charitable character and its consequent exemption from taxation merely because recipients of its benefits who are able
to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution x x x."
19
The generation of income from paying patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue,
20
which ruled that the old NIRC
(Commonwealth Act No. 466, as amended)
21
"positively exempts from taxation those corporations or associations which,
otherwise, would be subject thereto, because of the existence of x x x net income."
22
The NIRC of 1997 substantially reproduces
the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever
there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least
insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should
always strive, whenever possible, to have a surplus."
23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's.
24
The CTA explained that to apply the 10%
preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand, Congress specifically used the word
"non-stock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique
in the present tax code, indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does
not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively
for charitable purpose are exempt from income tax on income received by them as such, applying the provision of Section 30(E)
of the NIRC of 1997, as amended."
25

The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a
preferential tax rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual issues.
Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly set
forth." St. Luke's cites Martinez v. Court of Appeals
26
which permits factual review "when the Court of Appeals [in this case, the
CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion."
27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the testimony
of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x."
28
This is not a
case of overlooking or failing to consider relevant evidence. The CTA obviously considered the evidence and concluded that it is
self-serving. The CTA declared that it has "gone through the records of this case and found no other evidence aside from the
self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x."
29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section 248(A)(3) of
the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment[.]"
30

St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC.
31
As explained by the CTA En Banc,
the amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only deficiency interest under
Section 249(A) and (B) of the NIRC and not delinquency interest.
32

The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of 1997 vis-
-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10% income tax rate
under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit hospitals. The BIR
argues that Congress intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the
NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of 1997.
33
Section 27(B) of the present NIRC
provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
x x x x
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit
shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the
gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by
such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade,
business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting from
income tax non-stock, non-profit charitable institutions.
34
St. Luke's asserts that the legislative intent of introducing Section
27(B) was only to remove the exemption for "proprietary non-profit" hospitals.
35
The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to
income received by them as such:
x x x x
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person;
x x x x
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
x x x x
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not
remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand,
and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect
of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions
36
and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school
maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or
asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu,
37
this Court
considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club
was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its
golf course.
38
The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making
enterprise.
39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in Lung
Center of the Philippines v. Quezon City
40
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 [by] otherwise lessening the burden of government."
41
A non-profit club for the benefit of its
members fails this test. An organization may be considered as non-profit if it does not distribute any part of its income to
stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in
Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other
words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would
have been funded by appropriations from the Treasury.
42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of Congress."
43
The requirements for a tax exemption are strictly construed
against the taxpayer
44
because an exemption restricts the collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption
from real property taxes. This ruling uses the same premise as Hospital de San Juan
45
and Jesus Sacred Heart College
46
which
says that receiving income from paying patients does not destroy the charitable nature of a hospital.
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.
47

For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the
property. The Constitution provides that "[c]haritable institutions, churches and personages 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."
48
The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used
a portion of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove from the tax
exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income
tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any
specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes.
The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other
constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is
defined by the Corporation Code as "one where no part of its income is distributable as dividends to its members, trustees, or
officers"
49
and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized."
50
However, under Lung Center, any profit by
a charitable institution must not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve."
51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to
or inure to the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements
of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the
test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article
VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized
and operated exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires
that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing
that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit,
such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements
in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable
x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless
allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction
of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital
which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit."
52
Indeed, St. Luke's
admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed
the following "calculation" to support its claim that 65.20% of its "income after expenses was allocated to free or charitable
services" in 1998.
53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00
OPERATING EXPENSES
Professional care of patients P1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
P1,395,725,350.00
INCOME FROM OPERATIONS P334,642,615.00 100%
Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

In Lung Center, this Court declared:
"[e]xclusive" 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." x x x The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law.
Solely is synonymous with exclusively.
54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over
and above the cost" of services.
55
The P1.73 billion total revenues from paying patients is not even incidental to St. Luke's
charity expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the
remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-
paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is
intended to achieve."
56
The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well.
In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity conducted for
profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference
for the Senate, which introduced the phrase "or from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad esencial dicho
hospital para el funcionamiento del colegio de medicina de dicha universidad?
x x x x
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital tiene
cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social econmica, lo que se paga por estos
enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from
any activity conducted for profit.'
57

The question was whether having a hospital is essential to an educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress inserted the
phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an educational institution.
58
However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for
profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this reason alone,
completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar
as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the
expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to
institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has good
reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable
and social welfare purposes"59 and thus exempt from income tax.
60
In Michael J. Lhuillier, Inc. v. Commissioner of Internal
Revenue,
61
the Court said that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and
interest."
62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the
Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are
MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential
income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and interest
on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision
and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.








Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22814 August 28, 1968
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees.
Sabido, Sabido and Associates for plaintiff-appellant.
The City Attorney of Butuan City for defendants-appellees.
CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal place of business in
Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its municipal board and its City Treasurer.
Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter referred to as the City and collected by the
latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which
plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties submitted the case for decision in the
lower court upon a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola" soft drinks for sale
to customers in the City of Butuan and all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft
drinks are bottled in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City
of Butuan and all municipalities of Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently amended by
Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No.
122 are incorporated herein as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of
Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and the
amount of P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03 paid under protest
and those that if may later on pay until the termination of this case on the ground that Ordinance No. 110 as amended
of the City of Butuan is illegal, that the tax imposed is excessive and that it is unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared a form to be
accomplished by the plaintiff for the computation of the tax. A copy of the form is enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30, 1961 of its
warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this Profit and Loss Statement, the
defendants claim that the plaintiff is not entitled to a depreciation of P3,052.63 but only P1,202.55 in which case the
profit of plaintiff will be increased from P1,254.44 to P3,104.52. The plaintiff differs only on the claim of depreciation
which the company claims to be P3,052.62. This is in accordance with the findings of the representative of the
undersigned City Attorney who verified the records of the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased to P1.92 which price
is uniform throughout the Philippines. Said increase was made due to the increase in the production cost of its
manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality and illegality of Ordinance No. 110, as
amended of the City of Butuan in their respective memoranda.
x x x x x x x x x1wph1.t
Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview thereof. Section 2
provides for the payment by "any agent and/or consignee" of any dealer "engaged in selling liquors, imported or local, in the
City," of taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and carbonated
beverages therein named, and "all other soft drinks or carbonated drinks." Section 3-A, defines the meaning of the term
"consignee or agent" for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar
month." Pursuant to Section 5, the taxes "shall be based and computed from the cargo manifest or bill of lading or any other
record showing the number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks received within the
month." Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes within the period prescribed and the
penalties imposable for "deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or for failure "to furnish the
office of the City Treasurer a copy of the bill of lading or cargo manifest or record of soft drinks, liquors or carbonated drinks for
sale in the City." Section 9 makes the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside" but
"sold within" the City. Section 10 of the ordinance provides that the revenue derived therefrom "shall be alloted as follows: 40%
for Roads and Bridges Fund; 40% for the General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an import tax; (2) it
amounts to double taxation; (3) it is excessive, oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5)
section 2 of Republic Act No. 2264, upon the authority of which it was enacted, is an unconstitutional delegation of legislative
powers.
The second and last objections are manifestly devoid of merit. Indeed independently of whether or not the tax in question,
when considered in relation to the sales tax prescribed by Acts of Congress, amounts to double taxation, on which we need not
and do not express any opinion - double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as
part thereof, the injunction against double taxation found in the Constitution of the United States and of some States of the
Union.
1
Then, again, the general principle against delegation of legislative powers, in consequence of the theory of separation of
powers
2
is subject to one well-established exception, namely: legislative powers may be delegated to local governments to
which said theory does not apply
3
in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or carbonated drinks in the
production and sale of which plaintiff is engaged or less than P0.0042 per bottle, is manifestly too small to be excessive,
oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this connection, it is noteworthy that the tax
prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers "engaged in selling" soft drinks
or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise. As amended
by Ordinance No. 122, the tax is, however, imposed only upon "any agent and/or consignee of any person, association,
partnership, company or corporation engaged in selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which
was inserted by said Ordinance No. 122:
... Definition of the Term Consignee or Agent. For purposes of this Ordinance, a consignee of agent shall mean any
person, association, partnership, company or corporation who acts in the place of another by authority from him or one
entrusted with the business of another or to whom is consigned or shipped no less than 1,000 cases of hard liquors or
soft drinks every month for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the tax, unless they are
agents and/or consignees of another dealer, who, in the very nature of things, must be one engaged in business outside the City.
Besides, the tax would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or
shipped to him every month. When we consider, also, that the tax "shall be based and computed from the cargo manifest or bill
of lading ... showing the number of cases" not sold but "received" by the taxpayer, the intention to limit the application of
the ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from
this angle, the tax partakes of the nature of an import duty, which is beyond defendant's authority to impose by express
provision of law.
4

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be invalid, as
discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by
"agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other
merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of
producers or merchants established outside the City of Butuan, would be exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under
all circumstances, or negate the authority to classify the objects of taxation.
5
The classification made in the exercise of this
authority, to be valid, must, however, be reasonable
6
and this requirement is not deemed satisfied unless: (1) it is based upon
substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the
classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the
present; and (4) the classification applies equally all those who belong to the same class.
7

These conditions are not fully met by the ordinance in question.
8
Indeed, if its purpose were merely to levy a burden upon the
sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealers other than agents or consignees of
producers or merchants established outside the City of Butuan should be exempt from the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered annulling Ordinance No. 110, as
amended by Ordinance No. 122, and sentencing the City of Butuan to refund to plaintiff herein the amounts collected from and
paid under protest by the latter, with interest thereon at the legal rate from the date of the promulgation of this decision, in
addition to the costs, and defendants herein are, accordingly, restrained and prohibited permanently from enforcing said
Ordinance, as amended. It is so ordered.
