.R. No.

L-19201 June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner,

vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX
APPEALS, respondents.

Hilado and Hilado for petitioner.

Office of the Solicitor General for respondents.

PAREDES, J.:

Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr.
Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein
petitioner, for the construction of a new Catholic Church in the locality. The total amount was
actually spent for the purpose intended.

On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April
29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift
tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest.
The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to
June 15, 1960, and the compromise for the late filing of the return.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest
and the motion for reconsideration presented to the Commissioner of Internal Revenue were
denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition
for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he
was not the parish priest in Victorias; that there is no legal entity or juridical person known as the
"Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It
was also asserted that the assessment of the gift tax, even against the Roman Catholic Church,
would not be valid, for such would be a clear violation of the provisions of the Constitution.

After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below:

... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as
its Archbishops and Bishops with respect to the properties of the church within their parish.
They are the guardians, superintendents or administrators of these properties, with the right
of succession and may sue and be sued.

xxx xxx xxx

The petitioner impugns the, fairness of the assessment with the argument that he should not
be held liable for gift taxes on donation which he did not receive personally since he was not
yet the parish priest of Victorias in the year 1957 when said donation was given. It is
intimated that if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr.
Crispin Ruiz, who received the donation in behalf of the Catholic parish of Victorias or the
Roman Catholic Church. Following petitioner's line of thinking, we should be equally unfair to
hold that the assessment now in question should have been addressed to, and collected
from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish where
ever it may be. It does not seem right to indirectly burden the present parishioners of Rev.
Fr. Ruiz for donee's gift tax on a donation to which they were not benefited.

xxx xxx xxx

 We saw no legal basis then as we see none now, to include within the Constitutional
exemption, taxes which partake of the nature of an excise upon the use made of the
properties or upon the exercise of the privilege of receiving the properties. (Phipps vs.
Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.)

It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by
law, and the party claiming exemption must justify his claim by a clear, positive, or express
grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March
23, 1956; 53 O.G. 3762.)

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption from all kinds of
taxes. Statutes exempting charitable and religious property from taxation should be
construed fairly though strictly and in such manner as to give effect to the main intent of the
lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.)

xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent

Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to
the imposition of the compromise penalty in the amount of P20.00 (Collector of Internal
Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr.
Casimiro Lladoc is hereby ordered to pay to the respondent the amount of P900.00 as
donee's gift tax, plus the surcharge of five per centum (5%) as ad valorem penalty under
Section 119 (c) of the Tax Code, and one per centum (1%) monthly interest from May 15,
1958 to the date of actual payment. The surcharge of 25% provided in Section 120 for failure
to file a return may not be imposed as the failure to file a return was not due to willful
neglect.( ... ) No costs.

The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly
committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner
should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of
the Victorias Parish Church.

Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious purposes. The exemption is only from the payment
of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from
excise taxes. In the present case, what the Collector assessed was a donee's gift tax; the
assessment was not on the properties themselves. It did not rest upon general ownership; it was an
excise upon the use made of the properties, upon the exercise of the privilege of receiving the
properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting
provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax imposed
on the transfer of property by way of gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an impairment of the Constitution. As well
observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the
Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there
being no clear, positive or express grant of such privilege by law, in favor of petitioner, the
exemption herein must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax
liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should
not be liable, because at the time of the donation he was not the priest of Victorias. We note the
merit of the above claim, and in order to put things in their proper light, this Court, in its Resolution
of March 15, 1965, ordered the parties to show cause why the Head of the Diocese to which the
parish of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it
appearing that the Head of such Diocese is the real party in interest. The Solicitor General, in
representation of the Commissioner of Internal Revenue, interposed no objection to such a
substitution. Counsel for the petitioner did not also offer objection thereto.

On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal
issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also
appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod,
manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was
presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all
purposes.

In view here of and considering that as heretofore stated, the assessment at bar had been properly
made and the imposition of the tax is not a violation of the constitutional provision exempting
churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese,
to which the parish Victorias Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it
is modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that
the Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay,
the said gift tax, without special, pronouncement as to costs.
G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF
PATERNO MILLARE, respondents.

PARAS, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

STIPULATION OF FACTS

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

1. That the personal circumstances of the parties as stated in paragraph 1 of the

complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

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

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra

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

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

5. That all other matters not particularly and specially covered by this stipulation of
facts will be the subject of evidence by the parties.
 WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit
this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd.
Agripino
Brillantes
Typ
AGRIPINO
BRILLANT
ES
Attorney
for Plaintiff

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

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

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

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

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

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

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

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

Petitioner raised the following assignments of error:

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

II

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

III

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

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

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

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

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

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

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

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

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

Moreover, the exemption in favor of property used exclusively for charitable or

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

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

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

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

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

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

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby
AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner.
G.R. No. L-27588 December 31, 1927

THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the Roman

Catholic Apostolic Church, plaintiff-appellant,
vs.
THE PROVINCIAL BOARD OF ILOCOS NORTE, ET AL., defendants-appellants.

Vicente Llanes and Proceso Coloma for plaintiff-appellant.

Provincial Fiscal Santos for defendant-appellants.

AVANCEA, J.:

The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia,
possesses and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all
four sides of which face on public streets. On the south side is a part of the churchyard, the convent
and an adjacent lot used for a vegetable garden, containing an area off 1,624 square meters, in
which there is a stable and a well for the use of the convent. In the center is the remainder of the
churchyard and the church. On the north is an old cemetery with two of its walls still standing, and a
portion where formerly stood a tower, the base of which still be seen, containing a total area of
8,955 square meters.

As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land tax on the
lot adjoining the convent and the lot which formerly was the cemetery with the portion where the
tower stood.

The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land tax,
alleging that the collection of this tax is illegal. The lower court absolved the defendants from the
complaint in regard to the lot adjoining convent and declared that the tax collected on the lot, which
formerly was the cemetery and on the portion where the lower stood, was illegal. Both parties
appealed from this judgment.

The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative
Code) refers to the home of the parties who presides over the church and who has to take care of
himself in order to discharge his duties. In therefore must, in the sense, include not only the land
actually occupied by the church, but also the adjacent ground destined to the ordinary incidental
uses of man. Except in large cities where the density of the population and the development of
commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a
house and, in the case of a convent, it use is limited to the necessities of the priest, which comes
under the exemption.lawphi1.net

In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it
used for commercial purposes and, according to the evidence, is now being used as a lodging
house by the people who participate in religious festivities, which constitutes an incidental use in
religious functions, which also comes within the exemption.

The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from
land tax and the defendants are ordered to refund to plaintiff whatever was paid as such tax, without
any special pronouncement as to costs. So ordered.
G.R. No. 144104 June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner
and its hospital building constructed thereon are subject to assessment for purposes of real property
tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on
January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of
land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon
Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square
meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of
Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to private parties, for canteen and small
store spaces, and to medical or professional practitioners who use the same as their private clinics
for their patients whom they charge for their professional services. Almost one-half of the entire area
on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the
right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

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

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of 4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land
and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for
Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioners request was denied, and a petition was, thereafter, filed before
the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of
the resolution of the City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of
60% of its hospital beds are exclusively used for charity patients and that the major thrust of its
hospital operation is to serve charity patients. The petitioner contends that it is a charitable
institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment
dismissing the petition and holding the petitioner liable for real property taxes.6

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

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

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO

REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER

ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED
UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of
the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact
that it admits paying patients and renders medical services to them, leases portions of the land to
private parties, and rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out that for the years
1995 to 1999, 100% of its out-patients were charity patients and of the hospitals 282-bed capacity,
60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives
subsidies from the government attests to its character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives income, it does not
lose its character as a charitable institution, and its exemption from the payment of real estate taxes
on its real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The
petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of real
estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity.
The petitioners real property is not exempt from the payment of real estate taxes under P.D. No.
1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution
and that the said property is actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida Rivera,
the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only 20,000 a month, when the monthly rental
should be 357,000 a month as determined by the Commission on Audit; and that instead of
complying with the directive of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a monthly
rental of only 24,000. They assert that the petitioner uses the subsidies granted by the government
for charity patients and uses the rest of its income from the property for the benefit of paying
patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence
that 100% of its out-patients and 170 beds in the hospital are reserved for indigent patients. The
respondents further assert, thus:

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

The Issues

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

The Courts Ruling

The petition is partially granted.

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

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

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

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

Whereas, the more common lung diseases are, to a great extent, preventable, and curable
with early and adequate medical care, immunization and through prompt and intensive
prevention and health education programs;
 Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies
and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a
Lung Center which will house and nurture the above and related activities and provide
tertiary-level care for more difficult and problematical cases;

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

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

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

1. To construct, establish, equip, maintain, administer and conduct an integrated

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

2. To promote the noble undertaking of scientific research related to the prevention of

lung or pulmonary ailments and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of lung
or pulmonary diseases and their control; and to collect and publish the findings of
such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on

lung consciousness or awareness, and the development of fact-finding, information
and reporting facilities for and in aid of the general purposes or objects aforesaid,
especially in human lung requirements, general health and physical fitness, and other
relevant or related fields;

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

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

7. To encourage the formation of other organizations on the national, provincial

and/or city and local levels; and to coordinate their various efforts and activities for
the purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;
 8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given
to the organization;

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

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

11. To participate, as circumstances may warrant, in any activity designed and

carried on to promote the general health of the community;

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

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

14. To do everything necessary, proper, advisable or convenient for the

accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.16

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

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

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

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of
South Dakota v. Baker:21
 [T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to
enhance the usefulness of the institution to the poor; for it is a matter of common observation
amongst those who have gone about at all amongst the suffering classes, that the deserving
poor can with difficulty be persuaded to enter an asylum of any kind confined to the
reception of objects of charity; and that their honest pride is much less wounded by being
placed in an institution in which paying patients are also received. The fact of receiving
money from some of the patients does not, we think, at all impair the character of the charity,
so long as the money thus received is devoted altogether to the charitable object which the
institution is intended to further.22

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

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

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

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

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

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

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

An intention on the part of the legislature to grant an exemption from the taxing power of the
state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in favor of the
public. This principle applies with peculiar force to a claim of exemption from taxation . 28
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that
the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

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

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

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

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

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

...

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

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

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

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.32

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

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

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

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusivelyused for religious, charitable or
educational purposes.35

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

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

Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents

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

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

What is meant by actual, direct and exclusive use of the property for charitable purposes is the
direct and immediate and actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals for their clinics and a canteen.
Further, a portion of the land is being leased to a private individual for her business enterprise under
the business name "Elliptical Orchids and Garden Center." Indeed, the petitioners evidence shows
that it collected 1,136,483.45 as rentals in 1991 and 1,679,999.28 for 1992 from the said
lessees.

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

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent
Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of
the land and the area thereof which are leased to private persons, and to compute the real property
taxes due thereon as provided for by law.
G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:

Is the income derived from rentals of real property owned by the Young Men's Christian Association
of the Philippines, Inc. (YMCA) established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal Revenue Code (NIRC) and the
Constitution?

The Case

This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals1 on September 28, 19952 and February 29, 19963 in
CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals
(CTA) allowing the YMCA to claim tax exemption on the latter's income from the lease of its
real property.

The Facts

The facts are undisputed.4 Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially
the young people, pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to private respondent, in the
total amount of P415,615.01 including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally protested the assessment and, as a
supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied
the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:

. . . [T]he leasing of [private respondent's] facilities to small shop owners, to

restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the [private respondents]. It appears from the testimonies of
the witnesses for the [private respondent] particularly Mr. James C. Delote,
former accountant of YMCA, that these facilities were leased to members and
that they have to service the needs of its members and their guests. The
rentals were minimal as for example, the barbershop was only charged P300
per month. He also testified that there was actually no lot devoted for parking
space but the parking was done at the sides of the building. The parking was
 primarily for members with stickers on the windshields of their cars and they
charged P.50 for non-members. The rentals and parking fees were just enough
to cover the costs of operation and maintenance only. The earning[s] from
these rentals and parking charges including those from lodging and other
charges for the use of the recreational facilities constitute [the] bulk of its
income which [is] channeled to support its many activities and attainment of
its objectives. As pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably necessary therefore
for [private respondent] to make [the] most out [of] its existing facilities to earn
some income. It would have been different if under the circumstances, [private
respondent] will purchase a lot and convert it to a parking lot to cater to the
needs of the general public for a fee, or construct a building and lease it out to
the highest bidder or at the market rate for commercial purposes, or should it
invest its funds in the buy and sell of properties, real or personal. Under these
circumstances, we could conclude that the activities are already profit
oriented, not incidental and reasonably necessary to the pursuit of the
objectives of the association and therefore, will fall under the last paragraph of
Section 27 of the Tax Code and any income derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the
business of operating or contracting [a] parking lot, we find no legal basis also
for the imposition of [a] deficiency fixed tax and [a] contractor's tax in the
amount[s] of P353.15 and P3,129.73, respectively.

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are

hereby dismissed for lack of merit:

1980 Deficiency Fixed Tax P353,15;

1980 Deficiency Contractor's Tax P3,129.23;

1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax P1,798.93;

1980 Deficiency Withholding Tax on Wages P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully
paid but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the
National Internal Revenue Code effective as of 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA6 initially decided in favor of the CIR and disposed of
the appeal in the following manner:

Following the ruling in the afore-cited cases of Province of Abra vs.

Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent
Court of Tax Appeals that "the leasing of petitioner's (herein respondent's)
facilities to small shop owners, to restaurant and canteen operators and the
 operation of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the petitioners, and the
income derived therefrom are tax exempt, must be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it

dismissed the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate

[r]espondent from the income on rentals of small shops and parking fees [are]
in accord with the applicable law and jurisprudence. 8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTA's findings of fact, as they are supported
by evidence beyond what is considered as substantial.

xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying that
the rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is
designed for profit. Consequently, the little income from small shops and
parking fees help[s] to keep its head above the water, so to speak, and allow it
to continue with its laudable work.

The Court, therefore, finds the second ground of the motion to be meritorious
and in accord with law and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondent

CTA's decision is AFFIRMED in toto.9

The internal revenue commissioner's own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court. 10
 The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

In holding that it had departed from the findings of fact of Respondent Court of
Tax Appeals when it rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the

income of private respondent from rentals of small shops and parking fees [is]
exempt from taxation. 11

This Court's Ruling

The petition is meritorious.

First Issue:
Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental
to and reasonably necessary for the accomplishment of the objectives of the private
respondent and that the income derived therefrom are tax exempt." 12 Petitioner insists that
what the appellate court reversed was the legal conclusion, not the factual finding, of the
CTA. 13The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the present case, this Court finds
that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely
applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR:
"Whether or not the collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the last paragraph of Section
27 of the National Internal Revenue Code of 1977, as amended." 15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the CTA
did not necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held
that "[t]here is a question of law in a given case when the doubt or difference arises as to
what the law is on a certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or falsehood of alleged facts." 16 In the present case, the CA
did not doubt, much less change, the facts narrated by the CTA. It merely applied the law to
the facts. That its interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
 Second Issue:
Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. The following organizations

shall not be taxed under this Title in respect to income received by them as
such

xxx xxx xxx

(g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other
non-profitable purposes, no part of the net income of which inures to the
benefit of any private stockholder or member;

xxx xxx xxx

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 the tax
imposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioner argues that while the income received by the organizations enumerated in Section
27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect
to income received by them as such," the exemption does not apply to income derived ". . .
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 . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives." 17 We agree with the
commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict in interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory
exemption from taxation should be manifest. and unmistakable from the language of the law
on which it is based. Thus, the claimed exemption "must expressly be granted in a statute
stated in a language too clear to be mistaken." 19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its real
property, 20 the Court is duty-bound to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied. 21 Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to "religious, charitable
and educational propert[ies] or institutions." 22

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification
that the income from the properties must arise from activities 'conducted for profit' before it
may be considered taxable." 23This argument is erroneous. As previously stated, a reading of
said paragraph ineludibly shows that the income from any property of exempt organizations,
as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of
their activities conducted for profit" does not qualify the word "properties." This makes from
the property of the organization taxable, regardless of how that income is used whether
for profit or for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it
derived from renting out its real property, on the solitary but unconvincing ground that the
said income is not collected for profit but is merely incidental to its operation. The law does
not make a distinction. The rental income is taxable regardless of whence such income is
derived and how it is used or disposed of. Where the law does not distinguish, neither
should we.

Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions"
from the payment not only of property taxes but also of income tax from any source. 25 In
support of its novel theory, it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in
Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of which are, from whatever
source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements actually and
directly used for religious, charitable or educational purposes," which are exempt only from
property taxes. 28 Second, Lladoc v. Commissioner of Internal Revenue, 29which limited the
exemption only to the payment of property taxes, referred to the provision of the 1935
Constitution and not to its counterparts in the 1973 and the 1987 Constitutions. 30 Third, the
phrase "actually, directly and exclusively used for religious, charitable or educational
purposes" refers not only to "all lands, buildings and improvements," but also to the above-
quoted first category which includes charitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter. 32 Such intent must be effectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now
a member of this Court, stressed during the Concom debates that ". . . what is exempted is
not the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said
provision pertained only to property taxes. 34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax
exemption coversproperty taxes only." 35 Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 26, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming
that the YMCA "is a non-stock, non-profit educational institution whose revenues and assets
are used actually, directly and exclusively for educational purposes so it is exempt from
taxes on its properties and income." 37 We reiterate that private respondent is exempt from
the payment of property tax, but not income tax on the rentals from its property. The bare
allegation alone that it is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it
must prove with substantial evidence that (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational purposes. However, the Court notes
that not a scintilla of evidence was submitted by private respondent to prove that it met the
said requisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of
the Constitution? We rule that it is not. The term "educational institution" or "institution of
learning" has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant. 38 Under the Education Act of 1982, such
term refers to schools. 39 The school system is synonymous with formal education, 40 which
"refers to the hierarchically structured and chronologically graded learnings organized and
provided by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to the higher levels." 41 The Court has
examined the "Amended Articles of Incorporation" and "By-Laws"43 of the YMCA, but found
nothing in them that even hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is understood to
be school-based and "private auspices such as foundations and civic-spirited organizations"
are ruled out. 45 It is settled that the term "educational institution," when used in laws
granting tax exemptions, refers to a ". . . school seminary, college or educational
establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the
educational institutions covered by the constitutional provision under consideration.

. . . Words used in the Constitution are to be taken in their ordinary

acceptation. While in its broadest and best sense education embraces all
forms and phases of instruction, improvement and development of mind and
body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic instruction
in any or all of the useful branches of learning is given by methods common to
schools and institutions of learning. That we conceive to be the true intent and
scope of the term [educational institutions,] as used in the
Constitution. 47

Moreover, without conceding that Private Respondent YMCA is an educational institution,

the Court also notes that the former did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used for educational purposes.
Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is
patently insufficient, since the same merely signified that "[t]he net income derived from the
rentals of the commercial buildings shall be apportioned to the Federation and Member
Associations as the National Board may decide." 48 In sum, we find no basis for granting the
YMCA exemption from income tax under the constitutional provision invoked.

Cases Cited by Private

Respondent Inapplicable

The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are not applicable,
because the controversy in both cases involved exemption from the payment of property tax,
not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in point either,
because it involves a claim for exemption from the payment of regulatory fees, specifically
electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all
related to that involved in a claimed exemption from the payment of income taxes imposed
on property leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party
therein, which claimed an exemption from the payment of income tax, was an educational
institution which submitted substantial evidence that the income subject of the controversy
had been devoted or used solely for educational purposes. On the other hand, the private
respondent in the present case has not given any proof that it is an educational institution,
or that part of its rent income is actually, directly and exclusively used for educational
purposes.

Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited
merely to applying the law fairly and objectively. It cannot change the law or bend it to suit
its sympathies and appreciations. Otherwise, it would be overspilling its role and invading
the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom
or propriety of legislation. That prerogative belongs to the political departments of
government. Indeed, some of the members of the Court may even believe in the wisdom and
prudence of granting more tax exemptions to private respondent. But such belief, however
well-meaning and sincere, cannot bestow upon the Court the power to change or amend the
law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its real property is subject to income
tax. No pronouncement as to costs.

SO ORDERED.

Davide, Jr., Vitug and Quisumbing, JJ., concur.

Bellosillo, J., Please see Dissenting Opinion.

 Separate Opinions

BELLOSILLO, J., dissenting;

I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax
Appeals when supported by substantial evidence will not be disturbed on appeal unless it is
shown that the court committed grave error in the appreciation of facts.1 In the instant case,
there is no dispute as to the validity of the findings of the Court of Tax Appeals that private
respondent Young Men's Christian Association (YMCA) is an association organized and
operated exclusively for the promotion of social welfare and other non-profitable purposes,
particularly the physical and character development of the youth.2 The enduring objectives
of respondent YMCA as reflected in its Constitution and By-laws are:

(a) To develop well-balanced Christian personality, mission in life, usefulness

of individuals, and the promotion of unity among Christians and understanding
among peoples of all faiths, to the end that the Brotherhood of Man under the
Fatherhood of God may be fostered in an atmosphere of mutual respect and
understanding;

(b) To promote on equal basis the physical, mental, and spiritual welfare of the
youth, with emphasis on reverence for God, social discipline, responsibility for
the common good, respect for human dignity, and the observance of the
Golden Rule;

(c) To encourage members of the Young Men's Christian Associations in the

Philippines to participate loyally in the life of their respective churches; to
bring these churches closer together; and to participate in the effort to realize
the church Universal;

(d) To strengthen and coordinate the work of the Young Men's Christian
Associations in the Philippines and to foster the extension of the Youth Men's
Christian Associations to new areas;

(e) To help its Member Associations develop and adopt their programs to the
needs of the youth;

(f) To assist the Member Associations in developing and maintaining a high

standard of management, operation and practice; and

(g) To undertake and sponsor national and international programs and

activities in pursuance of its purposes and objectives. 3

Pursuant to these objectives, YMCA has continuously organized and undertaken throughout
the country various programs for the youth through actual workshops, seminars, training,
sports and summer camps, conferences on the cultivation of Christian moral values, drug
addiction, out-of-school youth, those with handicap and physical defects and youth
alcoholism. To fulfill these multifarious projects and attain the laudable objectives of YMCA,
fund raising has become an indispensable and integral part of the activities of the
Association. YMCA derives its funds from various sources such as membership dues,
charges on the use of facilities like bowling and billiards, lodging, interest income, parking
fees, restaurant and canteen. Since the membership dues are very minimal, the Association
derives funds from rentals of small shops, restaurant, canteen and parking fees. For the
taxable year ending December 1980, YMCA earned gross rental income of P676,829.00 and
P44,259.00 from parking fees which became the subject of the questioned assessment by
petitioner.

The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of
petitioner's facilities to small shop owners and to restaurant and canteen operators in
addition to the operation of a parking lot are reasonably necessary for and incidental to the
accomplishment of the objectives of YMCA. 4In fact, these facilities are leased to members in
order to service their needs and those of their guests. The rentals are minimal, such as, the
rent of P300.00 for the barbershop. With regard to parking space, there is no lot actually
devoted therefor and the parking is done only along the sides of the building. The parking is
primarily for members with car stickers but to non-members, parking fee is P0.50 only. The
rentals and parking fees are just enough to cover the operation and maintenance costs of
these facilities. The earnings which YMCA derives from these rentals and parking fees,
together with the charges for lodging and use of recreational facilities, constitute the bulk or
majority of its income used to support its programs and activities.

In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA's facilities to shop owners and restaurant operators and the operation of a parking lot
are used for commercial purposes or for profit, which fact takes YMCA outside the coverage
of tax exemption. In later granting the motion for reconsideration filed by respondent YMCA,
the Court of Appeals correctly reversed its earlier decision and upheld the findings of the
Court of Tax Appeals by ruling that YMCA is not designed for profit and the little income it
derives from rentals and parking fees helps maintain its noble existence for the fulfillment of
its goals for the Christian development of the youth.

Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions
of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:

Sec. 27. Exemptions from tax on corporations. The following organizations

shall not be taxed under this Title in respect to income received by them as
such . . . (g) civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (h) club organized
and operated exclusively for pleasure, recreation and other non-profitable
purposes, no part of the net income of which inures to the benefit of any
private stockholder or member . . . . 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.

The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however
extend to their income of whatever kind or character from any of their properties real or
personal regardless of the disposition made of such income; that based on the wording of
the law which is plain and simple and does not need any interpretation, any income of a tax
exempt entity from any of its properties is a taxable income; hence, the rental income
derived by a tax exempt organization from the lease of its properties is not therefore exempt
from income taxation even if such income is exclusively used for the accomplishment of its
objectives.

Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and
character . . . from any of their properties" might easily convey a meaning quite different
from the one actually intended and evident when a word or phrase is considered with those
with which it is associated. 5 It is a rule in statutory construction that every part of the statute
must be interpreted with reference to the context, that every part of the statute must be
considered together with the other parts and kept subservient to the general intent of the
whole enactment.6 A close reading of the last paragraph of Sec. 27 of the National Internal
Revenue Code, in relation to the whole section on tax exemption of the organizations
enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of
Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the exception to Sec. 27 pars. (g) and
(h) providing for the tax exemptions of the income of said organizations. Hence, if such
income from property or any other property is not conducted for profit, then it is not taxable.

Even taken alone and understood according to its plain, simple and literal meaning, the word
"income" which is derived from property, real or personal, provided in the last paragraph of
Sec. 27 means the amount of money coming to a person or corporation within a specified
time as profit from investment; the return in money from one's business or capital
invested.7 Income from property also means gains and profits derived from the sale or other
disposition of capital assets; the money which any person or corporation periodically
receives either as profits from business, or as returns from investments 8 The word "income"
as used in tax statutes is to be taken in its ordinary sense as gain or profit.9

Clearly, therefore, income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the ordinary meaning of
income from property as profit to the language of the last paragraph of Sec. 27 of the NIRC,
then only those profits arising from business and investment involving property are taxable.
In the instant case, there is no question that in leasing its facilities to small shop owners and
in operating parking spaces, YMCA does not engage in any profit-making business. Both the
Court of Tax Appeals, and the Court of Appeals in its resolution of 25 September 1995,
categorically found that these activities conducted on YMCA's property were aimed not only
at fulfilling the needs and requirements of its members as part of YMCA's youth program but,
more importantly, at raising funds to finance the multifarious projects of the Association.

As the Court has ruled in one case, the fact that an educational institution charges tuition
fees and other fees for the different services it renders to the students does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the law
exempting it from taxation. The mere realization of profits out of its operation does not
automatically result in the loss of an educational institution's exemption from income tax as
long as no part of its profits inures to the benefit of any stockholder or individual. 10 In order
to claim exemption from income tax, a corporation or association must show that it is
organized and operated exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. 11 The main evidence of the
purpose of a corporation should be its articles of incorporation and by-laws, for such
purpose is required by statute to be stated in the articles of incorporation, and the by-laws
outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious purpose for
which the corporation or association is created, such income should be tax-exempt.

In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held

In this connection, it should be noted that respondent therein is a corporation

organized for "charitable, educational and religious purposes"; that no part of
its net income inures to the benefit of any private individual; that it is exempt
from paying income tax; that it operates a hospital in which MEDICAL
assistance is given to destitute persons free of charge; that it maintains a
pharmacy department within the premises of said hospital, to supply drugs
and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them,
for which they are charged the cost of the medicines, plus an additional 10%
thereof, to partly offset the cost of medicines supplied free of charge to charity
patients. Under these facts we are of the opinion and so hold that the Hospital
may not be regarded as engaged in "business" by reason of said sale of
medicines to its paying patients . . . (W)e held that the UST Hospital was not
established for profit-making purposes, despite the fact that it had 140 paying
beds, because the same were maintained only to partly finance the expenses
of the free wards containing 203 beds for charity patients.

In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained

It is claimed however that the institution is run as a business in that it keeps a

lodging and boarding house. It may be admitted that there are 64 persons
occupying rooms in the main building as lodgers or roomers and that they take
their meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word. In the first
place, no profit is realized by the association in any sense. In the second place
it is undoubted, as it is undisputed, that the purpose of the association is not
primarily to obtain the money which comes from the lodgers and boarders. The
real purpose is to keep the membership continually within the sphere of
influence of the institution; and thereby to prevent, as far as possible, the
opportunities which vice presents to young men in foreign countries who lack
home or other similar influences.

The majority, if not all, of the income of the organizations covered by the exemption provided
in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If
we are to interpret the last paragraph of Sec. 27 to the effect that all income of whatever kind
from the properties of said organization, real or personal, are taxable, even if not conducted
for profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this
Court elucidated in Jesus Sacred Heart College v. Collector of Internal Revenue, 15 every
responsible organization must be so run as to at least insure its existence by operating
within the limits of its own resources, especially its regular income. It should always strive
whenever possible to have a surplus. If the benefits of the exemption would be limited to
institutions which do not hope or propose to have such surplus, then the exemption would
apply only to schools which are on the verge of bankruptcy. Unlike the United States where a
substantial number of institutions of learning are dependent upon voluntary contributions
and still enjoy economic stability, such as Harvard, the trust fund of which has been steadily
increasing with the years, there are and there have always been very few educational
enterprises in the Philippines which are supported by donations, and these organizations
usually have a very precarious existence. 16

Finally, the non-taxability of all income and properties of educational institutions finds
enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution

(3) All revenues and assets of non-stock, non-profit educational institutions

used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of in
the manner provided by law.