Political Law Uniformity in Taxation
In 1960, Ordinance 110 was passed in Butuan. It was later amended by Ordinance 122. This Ordinance imposes a tax on any
person, association, etc., of P0.10 per case of 24 bottles of Pepsi- Cola. Pepsi operates within the Butuan and it paid under
protest the amount of P4.926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30,
1961. Pepsi filed a complaint for the recovery of the total amount of P14,177.03 paid under protest and those that it may later
on pay until the termination of this case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that
the tax imposed is excessive and that it is unconstitutional. Pepsi averred it is unconstitutional because it partakes of the nature
of an import tax and it is highly unjust and discriminatory.
ISSUE: Whether or not the Ordinance is valid.
HELD: The tax prescribed in sec 3 of Ordinance No. 110, as originally approved, was imposed upon dealers engaged in selling
soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise. As
amended by Ord No. 122, the tax is, however, imposed only upon any agent and/or consignee of any person, association,
partnership, company or corporation engaged in selling . . . soft drinks or carbonated drinks. As a consequence, merchants
engaged in the sale of soft drinks or carbonated drinks, are not subject to the tax, unless they are agents and/or consignees of
another dealer, who, in the very nature of things, must be one engaged in business outside the City. Besides, the tax would not
be applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every
month. When we consider, also, that the tax shall be based and computed from the cargo manifest or bill of lading . . . showing
the number of cases not sold but received by the taxpayer, the intention to limit the application of the ordinance to soft
drinks and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax
partakes of the nature of an import duty, which is beyond defendants authority to impose by express provision of law. It is true
that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all
circumstances, or negate the authority to classify the objects of taxation. The classification made in the exercise of this
authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: (1) it is based upon
substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the
classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the
present; and (4) the classification applies equally to all those who belong to the same class. These conditions are not fully met by
the ordinance in question. Indeed, if its purpose were merely to levy a burden upon the sale of soft drinks or carbonated
beverages, there is no reason why sales thereof by dealers other than agents or consignees of producers or merchants
established outside the City of Butuan should be exempt from the tax.














G.R. No. L-30351 September 11, 1974
AUREA BAEZ and RAMON BAEZ Substituted by their legal heir, OSCAR VIRATA BAEZ, petitioners,
vs.
COURT OF APPEALS and PIO ARCILLA, respondents.
Domingo A. Songalia for petitioners.
Arsenio R. Reyes for respondent.

ZALDIVAR, J.:p
A petition for review of the decision of the Court of Appeals in C.A. G.R. No. 36227-R (Pio Arcilla, plaintiff-appellant, versus Aurea
Baez, Ramon Baez and People's Homesite and Housing Corporation, defendants-appellees).
The pertinent facts or the case are as follows: In 1956 respondent Pio Arcilla occupied a parcel of land, later known as Lot 5,
Block E-130 East Avenue Subdivision, Diliman, Quezon City, owned by the People's Homesite and Housing Corporation
(hereinafter referred to as PHHC). He fenced the lot with wire, and erected a house and made some plantings thereon. His
moves to apply for the acquisition of the lot from the PHHC when the same became available for disposition came to naught
because the employees of the PHHC whose help he sought merely regaled him with promises that the matter would be
attended to. Nevertheless, his occupancy was made a matter of record with the PHHC in connection with a census of occupants
and squatters taken some time later.
Notwithstanding respondent Arcilla's occupancy, the lot was awarded, on May 20, 1960, to Cristeta L. Laquihon pursuant to a
conditional contract to sell executed by the PHHC, subject to the standard resolutory conditions imposed upon grants of similar
nature, including the grantee's undertaking to eject trespassers, intruders or squatters on the land, and to construct a residential
house on the lot within a period of one year from the signing of the contract, non-compliance with, which conditions would
result in the contract being "deemed annulled and cancelled". Respondent Arcilia had no notice of this award, and neither did
the grantee nor the PHHC take any step to oust him from the premises occupied by him. It was only on April 29, 1963 that he
was first required to leave the area aforesaid.
Meanwhile, on May 9, 1962, grantee Cristeta L. Laquihon died, survived by her father, Basilio Laquihon, who, on July 27, 1962,
executed a deed of adjudication in his favor of the rights and interests thus far acquired by his deceased daughter over the lot in
question. In said deed Basilio Laquihon also acknowledged an indebtedness of the deceased to herein petitioner Aurea V. Baez
in the sum of P3,000.00 and agreed to assign the rights thus adjudicated by way of payment of the debt. The corresponding
request for the transfer of the rights from Cristeta to Basilio L. Laquihon was made by the latter to the PHHC on August 9, 1962,
while an undated request for the approval of the assignment of said land to Aurea V. Baez as above stated was similarly filed
with the PHHC.
The PHHC referred the requests for transfer and for assignment to its Head Executive Assistant, Olimpio N. Epis, for study. Mr.
Epis. in his memorandum, opined that, because the grantee failed, among others, to construct a residential house on the land
within the period provided in the conditional contract, the grantee's rights under the contract were forfeited and, accordingly,
she did not acquire any right which could be transmitted upon her death to her alleged successor, Basilio Laquihon. Hence, he
recommended the disapproval of the petition for transfer. It appears, however, that the unfavorable recommendation of Mr.
Epis was not acted upon by the Board of the PHHC but, instead, was returned by the General Manager to Mr. Epis with verbal
instructions to restudy the matter. After a restudy, Mr. Epis changed his opinion, and considered the transfers from Cristeta L.
Laquihon to Basilio Laquihon, and from the latter to Aurea V. Baez, to be proper and meritorious, and recommended the
approval of the same. This was in conformity with a previous recommendation made by PHHC's Homesite Sales Supervisor,
Roman Carreaga, to the PHHC's General Manager. On November 15, 1962, PHHC's Board of Directors adopted Resolution No.
200 approving the transfer of rights from Basilio Laquihon to Aurea V. Baez as a meritorious case. The transfer thus approved,
petitioner Aurea V. Baez continued paying the installments on the purchase price of the land.
Respondent Pio Arcilia did not know of the foregoing developments until sometime in 1963 when he was given notice to vacate
the lot occupied by him. He then interposed a protest against the award and transfer to petitioner Aurea V. Baez, claiming that
the original awardee acquired no rights to the aforesaid lot and that the transferee was disqualified from acquiring lots of the
PHHC. Since the PHHC's Board of Directors had theretofore approved the transfer objected to, the Administrative Investigating
Committee, to whom the protest was referred for resolution, considered itself without any further power to review the action of
the Board, and accordingly dismissed the protest. In the meantime, petitioner Aurea V. Baez completed the installment
payments on the land, and on October 29, 1964, the PHHC executed the corresponding deed of sale over the lot in her favor.
Thus left without recourse before the PHHC, respondent Arcilla went to court with his complaint to nullify the award of the lot in
question in favor of petitioner Aurea V. Baez and to compel the PHHC to award the same to him, with prayer for attorney's fees
and costs. After trial on the merits, the court a quo found for petitioners and accordingly decreed the dismissal of respondent's
complaint, without costs.
Respondent Arcilla appealed to the Court of Appeals, which rendered the decision sought to be reviewed, the dispositive portion
of which decision reads thus:
WHEREFORE, the judgment appealed from is hereby reversed and, in lieu thereof, another is hereby rendered
declaring null and void the transfer of rights over and award of lot 5, Block B-130, East Avenue Subdivision of
appellee PHHC, in favor of appellee Aurea Baez and ordering appellee People's Homesite and Housing
Corporation to afford appellant Pio Arcilla the opportunity, within thirty (30) days from the finality of this
decision, to perfect his preferential right to purchase said lot and thereafter to execute and deliver such deed
and documents necessary to consummate the sale to said appellant.
Seeking a review of the decision, petitioners filed the instant petition. During its pendency, petitioner Ramon Baez died on
March 30, 1972, and petitioner Aurea Baez also died on August 11, 1972, and the motion to have their heir, Oscar Virata Baez,
substituted for them, was granted by this Court on October 9, 1972.
Petitioners in their Brief made assignments of error, as follows:
1. That the Court of Appeals erred in holding that the respondent Pio Arcilla has the personality to seek the
annulment of the award and sale, of Lot 5, Block E-130, East Avenue Subdivision, Diliman, Quezon City,
belonging to the PHHC, to the applicant Cristela L. Laquihon on May 20, 1960, by PHHC, and the transfer of her
rights over the lot by her father Basilio Laquihon to the petitioner Aurea Baez in payment of the indebtedness
of Cristeta L. Laquihon to the petitioner Aurea Baez in the amount of P3,000.00;
2. The Court of Appeals erred in holding that the respondent Pio Arcilla has a preferential right to purchase the
lot in question, lot 5, block E-130, East Avenue Subdivision, Quezon City, of the People's Homesite and Housing
Corporation;
3. That the Court of Appeals erred in holding that the award of the lot in question to Cristeta L. Laquihon, made
on May 20, 1960 was null and void, because said awardee failed to construct a house in the lot within a period
of one (1) year from the signing of the contract to sell and, therefore, upon the death of Cristeta L. Laquihon on
May 9, 1962, she transferred no rights to her father Basilio Laquihon and said Basilio Laquihon could not validly
sell his rights of the lot in question to the petitioners;
4. That the Court of Appeals erred in holding that the approval of the transfer of rights of the late Cristeta L.
Laquihon by her father Basilio Laquihon to the petitioner Aurea Baez was due to the intercession of the then
Senator Estanislao Fernandez; and
5. That the Court of Appeals erred in holding that the petitioners are not qualified to acquire the lot in question
for having allegedly a lot in San Juan, Rizal.