In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and found
YMCA to be an educational institution exclusively devoted to educational and charitable
purposes and not operated for profit. The purposes of the Association as set forth in its
charter and constitution are "to develop the Christian character and usefulness of its
members, to improve the spiritual, intellectual, social and physical condition of young men
and to acquire, hold, mortgage and dispose of the necessary lands, buildings and personal
property for the use of said corporation exclusively for religious, charitable and educational
purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase
the mental efficiency and wage-earning capacity of young men, prepare them in special lines
of business and offer them special lines of study. We ruled therein that YMCA cannot be said
to be an institution used exclusively for religious purposes or an institution devoted
exclusively for charitable purposes or an institution devoted exclusively to educational
purposes, but it can be truthfully said that it is an institution used exclusively for all three
purposes and that, as such, it is entitled to be exempted from taxation.

Separate Opinions

BELLOSILLO, J., dissenting;

I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax
Appeals when supported by substantial evidence will not be disturbed on appeal unless it is
shown that the court committed grave error in the appreciation of facts.1 In the instant case,
there is no dispute as to the validity of the findings of the Court of Tax Appeals that private
respondent Young Men's Christian Association (YMCA) is an association organized and
operated exclusively for the promotion of social welfare and other non-profitable purposes,
particularly the physical and character development of the youth.2 The enduring objectives
of respondent YMCA as reflected in its Constitution and By-laws are:

(a) To develop well-balanced Christian personality, mission in life, usefulness

of individuals, and the promotion of unity among Christians and understanding
among peoples of all faiths, to the end that the Brotherhood of Man under the
Fatherhood of God may be fostered in an atmosphere of mutual respect and
understanding;

(b) To promote on equal basis the physical, mental, and spiritual welfare of the
youth, with emphasis on reverence for God, social discipline, responsibility for
the common good, respect for human dignity, and the observance of the
Golden Rule;

(c) To encourage members of the Young Men's Christian Associations in the

Philippines to participate loyally in the life of their respective churches; to
 bring these churches closer together; and to participate in the effort to realize
the church Universal;

(d) To strengthen and coordinate the work of the Young Men's Christian
Associations in the Philippines and to foster the extension of the Youth Men's
Christian Associations to new areas;

(e) To help its Member Associations develop and adopt their programs to the
needs of the youth;

(f) To assist the Member Associations in developing and maintaining a high

standard of management, operation and practice; and

(g) To undertake and sponsor national and international programs and

activities in pursuance of its purposes and objectives. 3

Pursuant to these objectives, YMCA has continuously organized and undertaken throughout
the country various programs for the youth through actual workshops, seminars, training,
sports and summer camps, conferences on the cultivation of Christian moral values, drug
addiction, out-of-school youth, those with handicap and physical defects and youth
alcoholism. To fulfill these multifarious projects and attain the laudable objectives of YMCA,
fund raising has become an indispensable and integral part of the activities of the
Association. YMCA derives its funds from various sources such as membership dues,
charges on the use of facilities like bowling and billiards, lodging, interest income, parking
fees, restaurant and canteen. Since the membership dues are very minimal, the Association
derives funds from rentals of small shops, restaurant, canteen and parking fees. For the
taxable year ending December 1980, YMCA earned gross rental income of P676,829.00 and
P44,259.00 from parking fees which became the subject of the questioned assessment by
petitioner.

The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of
petitioner's facilities to small shop owners and to restaurant and canteen operators in
addition to the operation of a parking lot are reasonably necessary for and incidental to the
accomplishment of the objectives of YMCA. 4In fact, these facilities are leased to members in
order to service their needs and those of their guests. The rentals are minimal, such as, the
rent of P300.00 for the barbershop. With regard to parking space, there is no lot actually
devoted therefor and the parking is done only along the sides of the building. The parking is
primarily for members with car stickers but to non-members, parking fee is P0.50 only. The
rentals and parking fees are just enough to cover the operation and maintenance costs of
these facilities. The earnings which YMCA derives from these rentals and parking fees,
together with the charges for lodging and use of recreational facilities, constitute the bulk or
majority of its income used to support its programs and activities.

In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA's facilities to shop owners and restaurant operators and the operation of a parking lot
are used for commercial purposes or for profit, which fact takes YMCA outside the coverage
of tax exemption. In later granting the motion for reconsideration filed by respondent YMCA,
the Court of Appeals correctly reversed its earlier decision and upheld the findings of the
Court of Tax Appeals by ruling that YMCA is not designed for profit and the little income it
derives from rentals and parking fees helps maintain its noble existence for the fulfillment of
its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions
of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:

Sec. 27. Exemptions from tax on corporations. The following organizations

shall not be taxed under this Title in respect to income received by them as
such . . . (g) civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (h) club organized
and operated exclusively for pleasure, recreation and other non-profitable
purposes, no part of the net income of which inures to the benefit of any
private stockholder or member . . . . 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.

The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however
extend to their income of whatever kind or character from any of their properties real or
personal regardless of the disposition made of such income; that based on the wording of
the law which is plain and simple and does not need any interpretation, any income of a tax
exempt entity from any of its properties is a taxable income; hence, the rental income
derived by a tax exempt organization from the lease of its properties is not therefore exempt
from income taxation even if such income is exclusively used for the accomplishment of its
objectives.

Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and
character . . . from any of their properties" might easily convey a meaning quite different
from the one actually intended and evident when a word or phrase is considered with those
with which it is associated. 5 It is a rule in statutory construction that every part of the statute
must be interpreted with reference to the context, that every part of the statute must be
considered together with the other parts and kept subservient to the general intent of the
whole enactment.6 A close reading of the last paragraph of Sec. 27 of the National Internal
Revenue Code, in relation to the whole section on tax exemption of the organizations
enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of
Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the exception to Sec. 27 pars. (g) and
(h) providing for the tax exemptions of the income of said organizations. Hence, if such
income from property or any other property is not conducted for profit, then it is not taxable.

Even taken alone and understood according to its plain, simple and literal meaning, the word
"income" which is derived from property, real or personal, provided in the last paragraph of
Sec. 27 means the amount of money coming to a person or corporation within a specified
time as profit from investment; the return in money from one's business or capital
invested.7 Income from property also means gains and profits derived from the sale or other
disposition of capital assets; the money which any person or corporation periodically
receives either as profits from business, or as returns from investments 8 The word "income"
as used in tax statutes is to be taken in its ordinary sense as gain or profit.9

Clearly, therefore, income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the ordinary meaning of
income from property as profit to the language of the last paragraph of Sec. 27 of the NIRC,
then only those profits arising from business and investment involving property are taxable.
In the instant case, there is no question that in leasing its facilities to small shop owners and
in operating parking spaces, YMCA does not engage in any profit-making business. Both the
Court of Tax Appeals, and the Court of Appeals in its resolution of 25 September 1995,
categorically found that these activities conducted on YMCA's property were aimed not only
at fulfilling the needs and requirements of its members as part of YMCA's youth program but,
more importantly, at raising funds to finance the multifarious projects of the Association.

As the Court has ruled in one case, the fact that an educational institution charges tuition
fees and other fees for the different services it renders to the students does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the law
exempting it from taxation. The mere realization of profits out of its operation does not
automatically result in the loss of an educational institution's exemption from income tax as
long as no part of its profits inures to the benefit of any stockholder or individual. 10 In order
to claim exemption from income tax, a corporation or association must show that it is
organized and operated exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. 11 The main evidence of the
purpose of a corporation should be its articles of incorporation and by-laws, for such
purpose is required by statute to be stated in the articles of incorporation, and the by-laws
outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose. 12

The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious purpose for
which the corporation or association is created, such income should be tax-exempt.

In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held

In this connection, it should be noted that respondent therein is a corporation

organized for "charitable, educational and religious purposes"; that no part of
its net income inures to the benefit of any private individual; that it is exempt
from paying income tax; that it operates a hospital in which MEDICAL
assistance is given to destitute persons free of charge; that it maintains a
pharmacy department within the premises of said hospital, to supply drugs
and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them,
for which they are charged the cost of the medicines, plus an additional 10%
thereof, to partly offset the cost of medicines supplied free of charge to charity
patients. Under these facts we are of the opinion and so hold that the Hospital
may not be regarded as engaged in "business" by reason of said sale of
medicines to its paying patients . . . (W)e held that the UST Hospital was not
established for profit-making purposes, despite the fact that it had 140 paying
beds, because the same were maintained only to partly finance the expenses
of the free wards containing 203 beds for charity patients.

In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained

It is claimed however that the institution is run as a business in that it keeps a

lodging and boarding house. It may be admitted that there are 64 persons
occupying rooms in the main building as lodgers or roomers and that they take
their meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word. In the first
 place, no profit is realized by the association in any sense. In the second place
it is undoubted, as it is undisputed, that the purpose of the association is not
primarily to obtain the money which comes from the lodgers and boarders. The
real purpose is to keep the membership continually within the sphere of
influence of the institution; and thereby to prevent, as far as possible, the
opportunities which vice presents to young men in foreign countries who lack
home or other similar influences.

The majority, if not all, of the income of the organizations covered by the exemption provided
in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If
we are to interpret the last paragraph of Sec. 27 to the effect that all income of whatever kind
from the properties of said organization, real or personal, are taxable, even if not conducted
for profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this
Court elucidated in Jesus Sacred Heart College v. Collector of Internal Revenue, 15 every
responsible organization must be so run as to at least insure its existence by operating
within the limits of its own resources, especially its regular income. It should always strive
whenever possible to have a surplus. If the benefits of the exemption would be limited to
institutions which do not hope or propose to have such surplus, then the exemption would
apply only to schools which are on the verge of bankruptcy. Unlike the United States where a
substantial number of institutions of learning are dependent upon voluntary contributions
and still enjoy economic stability, such as Harvard, the trust fund of which has been steadily
increasing with the years, there are and there have always been very few educational
enterprises in the Philippines which are supported by donations, and these organizations
usually have a very precarious existence. 16

Finally, the non-taxability of all income and properties of educational institutions finds
enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution

(3) All revenues and assets of non-stock, non-profit educational institutions

used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of in
the manner provided by law.

In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and found
YMCA to be an educational institution exclusively devoted to educational and charitable
purposes and not operated for profit. The purposes of the Association as set forth in its
charter and constitution are "to develop the Christian character and usefulness of its
members, to improve the spiritual, intellectual, social and physical condition of young men
and to acquire, hold, mortgage and dispose of the necessary lands, buildings and personal
property for the use of said corporation exclusively for religious, charitable and educational
purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase
the mental efficiency and wage-earning capacity of young men, prepare them in special lines
of business and offer them special lines of study. We ruled therein that YMCA cannot be said
to be an institution used exclusively for religious purposes or an institution devoted
exclusively for charitable purposes or an institution devoted exclusively to educational
purposes, but it can be truthfully said that it is an institution used exclusively for all three
purposes and that, as such, it is entitled to be exempted from taxation.
G.R. No. L-18384 September 20, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Jaime R. Nuevas for defendants-appellants heirs of Cesar Jalandoni.
Filemon Flores and Aniano Bagabaldo for defendants-appellants Angeles Jalandoni, et al.

BAUTISTA ANGELO, J.:

Isabel Ledesma died intestate on June 23, 1948 leaving real properties situated in the provinces of
Negros Occidental and Rizal and in the cities of Manila and Baguio, and personal properties
consisting of shares of stock in various domestic corporations. She left as heirs her husband
Bernardino Jalandoni and three children, namely, Cesar, Angeles and Delfin, all surnamed
Jalandoni.

On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate and inheritance tax return
reporting the following: (1) that the real and personal properties owned by the deceased and her
surviving husband had a total market value of P1,324,555.80; (2) that after deducting therefrom the
conjugal share of her husband and some expenses the net estate subject to estate tax was
P28,148.04; and (3) that the amount subject to inheritance tax was P542,225.83. This return also
shows that no testamentary or intestate proceedings were instituted.

On the basis of this return the Bureau of Internal Revenue made an assessment on November 20,
1948 calling for the payment of the amounts of P31,435.95 and P58,863.52 as estate and
inheritance taxes, respectively, stating therein that the assessment was "to be considered partial
pending investigation of the return." These sums were paid by Cesar Jalandoni.

After a preliminary investigation was made of the properties reported in the abovementioned return,
a second assessment was made on January 27, 1953 by the Bureau of Internal Revenue showing
that there was due from the estate the amounts of P5,539.67 and P9,899.37 as deficiency estate
and inheritance taxes, respectively, for which reason a demand was made on Bernardino Jalandoni
stating therein that the same was still "to be considered partial pending further investigation of the
return," which amounts were paid by Bernardino Jalandoni on February 28, 1953.

True to the foregoing reservation, the Bureau of Internal Revenue conducted another investigation
and this time it found (1) that the market value of the lands reported in the return filed by Cesar
Jalandoni was underdeclared in the amount of P365,149.50; (2) that seven lots which were
registered in the Talisay-Silay cadastre of Negros Occidental as belonging to the deceased,
including their improvements, were omitted from the return the same having a market value of
P100,200.00; and (3) the shares of stock owned by the deceased in the Victorias Milling Company,
Hawaiian-Philippine Company and Central Azucarera de la Carlota, though included in the return,
were however underdeclared in the amount of P16,355.36, and on the basis of these findings a third
assessment was made against the estate on May 9, 1956 wherein the heirs were required to pay
the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes,
respectively, including accrued interests, with the warning that failure on their part to pay the same
would subject them to the payment of surcharge, interest, and penalty for late payment of the tax.
In answer to this third assessment after notice was served on the administrator of the estate,
Bernardino Jalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased,
wrote a letter to the Collector of Internal Revenue setting up the defense of prescription in the sense
that the deficiency in the estate and inheritance taxes payment of which was required therein can no
longer be collected since more than five years had already elapsed from the filing of the return
invoking in his favor Section 331 of the National Internal Revenue Code. To this defense, the
Collector retorted claiming that the stand of counsel cannot be entertained for the reason that, it
appearing that the estate and inheritance tax return which was filed by the administrator or by the
heirs contained omissions which amount to fraud indicative of an intention to evade payment of the
proper tax due the government, the taxes then being collected could still be demanded within ten
years from the discovery of the falsity or omission pursuant to Section 332(a) of said Code, which
period had not yet expired, and as a consequence, the assessment notice was reiterated with the
request that the deficiency estate and inheritance taxes therein demanded be settled as soon as
possible. And noting that the 30-day period within which the heirs could appeal the Collector's
assessment to the Court of Tax Appeals had already elapsed, while on the other hand they
indicated their unwillingness to settle the claim, the Collector of Internal Revenue filed the present
case before the Court of First Instance of Manila pressing the collection of the deficiency estate and
inheritance taxes assessed against the heirs of the deceased Isabel Ledesma Jalandoni.