1. Article 1397 of the Civil Code provides that the action for annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. Hence strangers to the contract who are not bound thereby have neither the right nor the
personality to bring an action to annul such contract. It cannot be gainsaid that respondent Pio Arcilla was a stranger to, and not
bound principally or subsidiarily by, the conditional contract to sell executed on May 20, 1960 by the PHHC in favor of Cristeta L.
Laquihon, and the transfer of rights over the same lot from Basilio Laquihon to Aurea V. Baez. Hence respondent Pio Arcilla
could not bring an action to annul the same.
There is, however, an exception to the rule laid down in Article 1397. This Court, in Teves vs. People's Homesite and Housing
Corporation, L-21498, June 27, 1968
1
citing Ibaez vs. Hongkong and Shanghai Bank
2
, held that "a person who is not a partly
obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudiced in his rights
with respect to one of the contracting parties, and can show the detriment which would positively result to him from the
contract in which he had no intervention." Pursuant to said doctrine, in order that respondent Pio Arcilla might bring an action
for the nullity of the contracts aforesaid, he should have been not only prejudiced in his rights with respect to one of the
contracting parties, but must have also shown the detriment which he would positively suffer from the contracts. It becomes,
therefore, necessary to inquire, whether respondent Pio Arcilla's rights were prejudiced by the aforesaid contracts, and as to
what detriment, if any, he suffered because of those contracts.
What rights of respondent Pio Arcilla were prejudiced? The Court of Appeals found that Pio Arcilla "makes no pretense that he
entered into and built his land upon appellee PHHC's land with the consent of the latter." Pio Arcilia was, therefore, a trespasser,
or a squatter, he being a person who settled or located on land, in closed or uninclosed with "no bona fide claim or color of title
and without consent of the owner."
3
He began his material possession of the lot in bad faith, knowing that he did not have a
right thereto, and it is presumed that his possession continued to be enjoyed in the same character in which it was acquired, i.e.
in bad faith until the contrary is proved.
4
And what right can a squatter have to the land into which he has intruded against the
owner of the land? The answer is not hard to find, A squatter can have no possessory rights whatsoever, and his occupancy of
the land is only at the owner's sufferance, his acts are merely tolerated and cannot affect the owner's possession.
5
The squatter
is necessarily bound to an implied promise, that he will vacate upon demand.
This Court, in Bernardo et al. vs. Bernardo and Court of Appeals
6
, laid down the doctrine that:
In carrying out its social re-adjustment policies, the government could not simply lay aside moral standards, and
aim to favor usurpers, squatters, and intruders, unmindful of the lawful or unlawful origin and character of their
occupancy. Such a policy would perpetuate conflicts instead of attaining their just solution.
Respondent Pio Arcilla, having no possessory rights whatsoever, what detriment could be have suffered from the aforesaid
contracts?
The Court of Appeals, however, held that respondent Pio Arcilia had a right to purchase the lot occupied by him. The discussion
of this alleged right brings us to the second assignment of error.
2. We find merit in petitioners' second assignment of error. Relying on the decision of the Court of Appeals, respondent Arcilia
anchored his alleged preferential right to purchase Lot 5, Block E-130 on Resolution No. 562 of PHHC's Board of Directors, dated
June 27, 1963, which reads as follows:
(1) No preference, advantage or benefit shall be given to squatters in the allocation of PHHC residential lots by
reason alone of their prior occupancy thereof, but they shall be treated on the same footing as other qualified
applicants. Squatters who are found qualified and deserving shall be given preferential awards only in PHHC
resettlement projects, if they voluntarily comply with PHHC rules and policies without waiting to be evicted thru
court proceedings.
and on Resolution No. 558, dated April 16, 1962, which approved the recommendations of its Acting Legal Officer. The
recommendations included the proposed "Application Forms No. 6-D and No. 6-F" for non-occupants and occupants or
squatters, respectively, and provided, among others, that:
(6) The Sales and Management Department should have a ready and up-to- date census of all lots occupied by
squatters within PHHC subdivisions open for sale or award, in order that lots occupied by squatters who are not
qualified to buy the same, or who do not merit an award shall not be awarded to anybody until the PHHC has
obtained a final court decision for the eviction of such squatter. (Exhibit 1-B).
It should not be lost sight of, however, that according to the decision of the Court of Appeals, "Time there may have been,
perhaps, when occupancy of a lot without the consent of said appellee was not recognized at all as basis for a claim to a right to
purchase said lot;" and that "on the face of the evidence presented before us in this case, we note a clear shift in policy in the
disposition of lots of appellee PHHC," and the shift in policy was evidenced by the afore-quoted resolutions.