While this case was pending hearing on the merits, the lower court set a date for pre-trial in an effort
to have the parties agree on a stipulation of facts, and this having failed, upon request of
defendants, the lower court ordered the Collector of Internal Revenue to verify the allegation that
the seven lots in Negros Occidental which were claimed not to have been included in the return filed
by Cesar Jalandoni were in fact included therein, and to this effect the Collector designated
Examiner Genaro Butas to conduct the examination. In his report Examiner Butas stated that of the
seven lots that were previously reported not included in the return, two were actually declared
therein, though he reaffirmed his previous finding as regards the other five lots and the market value
of the sugar lands and rice lands left by the deceased and the value of the shares of stock owned
by her in several domestic corporations.

There being no additional evidence, oral or documentary, submitted by the parties, and passing
solely on the allegations appearing in the pleadings which appear to be undisputed, the trial court
rendered its decision on February 16, 1960 ordering defendants, jointly and severally, to pay plaintiff
the sum of P79,837.35 as estate and inheritance taxes, plus the interest that had accrued thereon
as a result of their delinquency. Defendants interposed the present appeal.

It is claimed that the lower court erred in finding that the return submitted by Cesar Jalandoni in
behalf of the heirs concerning the estate of the deceased for the purpose of the payment of the
required estate and inheritance taxes is false and fraudulent there being no evidence on record
showing that said return was filed in bad faith for which reason fraud cannot be imputed to
appellants. As against this claim appellee advances the theory that since fraudulent intent is a state
of mind which cannot be proven by direct evidence, the same may be inferred from facts and
circumstances that appear to be undisputed as was done by the court a quo as follows:

The difference between the amounts appearing in the returns filed and the undeclared
properties of the estate of the deceased is a substantial understatement of the true value of
the estate in question. The court is of the opinion, and so holds that the tax returns filed were
false. A substantial understatement of stocks and the omission of seven (7) parcels of land
belonging to the estate of the deceased, makes it impossible for the court to believe that the
omission or understatements were due to inadvertence, negligence, or honest statement of
error. Circumstances such as this are competent to base a finding of willful
intent.1awphl.nt
And to bolster up this finding appellee submits the following facts which, it contends, appear in the
record: (1) among the real properties belonging to the deceased five lots in Negros Occidental,
including improvements thereon, with a market value of P58,570.00 were not included in the return
filed by a representative of appellants; (2) the value of the sugar and rice lands that were reported in
the return were underdeclared in the amount of P365,149.50; and (3) the market value of the shares
of stock owned by the deceased in the Victorias Milling Company, Hawaiian-Philippine Company
and the Central Azucarera de la Carlota was underdeclared in the amount of P16,355.36. In other
words, it is claimed that a total amount of P440,074.86 which constitutes real asset of the estate has
been deliberately omitted from the return thereby evincing an intention to evade the payment of the
correct amount of tax due to the government.

We are of the opinion that this finding is neither fair nor reasonable. To begin with, it should be here
noted that when this case was pending hearing on the merits before the lower court, the latter, upon
request of appellants, ordered the Collector of Internal Revenue to verify the allegation that there
were seven lots in Negros Occidental which were claimed not to have been included in the return
filed by Cesar Jalandoni, and to this effect the Collector designated Examiner Genaro Butas to
conduct the examination. Examiner Butas, after conducting the examination, submitted his report
the pertinent of which reads:

Lot Assessed Fair Market

Classification
No. Value Value
493 Sugarland P15,140.00 P21,630.00
710 390.00 550.00
521 21,000.00 30,000.00
954 820.00 1,230.00
939 1,210.00 1,720.00
Lot 6,080.00 6,080.00
229
House 12,000.00 12,000.00
Commercial 6,400.00 6,400.00
Concrete
228 10,000.00 10,000.00
House
Camarin 500.00 500.00
TOTAL
P73,650.00 P90,110.00

In other words, from the report of Examiner Butas the following may be gleaned: that of the seven
lots alleged to have been excluded from the return, three were actually included, with the
particularity that they were the most valuable, to wit: Lot 493 with a market value of P21,630.00; Lot
521 with a market value of P30,000.00; and Lot 229 with a market value of P12,000.00, while
another lot was not also included because it belonged to Delfin Jalandoni, or Lot 228 which,
including improvements, has a market value of P16,900.00. Hence, from the foregoing we find that
the aggregate value of the aforesaid four lots is P86,610.00 which, if deducted from the total value
of the seven lots amounting to P90,110.00, gives a balance of P3,500.00 as the value of the three
remaining lots. These three lots being conjugal property, one-half thereof belonging to the
deceased's spouse should still be deducted, thus leaving a small balance of P1,750.00. If to this we
add that, as the record shows, these three lots were already declared in the return submitted by
Bernardino Jalandoni as part of his property and his wife for purposes of income tax, there is reason
to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an
honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this
conclusion as it would be stretching too much the imagination if we would find that, because of such
inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted
from the return the three lots with the only purpose of defrauding the government after declaring
therein as asset of the estate property worth P1,324,555.80.

The same thing may be said with regard to the alleged undervaluation of certain sugar and rice
lands reported by Cesar Jalandoni which appellee fixes at P365,149.50, for the same can at most
be considered as the result of an honest difference of opinion and not necessarily an intention to
commit fraud. It should be stated that in the estate and inheritance tax returns submitted by Cesar
Jalandoni on November 19, 1948 he reported said lands as belonging to the deceased with a
statement of what in his opinion represent their reasonable actual value but which happened not to
tally with the valuation made by the Collector of Internal Revenue. Certainly if there is any mistake in
the valuation made by Jalandoni the same can only be considered as honest mistake, or one based
on excusable inadvertence, he being not an expert in appraising real estate. The deficiency
assessment, moreover, was made by the Collector of Internal Revenue more than five years from
the filing of the return, and experience shows that such an intervening period is sufficiently long to,
warrant an increase in value of real estate which is precisely what was found by the Collector of
Internal Revenue with regard to the lands in question. It is certainly an error to impute fraud based
on an honest difference of opinion.

Finally, we find unreasonable to impute with regard to the appraisal made by appellants of the
shares of stock of the deceased in Victorias Milling Company, Hawaiian-Philippine Company and
Central Azucarera de la Carlota, simply because Cesar Jalandoni placed in his return an aggregate
market value of P95,480.00, instead of mentioning the book value declared by said corporations in
the returns filed by them with the Bureau of Internal Revenue. The fact that the value given in the
returns did not tally with the book value appearing in the corporate books is not in itself indicative of
fraud especially when we take into consideration the circumstance that said book value only
became known several months after the death of the deceased. Moreover, it is a known fact that
stock securities frequently fluctuate in value and a mere difference of opinion in relation thereto
cannot serve as proper basis for assessing an intention to defraud the government.

Having reached the conclusion that the heirs of the deceased have not committed any act indicative
of an intention to evade the payment of the inheritance or estate taxes due the government, as
evidenced by their willingness in the past to pay all the taxes properly assessed against them, it is
evident that the instant claim of appellee has already prescribed under Section 331 of the National
Internal Revenue Code. And with this conclusion, a discussion of the other errors assigned by
appellants would seem to be unnecessary.

WHEREFORE, the decision appealed from is reversed and the complaint of appellee is dismissed.
No pronouncement as to costs.
G.R. No. L-19707 August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.

Office of the Solicitor General for respondents.

CASTRO, J.:

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene
gases. During the period from June 2, 1953 to June 30, 1958, it made various sales of its products
to the National Power Corporation, an agency of the Philippine Government, and to the Voice of
America an agency of the United States Government. The sales to the NPC amounted to
P145,866.70, while those to the VOA amounted to P1,683, on account of which the respondent
Commission of Internal Revenue assessed against, and demanded from, the petitioner the payment
of P12,910.60 as deficiency sales tax and surcharge, pursuant to the following-provisions of the
National Internal Revenue Code:

Sec. 186. Percentage tax on sales of other articles.There shall be levied, assessed and
collected once only on every original sale, barter, exchange, and similar transaction either
for nominal or valuable considerations, intended to transfer ownership of, or title to, the
articles not enumerated in sections one hundred and eighty-four and one hundred and
eighty-five a tax equivalent to seven per centum of the gross selling price or gross value in
money of the articles so sold, bartered exchanged, or transferred, such tax to be paid by the
manufacturer or producer: . . . .

Sec. 183. Payment of percentage taxes.(a) In general.It shall be the duty of every
person conducting business on which a percentage tax is imposed under this Title, to make
a true and complete return of the amount of his, her, or its gross monthly sales, receipts or
earnings, or gross value of output actually removed from the factory or mill warehouse and
within twenty days after the end of each month, pay the tax due thereon: Provided, That any
person retiring from a business subject to the percentage tax shall notify the nearest internal
revenue officer thereof, file his return or declaration and pay the tax due thereon within
twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount
of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the
VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to
secure one, appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company,
the manufacturer or producer of oxygen and acetylene gases sold to the National Power
Corporation, cannot claim exemption from the payment of sales tax simply because its buyer the
National Power Corporation is exempt from the payment of all taxes." With respect to the sales
made to the VOA, the court held that goods purchased by the American Government or its agencies
from manufacturers or producers are exempt from the payment of the sales tax under the
agreement between the Government of the Philippines and that of the United States, provided the
purchases are supported by certificates of exemption, and since purchases amounting to only P558,
out of a total of P1,683, were not covered by certificates of exemption, only the sales in the sum of
P558 were subject to the payment of tax. Accordingly, the assessment was revised and the
petitioner's liability was reduced from P12,910.60, as assessed by the respondent commission, to
P12,812.16.1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the
sales it made to the NPC and the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall
be exempt from all taxes, except real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax
on sales made to it because while the tax is paid by the manufacturer or producer, the tax is
ultimately shifted by the latter to the former. The petitioner invokes in support of its position a 1954
opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes
"whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the
Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration,
which impose a tax on sales, have been described as "act[s] with schizophrenic symptoms,"3 as
they apparently have two faces one that of a vendor tax, the other, a vendee tax. Fortunately for
us the provisions of the Code throw some light on the problem. The Code states that the sales tax
"shall be paid by the manufacturer or producer,"4 who must "make a true and complete return of the
amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually
removed from the factory or mill warehouse and within twenty days after the end of each month, pay
the tax due thereon."5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the
purchaser is an entity like the NPC which is exempt from the payment of "all taxes, except real
property tax," the tax cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the
phrase "pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v.
United States,6 he said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid
and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He
pays or may pay the seller more for the goods because of the seller's obligation, but that is all. . . .
The price is the sum total paid for the goods. The amount added because of the tax is paid to get
the goods and for nothing else. Therefore it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that
reason alone that one may validly argue that it is a tax on the purchaser. The exemption granted to
the NPC may be likened to the immunity of the Federal Government from state taxation and vice
versa in the federal system of government of the United States. In the early case of Panhandle Oil
Co. v. Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the
imposition of a tax on sales of gasoline made to the Federal Government. Said the Supreme court
of the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United
States. It is immaterial that the seller and not the purchaser is required to report and make
 payment to the state. Sale and purchase constitute a transaction by which the tax is
measured and on which the burden rests. . . . The necessary operation of these enactments
when so construed is directly to retard, impede and burden the exertion by the United
States, of its constitutional powers to operate the fleet and hospital. . . . To use the number
of gallons sold the United States as a measure of the privilege tax is in substance and legal
effect to tax the sale. . . . And that is to tax the United States to exact tribute on its
transactions and apply the same to the support of the state.1wph1.t

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate
his charge even if it had been arbitrarily increased in the hope of getting more from the
government than could be got from the public at large. . . . It does not appear that the
government would have refused to pay a price that included the tax if demanded, but if the
government had refused it would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to
come nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital
[to which the sales were made], because they are instrumentalities of government and
cannot function naked and unfed, hitherto have been held entitled to have their bills for food
and clothing cut down so far as their butchers and tailors have been taxed on their sales;
and I had not supposed that the butchers and tailors could omit from their tax returns all
receipts from the large class of customers to which I have referred. The question of
interference with Government, I repeat, is one of reasonableness and degree and it seems
to me that the interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became
obvious that to test the constitutionality of a statute by determining the party on which the legal
incidence of the tax fell was an unsatisfactory way of doing things. The fall of the bastion was
signalled by Chief Justice Hughes' statement in James v. Dravo Constructing Co.8 that "These
cases [referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)]
have been distinguished and must be deemed to be limited to their particular facts."

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from
state taxation was not infringed by the imposition of a state sales tax with which the seller was
chargeable but which he was required to collect from the buyer, in respect of materials purchased
by a contractor with the United States on a cost-plus basis for use in carrying out its contract,
despite the fact that the economic burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has
prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it
no longer tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court
held that immunity from state regulation in the performance of governmental functions by Federal
officers and agencies did not extend to those who merely contracted to furnish supplies or render
services to the government even though as a result of an increase in the price of such supplies or
services attributable to the state regulation, its ultimate effect may be to impose an additional
economic burden on the Government.10
But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so
made in 1952 in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the
payment of a state privilege tax on the business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the
exercise of Esso's privilege to engage in such operations; so it is not "on" the federal
property. . . . Federal ownership of the fuel will not immunize such a private contractor from
the tax on storage. It may generally, as it did here, burden the United States financially. But
since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct.
208, 114 ALR 318, this has been no fatal flaw. . . . 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the
United States, by showing the drift of the decisions following announcement of the original rule, to
point up the that fact that even in those cases where exemption from tax was sought on the ground
of state immunity, the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross
receipts tax may be shifted to the Government, it could hardly matter that the shift comes
about by explicit agreement covering taxes rather than by being absorbed in a higher
contract price by bidders for a contract. The situation differed from that in the Panhandle and
similar cases in that they involved but two parties whereas here the transaction was
tripartite. These cases are condemned in so far as they rested on the economic ground of
the ultimate incidence of the burden being on the Government, but this condemnation still
leaves open the question whether either the state or the United States when acting in
governmental matters may be made legally liable to the other for a tax imposed on it as
vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the
issue. . . . Yet at the time it would have been a rash man who would find in this a dictum that
a sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may
immunize its contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less
can a claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the
tax becomes a part of the price which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. The method of listing the price and the tax separately and
defining taxable gross receipts as the amount received less the amount of the tax added, merely
avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely,
that the purchaser does not pay the tax. He pays or may pay the seller more for the goods because
of the seller's obligation, but that is all and the amount added because of the tax is paid to get the
goods and for nothing else.14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden
of the tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a
tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a
tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like
the NPC is permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except
that a claim is here made that the exemption of such sales from taxation rests on stronger grounds.
Even the Court of Tax Appeals appears to share this view as is evident from the following portion of
its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and
the respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the
agreement between the Government of the Philippines and the Government of the United
States, (See Commonwealth Act No. 733) provided such purchases are supported by
serially numbered Certificates of Tax Exemption issued by the vendee-agency, as required
by General Circular No. V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and
the United States of America Concerning Military Bases,16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for,
the United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free
of all licenses; fees; sales, excise or other taxes, or imposts; Government agencies,
including concessions, such as sales commissaries and post exchanges, messes and social
clubs, for the exclusive use of the United States military forces and authorized civilian
personnel and their families. The merchandise or services sold or dispensed by such
agencies shall be free of all taxes, duties and inspection by the Philippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of
the bases," in a word, only sales to the quartermaster, are exempt under article V from taxation.
Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or
even to the quartermaster but for a different purpose, are not free from the payment of the tax.
On the other hand, article XVIII exempts from the payment of the tax sales made within the
base by (not sales to) commissaries and the like in recognition of the principle that a sales tax is a
tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed
and that the exemption will not be held to be conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention of the parties.17 Hence, in so far as the
circular of the Bureau of Internal Revenue would give the tax exemptions in the Agreement an
expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under
section 186 of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.
 [G.R. No. 151135. July 2, 2004]

CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL

REVENUE, respondent.

DECISION
QUISUMBING, J.:

For review is the Decision[1] dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP
No. 62823, which reversed and set aside the decision[2] dated October 13, 2000, of the Court of Tax
Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the
sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the
alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate
courts Resolution,[3] dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles
and garments and other hospital supplies for export. Petitioners place of business is at the Subic
Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA)
as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. [4] As
an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes
except for the preferential tax provided for in Section 12 (c) [5] of Rep. Act No. 7227. Petitioner also
registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of
Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these goods
shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input
taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.[6]
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant
to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it
paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application
letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit,
this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No.
4. The second letter sought a refund or issuance of a tax credit certificate in the amount
of P1,108,307.72, representing erroneously paid input VAT for the period January 1,
1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated
the matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No.
5895. Petitioner stressed that Section 112(A)[7] if read in relation to Section 106(A)(2)(a)[8] of the
National Internal Revenue Code, as amended and Section 12(b)[9] and (c) of Rep. Act No. 7227
would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that
claims for refund are strictly construed against the taxpayer. Since petitioner failed to establish both
its right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in
Sections 204[10] and 229[11] of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT
CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.[12]

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and
112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entities
registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this
category, since it is a non-VAT taxpayer as evidenced by the Certificate of
Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No.
18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227,
said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227
and the Implementing Rules and Regulations of the Bases Conversion and Development Act of
1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997
for being barred by the two-year prescriptive period under Section 229 of the Tax Code.The tax
court also limited the refund only to the input VAT paid by the petitioner on the supplies and
materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for
input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the petitioners Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of
the CTA decision by the Court of Appeals. Respondent maintained that the exemption
of ContexCorp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes
such as the input component of the VAT. The Commissioner pointed out that from its very nature,
the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the
direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his
favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET
ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.[13]

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on
the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep.
Act No. 7227 and its implementing rules covers only the VAT imposable under Section 107 of the
[Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of
the seller-exporter the burden of which was passed on to the importer as an additional costs of the
goods.[14] This was because the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 107[15] of the Tax Code specifically imposes the VAT on importations. The
appellate court applied the principle that tax exemptions are strictly construed against the taxpayer.
The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only
to those for which they may be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials, capital,
and equipment as well as the sale of their goods and services.
 Petitioner timely moved for reconsideration of the Court of Appeals decision, but the
motion was denied.
Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL
REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE
ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT

PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON
ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND
1998.[16]

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of
the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to
petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of
supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of
petitioners VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous
and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and
unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered
firms and hence, said law should govern the case. Petitioner calls our attention to regulations issued
by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by
Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and
materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant
tax exemptions, such grant is not all-encompassing but is limited only to those taxes for which
a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not relieved from the
indirect taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax
paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on
by the seller, transferor, or lessor to the buyer, transferee or lessee.[17] Unlike a direct tax, such as
the income tax, which primarily taxes an individuals ability to pay based on his income or net wealth,
an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions
involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and
the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by
the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer
and ultimately to the final purchaser is the burden of the tax.[18]Stated differently, a seller who is
directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax.[19]
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under
VAT, the transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid.[20] This is a case wherein the VAT is removed at the exempt stage (i.e., at the point
of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser
of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or receipt.[21]

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.[22]

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firms business or non-retail customers. It is for this reason
that a sharp distinction must be made between zero-rating and exemption in designating a value-
added tax.[23]
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which
basically exempts them from all national and local internal revenue taxes, including VAT and
Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.[24]
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration[25] issued by the BIR. As such, it is exempt from VAT on all its sales and
importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can
claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input
VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed
on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not
the proper party to claim such VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-
Added Tax Regulations provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance
with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

Export Sales shall mean

...
 (5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise
known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act
No. 7227, otherwise known as the Bases Conversion and Development Act of 1992.

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered
and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international
agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc.
to which the Philippines is a signatory effectively subject such sales to zero-rate.

Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT
credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to
the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a
NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed
any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption
from the burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax
credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in
holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is
directly liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it
paid, if any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3,
2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19,
2001 are AFFIRMED. No pronouncement as to costs.
 [G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY

(PHILIPPINES), respondent.

DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga,
Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales
are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case,
the distinction between exempt entities and exempt transactions has little significance, because the
net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise,
has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on
capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in
ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside
the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal
portion of the Decision reads as follows:

WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.[3]

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at
the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga,
Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve
claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as
amended, to engage in the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38
with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of
 this Petition for Review), was filed on 4 October 1999 with Revenue District Office No.
83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents]
claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition
for Review in order to toll the running of the two-year prescriptive period.

For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled
that:
A claimant has the burden of proof to establish the factual basis
of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer.
This is due to the fact that claims for refund/credit [partake of] the nature of an
exemption from tax. Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to
prove the same is fatal to its claim for tax credit. He who claims exemption must be able
to justify his claim by the clearest grant of organic or statutory law. An exemption from
the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority
(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant
to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code,
as amended. As [respondents] business is not subject to VAT, the capital goods and
services it alleged to have purchased are considered not used in VAT taxable business.
As such, [respondent] is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes
on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of
the 1997 Tax Code on filing of a written claim for refund within two (2) years from the
date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4]

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives
under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987),
not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted
for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a
VAT-registered entity, though, it was still subject to the payment of other national internal revenue
taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for its refund within the two-year
prescriptive period. Such payments were -- to the extent of the refundable value -- duly supported
by VAT invoices or official receipts, and were not yet offset against any output VAT liability.
Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period
April 1, 1998 to June 30, 1999.[6]

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is

entitled to the fiscal incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10]It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
(RA) 7227[11] and 7844.[12]

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies,
articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought
into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or
otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such
activities.[13] Even so, respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption from export taxes, local
taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations applies if EO
226[15] is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use of
consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign
nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on
raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported
capital equipment and spare parts, export taxes, duties, imposts and fees, [16] local taxes and
licenses, and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and
regulations to the contrary -- extends[20] to that zone the provision stating that no local or national
taxes shall be imposed therein.[21] No exchange control policy shall be applied; and free markets for
foreign exchange, gold, securities and future shall be allowed and maintained. [22] Banking and
finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of
foreign currency depository units of local commercial banks and offshore banking units of foreign
banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it by
the Board of Investments, it also enjoys preferential credit facilities[25] and exemption from PD
1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered
person,[28] however, is entitled to their credits.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties or on each rendition of services in
the course of trade or business[29] as they pass along the production and distribution chain, the tax
being limited only to the value added[30] to such goods, properties or services by the seller,
transferor or lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services.[32] As such, it should be understood not in the context
of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its
nature as a tax on consumption.[33] In either case, though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.[35] Such method adopted the
mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe
and subsequently adopted in New Zealand and Canada.[36] Under the present method that relies on
invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the input
taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes,
the excess shall be carried over to the succeeding quarter or quarters.[42] Should the input taxes
result from zero-rated or effectively zero-rated transactions or from the acquisition of capital
goods,[43] any excess over the output taxes shall instead be refunded[44] to the taxpayer or
credited[45] against other internal revenue taxes.[46]

Zero-Rated and Effectively

Zero-Rated Transactions
 Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate obviously results
in no tax chargeable against the purchaser. The seller of such transactions charges no output
tax,[49] but can claim a refund of or a tax credit certificate for the VAT previously charged by
suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of
services[51] to persons or entities whose exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects such transactions to a zero rate. [52] Again,
as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic zero rating [54] is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making
such seller internationally competitive by allowing the refund or credit of input taxes that are
attributable to export sales.[55] Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear
the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax. But in an exemption there is only partial relief,[57] because the purchaser is not allowed any
[56]

tax refund of or credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties
to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to
the tax status -- VAT-exempt or not -- of the party to the transaction.[60] Indeed, such transaction is
not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes
paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT.[61] Such party is also not
subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on
its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. [62] While the liability is
imposed on one person, the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the
same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the
purchase transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT. [63] However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law
under which respondent was registered. The purchase transactions it entered into are, therefore,
not VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,[64] depending again on the application of the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country
-- for use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered
into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent,[67] unless the purchaser is exempt from the indirect burden of the VAT, in which case it
shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate,[68] because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] of the VAT system being enforced by the Bureau of
Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT,[73] then the same rule holds for such
exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country. [74] An ecozone
-- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the special law
creating the zone.[76] If respondent is located in an export processing zone[77] within that ecozone,
sales to the export processing zone, even without being actually exported, shall in fact be viewed
as constructively exported under EO 226.[78] Considered as export sales,[79] such purchase
transactions by respondent would indeed be subject to a zero rate.[80]

Tax Exemptions
Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT
as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the
law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.[81] Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
 Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still
be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the
law. That no VAT shall be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is
prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except
for real property taxes that presently are imposed on land owned by developers. [82] This similar and
repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or
national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be
subject to x x x internal revenue laws and regulations under PD 66[83] -- the original charter of PEZA
(then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
investments and creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except
those prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x
x[86] if brought to the ecozones restricted area[87] for manufacturing by registered export
enterprises,[88] of which respondent is one. These rules also apply to all enterprises registered with
the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used for the manufacture of their products; [91] on
required supplies and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought into
the zone for manufacturing.[93] In addition, they are given credits for the value of the national internal
revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively
used for the manufacture of their products,[94] as well as for the value of such taxes imposed on
domestic raw materials and supplies that are used in the manufacture of their export products and
that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto
accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption privilege
shall be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used
in the production of export goods,[99] and for locally produced raw materials, capital equipment and
spare parts used by exporters of non-traditional products[100] -- shall also be continuously enjoyed by
similar exporters within the ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.

Tax Refund as
Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the
taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims;[106] and of showing, by words too
plain to be mistaken, that the legislature intended to exempt them. [107] In the present case, all the
cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid to
pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
conferred by law upon it as an entity, not upon the transactions themselves.[108] Nonetheless, its
exemption as an entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon
to execute or administer such laws[109] will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly
provides that any VAT-registered suppliers sale of goods, property or services from the customs
territory to any registered enterprise operating in the ecozone -- regardless of the class or type of
the latters PEZA registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is
its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce as a
means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and accelerate
a sound and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall
x x x meet the tests of international competitiveness[,] accelerate development of less developed
regions of the country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer shall be devised and
extended to significant projects to compensate for market imperfections, to reward performance
contributing to economic development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments policy -- spelled
out earlier in RA 7227 -- of converting into alternative productive uses[118] the former military
reservations and their extensions,[119] as well as of providing them incentives[120] to enhance the
benefits that would be derived from them[121] in promoting economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export development into a
national effort[123] in order to win international markets. By providing many export and tax
incentives,[124] the State is able to drive home the point that exporting is indeed the key to national
survival and the means through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to compete
better in the regional as well as the global market. [126] After all, international competitiveness
requires economic and tax incentives to lower the cost of goods produced for export. State actions
that affect global competition need to be specific and selective in the pricing of particular goods or
services.[127]
 All these statutory policies are congruent to the constitutional mandates of providing incentives
to needed investments,[128] as well as of promoting the preferential use of domestic materials and
locally produced goods and adopting measures to help make these competitive. [129] Tax credits for
domestic inputs strengthen backward linkages. Rightly so, the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable economic
development.[130]

VAT Registration, Not Application

for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office. However, it
is now too late in the day for petitioner to challenge the VAT-registered status of respondent, given
the latters prior representation before the lower courts and the mode of appeal taken by petitioner
before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in manufacturing. [132] EO 226 even reiterates this privilege
among the incentives it gives to such enterprises.[133] Petitioner merely asserts that by virtue of the
PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital
goods and services respondent has purchased are not considered used in the VAT business, and
no VAT refund or credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are subject to the VAT,
although at zero rate. Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of
respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that issues and
arguments not adequately and seriously brought below cannot be raised for the first time on
appeal.[136] This is a matter of procedure[137] and a question of fairness.[138] Failure to assert within a
reasonable time warrants a presumption that the party entitled to assert it either has abandoned or
declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of such
regulations is not within the statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
cannot purport to do any more than interpret the latter.[142] The courts will not countenance one that
overrides the statute it seeks to apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is aptly determined,
no provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or
agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or agents. [144]
Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty. [145] Respondents registration carries
with it the presumption that, in the absence of contradictory evidence, an application for effective
zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has
been obeyed[146] by both the administrative officials and the applicant.
 Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely
to spur economic growth in the country and attain global competitiveness as envisioned in those
laws.
A VAT-registered status, as well as compliance with the invoicing requirements, [147] is sufficient
for the effective zero rating of the transactions of a taxpayer. The nature of its business and
transactions can easily be perused from, as already clearly indicated in, its VAT registration papers
and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its
mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be
determined, not by their nature, but by the taxpayers negligence -- a result not at all contemplated.
Administrative convenience cannot thwart legislative mandate.

Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate, the
tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime
instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment
of income tax for a certain number of years, depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu
of local and national taxes imposable upon business establishments within the ecozone cannot
outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected
thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA
7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such
provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax
imposed on consumption, not on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT payments made in excess of the zero
rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming
a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT
refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered with the
BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital
equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1,
1996, respondent would still have the same benefit under a general and express exemption
contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227,
extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by
the sponsorship speeches in Congress during the second reading of House Bill No. 14295, which
later became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes;
x x x tax credit for locally-sourced inputs x x x.

xxxxxxxxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x
tax credits for locally sourced inputs x x x.[153]

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to business

establishments registered and operating within an ecozone, which by law is considered as
a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions
intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered
and having satisfactorily complied with all the requisites for claiming a tax refund of or credit for the
input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
costs.
 [G.R. No. 147188. September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P.

TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.

DECISION
DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by
a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of 31 January 2001
in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals
(CTA) in C.T.A. Case No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is
not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount
of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue,
Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million.
These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by
the same notary public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10
million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989,
declaring, among other things, its gain from the sale of real property in the amount of P75,728.021.
After crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income
of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5
million, as evidenced by a Deed of Sale of Shares of Stocks. [9] Three and a half years later, or on 16
January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and
demand letter to the CIC for deficiency income tax for the year 1989 in the amount
of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed
against the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.[11]
 On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment[12] dated 9
January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year
1989 in the amount of P79,099,999.22, computed as follows:

Income Tax 1989

Net Income per return P75,987,725.00

Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation

Tax Due thereof at 35% P 61,595,703.75

Less: Payment already made

1. Per return P26,595,704.00

2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda
by covering up the additional gain of P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud
of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions
actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the
buyer of the property from CIC nor the seller of the same property to RMI. The additional gain
of P100 million (the difference between the second simulated sale for P200 million and the first
simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section
223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed
within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the
separate corporate personality of CIC should be disregarded. Toda, being the registered owner of
the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares
registered in the name of the individual directors of CIC, should be held liable for the deficiency
income tax, especially because the gains realized from the sale were withdrawn by him as cash
advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his
liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that
CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that
a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not
tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to
assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last
day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer
valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC
was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the
CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and,
accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January
1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property
owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged
that the latter was a representative, dummy, and a close business associate of the former, having
held his office in a property owned by CIC and derived his salary from a foreign corporation
(Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied[20] the
motion for reconsideration, prompting the Commissioner to file a petition for review[21] with the Court
of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary
expertise in matters of taxation, is better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present
petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED
NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE
PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE
CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER
TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989
HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale
by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further points out that the documents themselves prove
the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August
1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged
sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H.
Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page
20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40
million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as
of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was
withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax
return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if
any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion

or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other
hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when
it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in
bad faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action which
is unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May
1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40
million was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show
that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate
and one of the many trusted corporate executives of Toda. This information was revealed by Mr.
Boy Prieto, the assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did
not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,[28] Altonaga having left for the United States of America in January 1990. Nevertheless,
that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale
to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:

Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one hundred
percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock,
changing the structure of the property and the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to
be paid especially that the transfer from him to RMI would then subject the income to only 5%
individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of
acquiring and transferring title of the subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR
with the end in view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more
on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax
evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.[32] The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the consummation of the sale is relevant. A
sale by one person cannot be transformed for tax purposes into a sale by another by using the latter
as a conduit through which to pass title. To permit the true nature of the transaction to be disguised
by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another
and distinct entity when it is proved that the latter was merely a conduit is to sanction a
circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax
purposes.[34] The two sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as
amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources by every corporation organized in,
or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand
pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986[35] (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of
assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and
(3) failure to file a return, the period within which to assess tax is ten years from discovery of the
fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the
Opinion of the BIR on the tax consequence of the two sale transactions. [36] Thus, the BIR was amply
informed of the transactions even prior to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made with the execution of public documents and
the declaration of taxes for 1989. However, these circumstances do not negate the existence of
fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the
year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles
property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is
ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.[37] The assessment for the
1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the
correct assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable

for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. There are, however, certain instances in
which personal liability may arise. It has been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly
attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. [38]
 It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he
knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer
for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks
specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in
its audited financial statement as of December 31, 1989, attached hereto as Annex B and made a part hereof.
The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all
income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.[39][Underscoring Supplied].

When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held
himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since
its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares
of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of
the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE,
and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to
pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989,
plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.

ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 48533 August 31, 1992

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-

LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 19771 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income taxes which they claim to have
been erroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati,
Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation
based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were
assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of
the Philippines, during which petitioners were paid U.S. dollars as compensation for
services in their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A.
Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case
No. 2511 filed their income tax returns for the year 1970, they computed the tax due
by applying the dollar-to-peso conversion on the basis of the floating rate ordained
under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90

to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of

P6.25 to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February 8,
1973 and October 8, 1973, petitioners in said cases filed with the office of the
 respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of
Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of computing and paying
the corresponding income tax due from them. The aforesaid computation as shown
in the amended income tax returns resulted in the alleged overpayments, refund
and/or tax credit. Accordingly, claims for refund of said over-payments were filed with
respondent Commissioner. Without awaiting the resolution of the Commissioner of
the Internal Revenue on their claims, petitioners filed their petitioner for review in the
above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in

C.T.A. Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594
was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common
question of law and facts, that respondent Court of Tax Appeals heard the cases
jointly. In its decision dated September 26, 1977, the respondent Court of Tax
Appeals held that the proper conversion rate for the purpose of reporting and paying
the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled
cases was denied and the petitions for review dismissed, with costs against
petitioners. Hence, this petition for review on certiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing
free market rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes
into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate
used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine
income tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case
No. 2594) and, therefore, should be governed by the provisions of the National
Internal Revenue Code and its implementing rules and regulations, and not by the
provisions of Central Bank Circular No. 42 dated May 21, 1953, as contended by
petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by

Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a tax upon the taxable net income received
during each taxable year from all sources by a citizen of the Philippines, whether
residing here or abroad.
 Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their tax returns for the period involved herein, they gave their
legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal
(Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511
and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-71
dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027
dated May 4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of conversion
(Revenue Circulars Nos. 7-71 and 41-71) should be applied in order to
determine the true and correct value in Philippine pesos of the income
of petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter,
We are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal
Revenue and thus vote to deny the petition.

This basically an income tax case. For the proper resolution of these cases income may be defined
as an amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it means cash
or its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an amount of money or currency of
one country into an equivalent amount of money or currency of another." 6 When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned
nation's currency and were ALSO spending in said currency. There was no conversion, therefore,
from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
earnings do not fall within the classification of foreign exchange transactions, there occurred no
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,
receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He
also claims that he had to use the prevailing free market rate of exchange in these cases because
of the need to ascertain the true and correct amount of income in Philippine peso of dollar earners
for Philippine income tax purposes.

A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by concluding
that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of
two yeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as
follows:

Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the following schedule:

xxx xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars
were a valid exercise of the authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said
code until revoked by the Secretary of Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages
in US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners
forget that they are citizens of the Philippines, and their income, within or without, and in these
cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any
exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for
respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum
Circulars, being of long standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of
Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.

Gregorio Araneta for appellants.

Assistant Attorney Round for appellees.

MALCOLM, J.:

This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference
to the Civil Code, a law of Spanish origin.

STATEMENT OF THE CASE.

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage
was contracted under the provisions of law concerning conjugal partnerships (sociedad de
gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed
form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the
sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not
represent his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3, 1913, the income declared by
Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half of Susana Paterno. The general question had in the meantime
been submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17,
1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to Washington for a decision by the
United States Treasury Department. The United States Commissioner of Internal Revenue reversed
the opinion of the Attorney-General, and thus decided against the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno
in the Court of First Instance of the city of Manila against Collector of Internal Revenue and the
Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have
been wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under
the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint
was that if the income tax for the year 1914 had been correctly and lawfully computed there would
have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together
amounts of a total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the
plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year
1914, P3,786.08, in excess of the sum lawfully due and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and
the stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente
Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50,
the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made
by Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the
gross income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the
purpose of assessing the normal tax of one per cent on the net income there were allowed as
specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and
(2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and
wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was
assessed. The normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in
the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without
costs.

ISSUES.

The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that
is should be divided into two equal parts, because of the conjugal partnership existing between
them. The learned argument of counsel is mostly based upon the provisions of the Civil Code
establishing the sociedad de gananciales. The counter contentions of appellees are that the taxes
imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon
capital and property; that the fact that Madrigal was a married man, and his marriage contracted
under the provisions governing the conjugal partnership, has no bearing on income considered as
income, and that the distinction must be drawn between the ordinary form of commercial partnership
and the conjugal partnership of spouses resulting from the relation of marriage.

DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given the
course of history. The final stage has been the selection of income as the norm of taxation.
(See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into
statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils
arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on
those best able to pay. To carry out this idea, public considerations have demanded an exemption
roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is
supposed to reach the earnings of the entire non-governmental property of the country. Such is the
background of the Income Tax Law.

Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant
of time is called capital. A flow of services rendered by that capital by the payment of money from it
or any other benefit rendered by a fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature
of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be defined as "profits or gains."
(London County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N.
S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition
[1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon
[1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court, January
7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and wife
not living apart, contains the following:

The husband, as the head and legal representative of the household and general custodian of its
income, should make and render the return of the aggregate income of himself and wife, and for the
purpose of levying the income tax it is assumed that he can ascertain the total amount of said
income. If a wife has a separate estate managed by herself as her own separate property, and
receives an income of more than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both incomes more than $4,000, the wife's
return should be attached to the return of her husband, or his income should be included in her
return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The
tax in such case, however, will be imposed only upon so much of the aggregate income of both shall
exceed $4,000. If either husband or wife separately has an income equal to or in excess of $3,000,
a return of annual net income is required under the law, and such return must include the income of
both, and in such case the return must be made even though the combined income of both be less
than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their
combined incomes must be made in the manner stated, although neither one separately has an
income of $3,000 per annum. They are jointly and separately liable for such return and for the
payment of the tax. The single or married status of the person claiming the specific exemption shall
be determined as one of the time of claiming such exemption which return is made, otherwise the
status at the close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine Islands,
we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal
partnership. Recently in two elaborate decisions in which a long line of Spanish authorities were
cited, this court in speaking of the conjugal partnership, decided that "prior to the liquidation the
interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy,
which constitutes neither a legal nor an equitable estate, and does not ripen into title until there
appears that there are assets in the community as a result of the liquidation and settlement." (Nable
Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off.
Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such income has
become capital. Susana Paterno has no absolute right to one-half the income of the conjugal
partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return
in order to receive the benefit of the exemption which would arise by reason of the additional tax. As
she has no estate and income, actually and legally vested in her and entirely distinct from her
husband's property, the income cannot properly be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as
individual partners in an ordinary partnership. The husband and wife are only entitled to the
exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax
directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our
Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.
The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the
Philippine Islands and the United States Treasury Department. The decision of the latter overruling
the opinion of the Attorney-General is as follows:

TREASURY DEPARTMENT, Washington.

Income Tax.

FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence "from the Philippine authorities relative to the method of submission of
income tax returns by marred person."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises
that the Insular Auditor has been authorized to suspend action on the warrants in question
until an authoritative decision on the points raised can be secured from the Treasury
Department."

From the correspondence it appears that Gregorio Araneta, married and living with his wife,
had an income of an amount sufficient to require the imposition of the net income was
properly computed and then both income and deductions and the specific exemption were
divided in half and two returns made, one return for each half in the names respectively of
the husband and wife, so that under the returns as filed there would be an escape from the
additional tax; that Araneta claims the returns are correct on the ground under the Philippine
law his wife is entitled to half of his earnings; that Araneta has dominion over the income and
under the Philippine law, the right to determine its use and disposition; that in this case the
wife has no "separate estate" within the contemplation of the Act of October 3, 1913, levying
an income tax.

It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and
an application for refund made, and that the application for refund was rejected, whereupon
the matter was submitted to the Attorney-General of the Islands who holds that the returns
were correctly rendered, and that the refund should be allowed; and thereupon the question
at issue is submitted through the Governor-General of the Islands and Bureau of Insular
Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon the facts as stated, this office
holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this
case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the
application for refund was properly rejected.

The separate estate of a married woman within the contemplation of the Income Tax Law is
that which belongs to her solely and separate and apart from her husband, and over which
her husband has no right in equity. It may consist of lands or chattels.

The statute and the regulations promulgated in accordance therewith provide that each
person of lawful age (not excused from so doing) having a net income of $3,000 or over for
the taxable year shall make a return showing the facts; that from the net income so shown
there shall be deducted $3,000 where the person making the return is a single person, or
married and not living with consort, and $1,000 additional where the person making the
return is married and living with consort; but that where the husband and wife both make
returns (they living together), the amount of deduction from the aggregate of their several
incomes shall not exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and
separate estate in excess of $3,000, but together they have an income in excess of $4,000,
in which the latter event either the husband or wife may make the return but not both. In all
instances the income of husband and wife whether from separate estates or not, is taken as
a whole for the purpose of the normal tax. Where the wife has income from a separate
estate makes return made by her husband, while the incomes are added together for the
 purpose of the normal tax they are taken separately for the purpose of the additional tax. In
this case, however, the wife has no separate income within the contemplation of the Income
Tax Law.

Respectfully,

DAVID A. GATES.
Acting Commissioner.

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax
Law was drafted by the Congress of the United States and has been by the Congress extended to
the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its
provisions, the authoritative decision of the official who is charged with enforcing it has peculiar
force for the Philippines. It has come to be a well-settled rule that great weight should be given to
the construction placed upon a revenue law, whose meaning is doubtful, by the department charged
with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2
Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic
Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is
hereby affirmed with costs against appellants. So ordered.
 [G.R. No. 137377. December 18, 2001]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI

CORPORATION, respondent.