If the afore-quoted resolutions relied upon by respondent Arcilla were evidence of the shift of policy, then, it stands to reason
that before the adoption of said resolutions, the policy of the PHHC was different; otherwise, there would have been no reason
for a change of policy. Resolution No. 562 was dated June 27, 1963. Hence the policy before June 27, 1963 was different. In fact
even the Court of Appeals noted that before said date, "occupancy of a lot" was perhaps "not recognized at all as a basis for a
claim of a right to purchase said lot." Hence at the time Lot No. 5 was awarded to Cristeta L. Laquihon on May 20, 1960, and at
the time the PHHC approved the transfer of original awardee's rights to herein petitioners on Nov. 15, 1962, it was not yet the
policy of the PHHC to recognize mere occupancy of a lot as giving a right to purchase the same, for said Policy was adopted only
later, i.e. on June 27, 1963.
Moreover, it is not stated expressly in the above-quoted resolutions, and neither can it be necessarily implied therefrom, that
the occupant was given a preferential right to purchase the lot he occupied. In fact Resolution No. 562 explicitly states that
although a squatter shall be treated on the same footing as other qualified applicants, said occupant has no preference at all by
reason of said occupancy. In the instant case, it is not even shown, although it was taken for granted, that respondent Pio Arcilia
was a qualified applicant who should be treated on the Same footing as others. The fact is that said respondent never filed an
application for the lot, so he cannot be a qualified applicant. A squatter found to be qualified and deserving was to be given
preferential award, not necessarily to the same lot he occupies but only in PHHC resettlement projects; and it does not appear
that Lot 5, Block E-130, in question, is in a resettlement project.
Furthermore, said preferential award in resettlement projects is granted only in case the squatter is not evicted through court
proceedings. In the instant case, respondent Arcilla had been ejected from the lot through court proceedings in Civil Case No. IV-
11691 of the City Court of Quezon City. If a squatter was given a Preferential right to the lot he occupies, how come that the
same resolution No. 562 also provided that "No administrative case shall be entertained on the basis alone of a squatter's claim
of prior or actual occupancy of PHHC lot?"
We hold that the claim, of respondent Pio Arcilla to the alleged preferential right to purchase Lot 5, Block E-130, had not been
substantiated.
3. Respondent Arcilla argues that the awardee of the lot, Cristeta L. Laquihon, did not comply with the resolutory condition of
building a house; so, she acquired no rights that could be transmitted to her father.
This Court cannot sustain respondent's stand.
This Court of Appeals stated in its decision that the contract to sell, dated May 20, 1960, executed by the PHHC in favor of
Cristeta L. Laquihon was.
Subject to the standard resolutory conditions imposed upon grants of similar nature, including the grantee's
undertaking to eject trespassers, intruders or squatters on the land and to 'construct a residential house on the
lot and shall complete the same within a period of (1) year from the signing of this contract with no extension,'
the non-compliance with which results in the contract being 'deemed annulled and cancelled (Exhibit 7).
Because no residential house, continued the Court of Appeals, was ever erected by the awardee on the premises not even
until she died on May 9, 1962, "she failed to comply with a condition of the award, the non-compliance with which has a
resolutory effect upon the award," such that when Cristeta L. Laquihon died, she acquired no vested right in the land, and she
transmitted nothing to her father, Basilio Laquihon, who, on his part, could not have transferred any right to petitioners Baez.
It is granted that by virtue of the resolutory condition, the resolution of the contract took place by force of law and that there
was no need of judicial declaration to resolve the contract. Civilists, however, are not agreed on whether the injured party
retains the option of demanding fulfillment or rescission of the obligation as provided in Article 1191 or not. Thus Collin y
Capitant, Curson Elemental de Derecho Civil, Vol. III, p. 750 says:
En la hipotesis de una clausula del contrato que pronuncie una resolucion eventual, hay que proclamar la validez
de tal clausula en el Derecho espanol siempre que no aparezca por sus circumstancias como contraria a la ley o a
las buenas costumbres.
El efecto de tal clausula sera que la resolucion se produzca de pleno derecho, sin intervencion judicial; pero
entendemos que, a pesar de ella el acreedor conservara el derecho de opcion que le concede el art. 1124 [Art.
1191 of the Civil Code of the Philippines] a no ser que la clausula misma resulte otra cosa.
Manresa, in Commentaries al Codigo Civil Espanol, 1967, Vol. VIII, p. 416, however, says that the stipulated resolution of the
contract in case one of the parties does not comply with his undertaking is produced by force of law, but the option of the
injured party disappears.
If the creditor could still demand, in spite of the resolution ipso jure of the contract, then the resolution would not be mandatory
on the creditor and the resolution would produce its effect when the creditor notified the debtor of his decision. (Tolentino, Civil
Code of the Philippines, Vol. IV, p. 175.)
It is certain, therefore, that the said contract to sell in the instant case was by virtue of the stipulated resolutory conditions
resolved by operation of law. But the Court of Appeals overlooked in the instant case the express provision of the contract to sell
that said resolution becomes effective only from the date written notice thereof is sent by the PHHC to the applicant. Thus
paragraph 12 of the contract to sell (Exhibit 7) provides:
12. Should the APPLICANT violate, refuse or fail to comply with any of the terms and conditions stipulated herein
or default in the payment of three monthly installments as provided for in paragraph 1 hereof, this contract shall
be deemed annulled and cancelled and the CORPORATION shall be at liberty to dispose of said property to any
other person in the same manner as if the contract had never been made ... The annulment and cancellation
and the right of the CORPORATION to repossess the property shall become effective from the date written
notice thereof is sent by the CORPORATION to the APPLICANT at his last known post-office address ...
The record does not show, and the decision of the Court of Appeals does not state, that the PHHC ever notified in writing the
awardee of the cancellation of the contract to sell. Hence, the resolution of the contract never became effective. Consequently,
whatever rights the original awardee Cristeta Laquihon had over the disputed lot were transmitted upon her death to her only
legal and compulsory heir, her father Basilio (Art. 777, Civil Code) which rights the latter could also convey to herein petitioners.
But even if it be assumed gratia argumenti, that the original awardee Cristeta Laquihon acquired no vested right to the lot upon
her death because of her failure to comply with the resolutory condition of constructing a house on the lot, and the lot had to
revert to the PHHC, still it cannot be denied that the PHHC waived the effects of said resolutory condition when its Board of
Directors approved, on November 15, 1962, the transfer to Aurea Baez. In consenting to the transfer, the PHHC necessarily
waived any right that might have accrued to it by virtue of the resolution of the contract before the transfer.
Regarding the other resolutory condition mentioned by the decision sought to be reviewed, and emphasized by private
respondent, that the original awardee did not file an action for ejectment, it is to be noted that the awardee was not obliged to
file said ejectment suit against respondent, the latter having squatted on the land since 1956 and the award to Cristeta Laquihon
having been made only on May 20, 1960. On this matter, the Constitutional Contract to Sell (Exhibit 7) explicitly provides that:
3. ... The applicant shall undertake the ejectment of any trespasser, intruder or squatter who shall build on the
lot or who shall deprive him of the right to possess the same from the date of this contract.
The awardee was obliged to eject squatters 44 who shall build on the lot ... from the date of this contract." Hence, respondent
Arcilla having built his house or squatted on the land very much before, i.e. 4 years before the land was awarded to awardee,
the latter was not under contractual obligation to eject him.
Resolution No. 558 does not require, furthermore, that the applicant for, or transferee of, a PHHC lot should reside in Quezon
City. What the Resolution requires is that he should have his "permanent residence or principal place of work or business in
Quezon City, Manila or suburbs ..." San Juan, the address of petitioners herein, is certainly included in the term "suburbs."
4. In support of their fourth assignment of error, that the Court of Appeals erred in holding that the approval of
the transfer of the rights to the lot to petitioners was due to the intercession of the then Senator Estanislao
Fernandez, petitioners argued that the issue of whether the letter of Senator Fernandez influenced the approval
of the transfer was not assigned as error in respondent Arcilla's brief in the Court of Appeals, and neither was
such influence alleged in the complaint, hence the Court of Appeals could not decide said issue; and that the
Board of Directors, uninfluenced by politicians, used its discretion in approving the transfer.
Section 7 of Rule 51 of the Rules of Court provides that in order that a question may be considered by the Court of Appeals, said
question must be stated in the assignment of errors and it must be properly argued in the brief. (Traders Insurance and Surety
Co. vs. Golangco, et al., 95 Phil. 824, 830; Tan Si Kick v. Tiacho, 79 Phil. 696, 698.) We note that there were only two errors
assigned in appellant's brief in the Court of Appeals, namely: that the trial court erred in holding that (1) the claim of plaintiff
that defendant was disqualified to acquire lot 5 for she already owned lot in San Juan was not substantiated, and (2) there was a
valid perfected contract of sale between the PHHC and the late Cristeta Laquihon, and between the PHHC and Aurea Baez and
Ramon Baez, and that they are bound by the terms and conditions thereof. Hence the alleged intercession of the then Senator
Estanislao Fernandez in the transfer of right by Basilio Laquihon to petitioners, which was not stated in the assignment of errors
and not argued in the brief, should have not been considered by the Court of Appeals.
Moreover, the evidence on which the finding of the Court of Appeals that the PHHC accommodated petitioners because of the
intercession of whoever wrote "Exhibit C, has no evidentiary basis, for Exhibit C was rejected by the trial court "for being
immaterial, irrelevant, impertinent and not properly identified (TSN, Nov. 4, 1964, p. 90)." The party introducing it did not even
ask permission from the Court that the same be attached to the record so that the appellate court may review the ruling of the
trial court (U.S. vs. Cabaraban, 36 Phil. 251, 253-254; Velez vs. Chaves, 50 Phil. 676, 678-679). Evidence ruled out at the trial of
the case cannot be taken into consideration in the decision, for that would infringe the constitutional right of the adverse party
to due process of law (Tinsay vs. Yusay and Yusay, 47 Phil. 639, 643). Documents forming no part of the proofs before the
appellate court will not be considered in disposing of the issues of an action (De Castro v. Court of Appeals, 75 Phil., 824, 835,
citing Dayrit v. Gonzalez, 7 Phil. 182; 5 Encyc. of Evidence, 469). Although said letter was written on stationery bearing the
letterhead of the then Senator Fernandez, it does not conclusively follow that it was Senator Fernandez himself who wrote the
letter. Even the signature of the letter was "illegible".