DECISION
PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15,
1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of
the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal
Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and contractors taxes
from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It is duly
registered to engage in such business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to
examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year
ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income
from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was
with the National Development Company (NDC) in connection with the construction and installation of a
wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of
Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income,
branch profit remittance, contractors and commercial brokers taxes. Respondent questioned this assessment in
a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of
surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985

Undeclared gross income (Philphos and

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14

Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57

Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57

Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00

Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50

20% int. p.a. fr. 7-15-85 to

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared net income from

Philphos and NDC construction projects . . . . . P 483,634,905.57

Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00

Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57

Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00

Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50

20% int. p.a. fr. 4-26-85

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16

III. DEFICIENCY CONTRACTORS TAX

FY ended March 31, 1985

Undeclared gross receipts/ gross income from

Philphos and NDC construction projects . . . . P 967,269,811.14

Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00

Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00

25% surcharge for late payment . . . . . . . . . 9,672,698.00

Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00

Add: 20% int. p.a. fr. 4-21-85 to

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKERS TAX

FY ended March 31, 1985

Undeclared share from commission income

(denominated as subsidy from Home

Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50

Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00

Add: 50% surcharge for non-declaration. . . . . . . 814,284.50

25% surcharge for late payment . . . . . . . . . 407,142.25

Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75

Add: 20% int. p.a. fr. 4-21-85

to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98

TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68

The 50% surcharge was imposed for your clients failure to report for tax purposes the aforesaid taxable
revenues while the 25% surcharge was imposed because of your clients failure to pay on time the above
deficiency percentage taxes.

x x x x x x x x x. [1]

Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross income
from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the
projects called for the construction and installation of facilities in the Philippines, the entire income therefrom
constituted income from Philippine sources, hence, subject to internal revenue taxes. The assessment letter
further stated that the same was petitioners final decision and that if respondent disagreed with it, respondent
may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The
first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and contractors
tax assessments in petitioners assessment letter. The second, CTA Case No. 4110, questioned the deficiency
commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring a one-time amnesty covering
unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail
of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his net
worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth as of
December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent to
ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30,
1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year (FY)
1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid the amount
of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.)
No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No.
64[3] included estate and donors taxes under Title III and the tax on business under Chapter II, Title V of the
National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the
immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the period
within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those taxpayers
who already filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an amended return and paying an additional 5% on the
increase in net worth to cover business, estate and donors tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No.
64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase of its
net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax amnesty
under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and
withdrawn. The Court of Tax Appeals disposed of as follows:

WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from
collecting the 1985 deficiency taxes it had assessed against petitioner and the same are deemed considered
[sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the amnesty under
Executive Order No. 41, as amended.[4]

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court
of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:

(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which
ruled that herein respondents deficiency tax liabilities were extinguished upon respondents availment of tax
amnesty under Executive Orders Nos. 41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes
assessed by petitioner.[5]

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of
E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax, branch profit remittance
tax and contractors tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner
claims, however, that respondent is disqualified from availing of the said amnesties because the latter falls
under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder,
viz:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of
the effectivity hereof;
 d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity
hereof as a result of information furnished under Section 316 of the National Internal Revenue
Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as
amended.
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No.
4109 had already been filed and was pending before the Court of Tax Appeals. Respondent therefore fell
under the exception in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers with income tax cases already filed in court as of the
effectivity hereof. The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax
cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a
taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax
amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractors tax assessments was filed by respondent with the Court of
Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No.
4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in Section 4
(b), hence, respondent was not disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit
remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal
Revenue Code.[6] In the tax code, this tax falls under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its deficiency branch
profit remittance tax assessment.
The difficulty herein is with respect to the contractors tax assessment and respondents availment of the
amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and donors
taxes and tax on business. Estate and donors taxes fall under Title III of the Tax Code while business taxes fall
under Chapter II, Title V of the same. The contractors tax is provided in Section 205, Chapter II, Title V of the
Tax Code; it is defined and imposed under the title on business taxes, and is therefore a tax on business.[7]
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of
the amnesty for business, estate and donors taxes. Instead, Section 8 of E.O. No. 64 provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with
this amendatory Executive Order shall remain in full force and effect.

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with
the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to
amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision
excepts from tax amnesty coverage a taxpayer who has income tax cases already filed in court as of the
effectivity hereof. As to what Executive Order the exception refers to, respondent argues that because of the
words income and hereof, they refer to Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O.
No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. [9] While
an amendment is generally construed as becoming a part of the original act as if it had always been contained
therein,[10] it may not be given a retroactive effect unless it is so provided expressly or by necessary
implication and no vested right or obligations of contract are thereby impaired.[11]
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No.
41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not
merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not covered in
the first.[12] It has been held that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not
subject to tax under the original act.[13] In an amendatory act, every case of doubt must be resolved against its
retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion
or violation of a revenue or tax law.[15] It partakes of an absolute forgiveness or waiver by the government of
its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean
slate.[16] A tax amnesty, much like a tax exemption, is never favored nor presumed in law.[17] If granted, the
terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally
in favor of the taxing authority.[18] For the right of taxation is inherent in government. The State cannot strip
itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty)
from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be
allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term income tax cases should be read as to refer to estate and
donors taxes and taxes on business while the word hereof, to E.O. No. 64. Since Executive Order No. 64 took
effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of
effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed
its supplementary tax amnesty return on December 15, 1986, respondent already fell under the exception in
Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted
therein.
It is respondents other argument that assuming it did not validly avail of the amnesty under the two
Executive Orders, it is still not liable for the deficiency contractors tax because the income from the projects
came from the Offshore Portion of the contracts. The two contracts were divided into two parts, i.e., the
Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the Offshore
Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to
Philippine taxes.
Before going into respondents arguments, it is necessary to discuss the background of the two contracts,
examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment
arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of
phosphatic fertilizer for the local and foreign markets.[20] The Philphos plant complex which was envisioned to
be the largest phosphatic fertilizer operation in Asia, and among the largest in the world, covered an area of
180 hectares within the 435-hectare Leyte Industrial Development Estate in the municipality of Isabel,
province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient
and integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/ port complex was
intended to be one of the major facilities for the industrial plants at the Leyte Industrial Development Estate. It
was to be specifically adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer
products, liquid materials and other products of Philphos, the Philippine Associated Smelting and Refining
Corporation (Pasar),[21] and other industrial plants within the Estate. The bidding was participated in by
Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project Between National
Development Company and Marubeni Corporation.[22] The Port Development Project would consist of a
wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil depot, utilities
systems, storage and service buildings, offsite facilities, harbor service vessels, navigational aid system, fire-
fighting system, area lighting, mobile equipment, spare parts and other related facilities. [23] The scope of the
works under the contract covered turn-key supply, which included grants of licenses and the transfer of
technology and know-how,[24] and:

x x x the design and engineering, supply and delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning of the Wharf-Port Complex as set forth in Annex I of this
Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Wharf/Port Complex through the Owner, with the design and construction of other facilities around the
site. The scope of works shall also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial port practice, for the timely and successful implementation
of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I.[25]

The contract price for the wharf/ port complex was Y12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion I;
(2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine Pesos
Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by
the Overseas Economic Cooperation Fund (OECF); and (b) by suppliers credit in favor of Marubeni from the
Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the
Japanese government as assistance to foreign governments to promote economic development. [26] The OECF
extended to the Philippine Government a loan of Y7,560,000,000.00 for the Leyte Industrial Estate Port
Development Project and authorized the NDC to implement the same.[27] The other type of financing is an
indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to
advance payment to its sub-contractors.[28]
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were
further broken down and subdivided according to the materials, equipment and services rendered on the
project. The price breakdown and the corresponding materials, equipment and services were contained in a list
attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled Turn-Key Contract for Ammonia Storage Complex Between
Philippine Phosphate Fertilizer Corporation and Marubeni Corporation.[30] The object of the contract was to
establish and place in operating condition a modern, reliable, efficient and integrated ammonia storage
complex adapted to the site for the receipt and storage of liquid anhydrous ammonia [31]and for the delivery of
ammonia to an integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. [32] The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading system,
transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and other related
facilities.[33] The scope of the works required for the completion of the ammonia storage complex covered the
supply, including grants of licenses and transfer of technology and know-how,[34] and:

x x x the design and engineering, supply and delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning of the Ammonia Storage Complex as set forth in Annex I
of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the
whole of the Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work and supply necessary
for, incidental to or appropriate under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the abovementioned
Annex I.[35]

The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like the NDC contract,
the price was divided into three portions. The price in Japanese currency was broken down into the Japanese
Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified as the
Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by suppliers credit from the
Export-Import Bank of Japan. The price stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the project and their individual prices. Like the
NDC contract, the breakdown in the Philphos contract is contained in a list attached to the latter as Annex
III.[36]
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the
two contracts corresponds to the two parts into which the contracts were classifiedthe Foreign Offshore
Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to the
Foreign Offshore Portion.[37] Japanese Yen Portion II and the Philippine Pesos Portion correspond to the
Philippine Onshore Portion.[38]
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractors tax on the
income from the two projects. In fact respondent claims, which petitioner has not denied, that the income it
derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes thereon
already paid to the Philippine government.[39] It is with regard to the gross receipts from the Foreign Offshore
Portion of the two contracts that the liabilities involved in the assessments subject of this case arose. Petitioner
argues that since the two agreements are turn-key,[40] they call for the supply of both materials and services to
the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and completed within the
territorial jurisdiction of the Philippines.[41] Accordingly, respondents entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross
receipts covering both labor and materials should be subjected to contractors tax in accordance with the ruling
in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four percent of
the gross receipts is hereby imposed on proprietors or operators of the following business establishments
and/or persons engaged in the business of selling or rendering the following services for a fee or
compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No.
4566;

xxxxxxxxx

(q) Other independent contractors. The term independent contractors includes persons (juridical or
natural) not enumerated above (but not including individuals subject to the occupation tax under the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees. It does not include regional or
area headquarters established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines and which act
as supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

x x x x x x x x x.[43]
 Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors or their employees.
The word contractor refers to a person who, in the pursuit of independent business, undertakes to do a specific
job or piece of work for other persons, using his own means and methods without submitting himself to
control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of engaging in business.[45] It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;[46] and is directly collectible from the person exercising the privilege. [47] Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges or business are done or performed within the
jurisdiction of said authority.[48] Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the
two subject contracts. Respondent, however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made
and the works and services to be performed by respondent are indeed classified into two. The first part,
entitled Breakdown of Japanese Yen Portion I provides:

Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of
materials and equipment which will be shipped to Leyte as units and lots. This subdivision of price is to
be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The agreed
subdivision of Japanese Yen Portion I is as follows:

x x x x x x x x x. [50]

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II and
the Philippine Pesos Portion enumerate other materials and equipment and the construction and installation
work on the project. In other words, the supplies for the project are listed under Portion I while labor and other
supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager
of the Industrial Plant Section II of the Industrial Plant Department of Marubeni Corporation in Japan who
supervised the implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan.[51] The machines and equipment were
designed, engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-
contractors in the technical appendices to each contract.[52] Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication, engineering and
manufacture thereof;[53] Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone which
provided the rubber fenders of the mobile equipment;[54] and B.S. Japan for the supply of radio
equipment.[55] The engineering and design works made by Kawasaki Steel Corporation included the lay-out of
the plant facility and calculation of the design in accordance with the specifications given by
respondent.[56] All sub-contractors and manufacturers are Japanese corporations and are based in Japan and all
engineering and design works were performed in that country.[57]
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2)
sets of ship unloader and loader; several boats and mobile equipment.[58] The ship unloader unloads bags or
bulk products from the ship to the port while the ship loader loads products from the port to the ship. The
unloader and loader are big steel structures on top of each is a large crane and a compartment for operation of
the crane. Two sets of these equipment were completely manufactured in Japan according to the specifications
of the project. After manufacture, they were rolled on to a barge and transported to Isabel, Leyte. [59] Upon
reaching Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where they
were installed.[60] Their installation simply consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in
Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four sets of
tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in Japan.
They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all
on wheels and self-propelled. Once unloaded at the port, they were ready to be driven and perform what they
were designed to do.[62]
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the
NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams and other steel structures, navigational and
communication as well as electrical equipment. [63]
In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the
ammonia storage tanks and refrigeration units.[64] The steel plates for the tank were manufactured and cut in
Japan according to drawings and specifications and then shipped to Isabel. Once there, respondents employees
put the steel plates together to form the storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply installed there. [65] Annex III to the
Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material and spare
parts.
All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts.[66] The inspection was made by representatives of
respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private consultancy
firm to verify the correctness of the tests on the machines and equipment[67]while Philphos sent a
representative to Japan to inspect the storage equipment.[68]
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction
Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects provided
by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were
duly issued by Kawasaki in Japanese and English.[69] Yashima & Co. Ltd. and B.S. Japan were likewise paid
by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations, payments for all materials and equipment under
Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through the
Philippine National Bank, established letters of credit in favor of respondent through the Bank of Tokyo. The
letters of credit were financed by letters of commitment issued by the OECF with the Bank of Tokyo. The
Bank of Tokyo, upon respondents submission of pertinent documents, released the amount in the letters of
credit in favor of respondent and credited the amount therein to respondents account within the same bank.[71]
Clearly, the service of design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination [72]of the two
projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines.
While the construction and installation work were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of
ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks
and refrigeration units were made and completed in Japan. They were already finished products when shipped
to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets,
pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to
the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan.
All services for the design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering Equipment &
Supply Co[73]is not in point. In that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized air-conditioning systems for clients who
contracted its services. Engineering, however, did not manufacture all the materials for the air-conditioning
system. It imported some items for the system it designed and installed.[74] The issues in that case dealt with
services performed within the local taxing jurisdiction. There was no foreign element involved in the supply
of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.
G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous.
We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So
finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price
was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made
in cash and through irrevocable letters of credit. 3Fourteen promissory notes were signed for the
balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in
due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on
the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable
on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon
served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The
NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of
P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a petition
for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of
the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income from sources
within the Philippines. The following items of gross income shall be treated as gross
income from sources within the Philippines:

(1) Interest. Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or labor
and the sale from which the (interest) income flowed had its situs' in the Philippines. The law
specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there
speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where
the contract is signed. The residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of payment, is the determining
factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p.
128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of
L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd.,
4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest payment
paid by him can have no other source than within the Philippines. The interest is paid not by
the bond, note or other interest-bearing obligations, but by the obligor. (See mertens,
Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels purchased and
acquired by it from the Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA
Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of
these promisory notes, which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on
the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which
paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted
to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the
purchase price of the vessels acquired by petitioner is interest derived from sources within
the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. xxxx xxx xxx xxx

 (b) Exclusion from gross income. The following items shall not be included in gross
income and shall be exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. Interest upon the obligations of the Government of
the Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act
authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which
in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such
authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above
note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this
question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the government in consonance with and certainly not
against the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real
or personal capacity, executors, administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the Government of the Philippines having
control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any nonresident alien
individual, not engaged in trade or business within the Philippines and not having any office
or place of business therein, shall (except in the cases provided for in subsection (a) of this
section) deduct and withhold from such annual or periodical gains, profits and income a tax
to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in section fifty-
three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be returned and
paid in the same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations
of the NDC but without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is
governed in its proprietary activities not only by its charter but also by the Corporation Code and
other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the
Tax Code, thus:

Section 53(c). Return and Payment. Every person required to deduct and withhold any
tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of
April of each year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities
of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for
the determination whether or not the income paid to an individual is not subject to
withholding. In case the Commissioner of Internal Revenue decides that the income paid to
an individual is not subject to withholding, the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from
liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is

so ordered.
G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.

x---------------------------------------------------------x

G.R. No. L-13049 February 28, 1961

ARTHUR HENDERSON, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Office of the Solicitor General for petitioner.