But assuming that the letter was written by Senator Fernandez, it cannot be implied from the facts of the case that the transfer
of rights from Basilio Laquihon to petitioners herein was approved solely on the strength of such letter, for the approval of the
transfer was recommended as "extremely meritorious" by the Head Executive Assistant (Exh. "2"), and by the Homesite Sales
Supervisor (Exh. F). Neither can it be said that the approval of the transfer by the Board of Directors was vitiated by undue
influence or that it was illegal. That letter, even if it was written really by Senator Fernandez, could not destroy the free agency
of the PHHC Board of Directors, and it could not have interfered with the exercise of Board's independent discretion. This Court
has already said that solicitation, importunity, argument and persuasion are not undue influence, and a contract is not to be set
aside merely because one party used these means to obtain the consent of the others. Influence obtained by persuasion or
argument or by appeals to the affections is not prohibited either in law or morals, and i s not obnoxious even in courts of equity.
Such may be termed "due influence." (Martinez vs. Hongkong and Shanghai Bank, 15 Phil. 252, 270.)
5. In support of their fifth assignment of error, petitioners argued that the Court of Appeals erred in relying merely on the
certification of the Municipal Treasurer of San Juan to the effect that his office "has a record of real property holding of Ramon
and Aurea Baez" consisting of a lot located at M. J. Paterno Street and assessed at P31,190.00 under Tax Declaration No. 23804
of the land records of said municipality, for a tax declaration is not evidence of title of property, and respondent Arcilla did not
present any other evidence to prove that petitioners are really owners of a lot in San Juan, Rizal; that even granting that they are
owners of a lot, still as maintained by the PHHC, they are not disqualified to acquire the lot in question as they merely stepped
into the shoes of the original purchaser Cristeta Laquihon; that R. A. No. 498, relied upon by respondent in his complaint in
asserting that the award of the lot to petitioner Aurea Baez was null and void, is not applicable to the case and could not
therefore have been violated.
In the decision under review, the Court of Appeals said that to be an awardee of PHHC's lots, one must not "already own or hold
under a contract to buy residential lot or lots in any subdivision situated in ... San Juan ... (Exhibits D-2 and Z)."
Paragraph 9 of the Conditional Contract to Sell (Exhibit 7) also provides that "any transfer that may be authorized or permitted
by the CORPORATION shall be under the condition that the transferee is qualified to acquire a lot under the rules and
regulations of the CORPORATION ..."
The sole evidence submitted by respondent Arcilla to prove that petitioners herein were disqualified to be transferees of the lot
in question was the certification of the Treasurer of San Juan (Exhibit I) that there is a tax declaration No. 23804 of the land
records of said municipality in the name of Ramon and Aurea Baez. Said Tax declaration is insufficient to prove ownership. It
has been held anent this matter that
Assessment alone is of little value as proof of title. Mere tax declaration does not vest ownership of the property
in the declarant" (Province of Camarines Sur vs. Director of Lands, 64 Phil. 600, 613 citing Evangelista vs.
Tabayuyong, 7 Phil., 607; Casimiro vs. Fernandez, 9 Phil., 562; Elumbaring vs. Elumbaring, 12 Phil. 384).
It is well-settled that neither tax receipts nor declaration of ownership for taxation purposes are evidence of ownership or of the
right to possess realty when not supported by other effective proofs. (Elumbaring vs. Elumbaring, 12 Phil. 384, 388389).
It has not been proven, therefore, that petitioners herein are owners of a lot in San Juan, and consequently disqualified to be
transferees of the questioned lot.
R.A. No. 498, relied upon by herein respondent in his complaint, in asserting that the award to petitioners was null and void, is
not applicable to the instant case. Said Act authorizes cities, municipalities and provinces to purchase and/or expropriate home
sites and landed estates and subdivide them for resale at cost, and provides in Section 3 that 14 no such lot shall be sold to any
person, who already owns a residential lot, and any sale made to such person shall be void." The PHHC not being a city,
municipality, or province, it is apparent that Act is not applicable to the instant case.
IN VIEW OF THE FOREGOING, the decision of the Court of Appeals, dated January 9, 1969, in CA-G. R. No. 36227-R, is set aside,
and the decision of the Court of First Instance of Quezon City in Civil Case No. Q-7679, is affirmed. Costs against respondent Pio
Arcilla.
IT IS SO ORDERED.