Formilleza & Latorre for respondent.

PADILLA, J.:

These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur
Henderson (G.R. No. L-13049) under the provisions of section 18, Republic Act No. 1125, for review
of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and
adopted by the Court of Tax Appeals in Case No. 237.

The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed
with the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952,
inclusive, where the following net incomes, personal exemptions and amounts subject to tax appear:

1948:
Net Income P29,573.79
.......................................................
Less:Personal Exemption 2,500.00
..............................
Amount subject to tax P27,073.79
.......................................
1949:
Net Income P31,817.66
.......................................................
Less:Personal Exemption 2,500.00
..............................
Amount subject to tax P29,317.66
.......................................
1950:
Net Income P34,815.74
.......................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P31,815.74
.......................................
 1951:
Net Income P32,605.83
........................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P29,605.83
.......................................
1952:
Net Income P36,780.11
.......................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P33,780.11
.......................................

(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal
Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and
paid the amounts assessed as follows:

1948:
14 May 1949, O.R. No. 52991, Exhibit B P2,068.12
......
12 September 1950, O.R. No. 160473, Exhibit 2,068.11
B-1 .
Total Paid ......................................................... P4,136.23
1949:
13 May 1950, O.R. No. 232366, Exhibit G P2,314.95
...........
15 September 1950, O.R. No. 247918, Exhibit 2,314.94
G-1 .
Total Paid ......................................................... P4,629.89
1950:
27 April 1951, O.R. No. 323173, Exhibit K P7,273.00
....
1951:
Amount withheld from salary and paid by P5,780.40
employer .
15 May 1952, O.R. No. 33250, Exhibit O 360.50
.................
15 August 1952, O.R. No. 383318, Exhibit O-1 361.20
....
Total Paid ......................................................... P6,502.10
1952:
Amount withheld from salary and paid by P5,660.40
employer .
 18 May 1953, O.R. No. 438026, Exhibit T 1,160.30
..
13 August 1953, O.R. No. 443483, Exhibit T-1 1,160.30
.....
Total Paid ......................................................... P7,981.00

On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue
reassessed the taxpayers'income for the years 1948 to 1952, inclusive, as follows:

1948:
Net income per return
.................................. P29,573.79
Add:
Rent expense
........................................................... 7,200.00
Additional bonus for 1947 received May 13, 1948 6,500.00
.
Other income:
Manager's residential expense (2/29/48 1,400.00
a/c/#4.51)
Manager's residential expense (refer to 1948 P 1,849.32
& L) ..
Entrance fee Marikina Gun & Country Club
.... 200.00
Net income per investigation P46,723.11
............................................
Less: Personal exemption
................................................ 2,500.00
Net taxable income
.......................................................... P44,223.11
Tax due thereon
............................................................... P8,562.47
Less: Amount of tax already paid per OR #52991 &
160473
.. 4,136.23
Deficiency tax still due & assessable ............................ P4,426.24

1949:
Net income per return
.................................. P31,817.66
Add: disallowances
Capital loss (no capital gain)
................... P3,248.84
Undeclared bonus
..................... 3,857.75
Rental allowance from A.I.U. 1,800.00
 ...................
Subsistence allowance from A.I.U.
... 6,051.30 14,958.09
Net income per investigation P46,775.75
............................................
Less: Personal exemption 2,500.00
.................................................
Amount of income subject to tax 43,275.75
...................................
Tax due thereon P8,292.21
................................................................
Less: tax already assessed & paid per OR Nos. 232366 & 4,629.89
247918
Deficiency tax due P3,662.23
.............................................................
(Should be) ...................................................................... 3,662.32

1950:
Net income per return
.................................. P34,815.74
Add:
Rent, electricity, water allowances
......................... 8,373.73
Net income per investigation P43,189.47
............................................
Less: Personal exemption 3,000.00
.................................................
Net taxable income P40,189.47
............................................................
Tax due thereon P10,296.00
................................................................
Less: tax already paid per OR No. #323173 7,273.00
Deficiency tax due & assessable P3,023.00
...................

1951:
Net income per return
.................................. P32,605.83
Add: house rental allowance from AIU 5,782.91
Net income per investigation
............................................ P83,388.74
Less: Personal exemption
................................................. 3,000.00
Amount of income subject to tax
.................................... P35,388.74
 Tax due thereon
................................................................ P 8,560.00
Less: tax already assessed and paid per O.R. Nos.
A33250
& 383318
....................... 6,502.00
Deficiency tax due
.................. P2,058.00

1952:
Net income per return
.................................. P36,780.11
Add:
Withholding tax paid by company
..................................... 600.00
Travelling allowances
....................................................... 3,247.40
Allowances for rent, telephone, water, electricity,
etc. ..... 7,044.67
Net income per investigation P47,672.18
............................................
Less: Personal exemption 3,000.00
.................................................
Net taxable income P44,672.18
..................................
Tax due thereon P12,089.00
................................................................
Less: Tax already withheld P5,660.40
Tax already paid per O.R. Nos. #438026,
443484 2,320.60 7,981.00
Deficiency tax still due & collectible P4,108.00
...............................

(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February

1954 with respectto those due for the years 1948, 1949, 1950 and 1952and on or before 15
February 1954 with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).

In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable
income thetaxpayer-husband's allowances for rental, residential expenses,subsistence, water,
electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun
and Country Bluc paid by his employer for hisaccount; and travelling allowance of his wife. On 26
and27 January 1954 the taxpayers asked for reconsiderationof the foregoing assessment (pp. 29,
31, BIR rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in
support of their request for reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards
the husband-taxpayer's allowances forrental and utilities such as water, electricity and telephone,he
did not receive the money for said allowances, but thatthey lieved in the apartment furnished and
paid for byhis employer for its convenience; that they had no choicebut live in the said apartment
furnished by his employer,otherwise they would have lived in a less expensive one;that as regards
his allowances for rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948,
rentalof P1,800 and subsistence of P6,051.50 (the latter merelyconsisting of allowances for rent and
utilities such as light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950,
rental of P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952,
onlythe amount of P3,900 for each year, which is the amountthey would have spent for rental of an
apartment includingutilities, should be taxed; that as regards the amount ofP200 representing
entrance fee to the Marikina Gun andCountry Club paid for him by his employer in 1948, thesame
should not be considered as part of their income forit was an expense of his employer and his
membershiptherein was merely incidental to his duties of increasingand sustaining the business of
his employer; and that asregards the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it
should not be considered as part of theirincome because she merely accompanied him in his
businesstrip to New York as his secretary and, at the behestof her husband's employer, to study
and look into the detailsof the plans and decorations of the building intendedto be constructed byn
his employer in its property at DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid
the deficiency taxes assessed under Official ReceiptsNos. 451841, 451842, 451843, 451748 and
451844 (ExhibitsC, I, M, Q, and Y). After hearing conducted by theConference Staff of the Bureau of
Internal Revenue on5 October 1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended
to the Collector of Internal Revenuethat the assessments made on 28 November 1953 (Exhibits2, 4,
6, 8, 10) be sustained except that the amountof P200 as entrance fee to the Marikina Gun and
CountryClub paid for the husband-taxpayer's account by his employerin 1948 should not be
considered as part of thetaxpayers' taxable income for that year (pp. 95-107, BIRrec.). On 14 July
1955, in line with the recommendationof the Conference Staff, the Collector of Internal
Revenuedenied the taxpayers' request for reconsideration, exceptas regards the assessment of
their income tax due for theyear 1948, which was modified as follows:

Net income per return P29,573.79

Add: Rent expense 7,200.00
Additional bonus for 1947
received on May 13, 1948 6,500.00
Manager's residential expense
(2/29/48 a/c #4.41) 1,400.00
Manager's residential expense
(1948 profit and loss) 1,849.32
Net income per investigation P46,523.11
Less: Personal exemption 2,500.00
Net taxable income P44,023.11
Tax due thereon P 8,506.47
Less; Amount already paid 4,136.23
Deficiency tax still due P 4,370.24

and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023
for 1950, P2,058 for1951 and P4,108 for 1952, 5% surcharge and 1% monthlyinterest thereon from
1 March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City
Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain
sought a reconsideration of the denial of their requestfor reconsideration and offered to settle the
case ona more equitable basis by increasing the amount of thetaxable portion of the husband-
taxpayer's allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the
employee of the benefits he derived therefrommeasured by what he had saved on account
thereof'in the ordinary course of his life ... for which hewould have spent in any case'". The
taxpayers also reiteratedtheir previous stand regarding the transportationallowance of the wife-
taxpayer of P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18,
P569.33,P1,294, P354 and P2,164, or a total of P7,858.51, (Exhibit Z). On 10 February 1956 the
taxpayers again requestedthe Collector of Internal Revenue to refund to them theamounts allegedly
paid in excess as income taxes for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof
Internal Revenue did not take any action on the taxpayers'request for refund.

On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision
of theCollector of Internal Revenue (C.T.A. Case No. 237). Afterhearing, on 26 June 1957 the Court
rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer)
employment as president of theAmerican International Underwriters as president of theAmerican
International Underwriters of the Philippines,Inc. does not require him to occupy the apartments
suppliedby his employer-corporation;" that, however, onlythe amount of P4,800 annually, the ratable
value to him ofthe quarters furnished constitutes a part of taxable income;that since the taxpayers
did not receive any benefitout of the P3,247.40 traveling expense allowance grantedin 1952 to the
wife-taxpayer and that she merely undertookthe trip abroad at the behest of her husband's
employer,the same could not be considered as income; andthat even if it were considered as such,
still it could not besubject to tax because it was deductible as travel expense;and ordering the
Collector of Internal Revenue to refundto the taxpayers the amount of P5,109.33 with interestfrom
27 February 1954, without pronouncement as tocosts. The taxpayers filed a motion for
reconsiderationclaiming that the amount of P5,986.61 is the amount refundableto them because the
amounts of P1,400 and P1,849.32 as manager's residential expenses in 1948 shouldnot be
included in their taxable net income for the reasonthat they are of the same nature as the rentals for
theapartment, they being mainly expenses for utilities aslight, water and telephone in the apartment
furnished bythe husbant-taxpayer's employer. The Collector of InternalRevenue filed an opposition
to their motion for reconsideration.He also filed a separate motion for reconsiderationof the decision
claiming that his assessmentunder review was correct and should have been affirmed.The
taxpayers filed an opposition to this motion for reconsiderationof the Collector of Internal Revenue;
thelatter, a reply thereto. On 28 September 1957 the Courtdenied both motions for reconsideration.
On 7 October1957 the Collector of Internal Revenue filed a notice ofappeal in the Court of Tax
Appeals and on 21 October1957, within the extension of time previously granted bythis Court, a
petition for review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of appealin
the Court of Tax Appeals and a petition for review inthis Court (G.R. No. L-13049).

The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the
Court of TaxAppeals:

I. The Court of Tax Appeals erred in finding that theherein respondent did not have any
choice in the selection ofthe living quarters occupied by him.

II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a minor
company official butthe President of his employer-corporation, in the appreciationof
respondent's alleged lack of choice in the matter of the selectionof the quarters occupied by
him.

III. The Court of Tax Appeals erred in giving full weightand credence to respondent's
allegation, a self-serving and unsupported declaration that the ratable value to him of the
living quarters and subsistence allowance was only P400.00 a month.

IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per
annum, or P400.00 a month constitutes income to respondent.

V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum, or
P400.00 a month as the only amount taxable aganst respondent during the five tax years in
question.
 VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount of
P3,247.40 constituted income to respondent and, therefore, subject to the income tax.

VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with
interest from February 17, 1954. (G.R. No. L-12954.)

The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:

I. The Court of Tax Appeals erred in its computation of the 1948 income tax and
consequently in the amount that should be refunded for that year.

II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained in
its resolution dated September 28, 1957. (G.R. No. L-13049.)

The Government's appeal:

The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not
sufficient to support the findings and conclusion of the Court of Tax Appeals that the quarters
occupied by the taxpayers were not of their choice but that of the husband-taxpayer's employer; that
it did not take into consideration the fact that the husband-taxpayer is not a mere minor company
official, but the highest executive of his employer-corporation; and that the wife-taxpayer's trip
abroad in 1952 was not, as found by the Court, a business but a vacation trip. In Collector of
Internal Revenue vs. Aznar, 56, Off. Gaz. 2386, this Court held that in petitions for review under
section 18, Republic Act No. 1125, it may review the findings of fact of the Court of Tax Appeals.

The determination of the main issue in the case requires a review of the evidence. Are the
allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation,
including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by
his employer-corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act
No. 466, National Internal Revenue Code, provides:

"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such property;
also from interest, rents dividend, securities, or the transaction of any business carried on for
gain or profit, or gains, profits, and income derived from any source whatever. (Emphasis
ours.)

The Court of Tax Appeals found that the husband-taxpayer "is the president of the American
International Underwriters for the Philippines, Inc., a domestic corporation engaged in insurance
business;" that the taxpayers "entertained officials, guests and customers of his employer-
corporation, in apartments furnished by the latter and successively occupied by him as president
thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr,
chairman of the parent corporation of the American International Underwriters for the Philippines,
Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey Boulevardby
petitioner's employer-corporatio, the construction of a building thereon, the drawing of prospectus
and plans for said building, and other related matters."

Arthur H. Henderson testified that he is the President of American International Underwriters for the
Philippines, Inc., which representa a group of American insurance companies engagad in the
business of general insurance except life insurance; that he receives a basic annual salary of
P30,000 and allowance for house rental and utilities like light, water, telephone, etc.; that he and his
wife are childless and are the only two in the family; that during the years 1948 to 1952, they lived in
apartments chosen by his employer; that from 1948 to the early part of 1950, they lived at the
Embassy Apartments on Dakota Street, Manila, where they had a large sala, three bedrooms,
dining room, two bathrooms, kitchen and a large porch, and from the early part of 1950 to 1952,
they lived at the Rosaria Apartments on the same street where they had a kitchen, sala, dining room
two bedrooms and bathroom; that despite the fact that they were the only two in the family, they had
to live in apartments of the size beyond their personal needs because as president of the
corporation, he and his wife had to entertain and put up houseguests; that during all those years of
1948 to 1952, inclusive, they entertained and put up houseguests of his company's officials, guests
and customers such as the president of C, V. Starr & Company, Inc., who spent four weeks in his
apartment, Thomas Cocklin, a lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of
AIUPI; that were he not required by his employer to live in those apartments furnished to him, he
and his wife would have chosen an apartment only large enough for them and spend from P300 to
P400 monthly for rental; that of the allowances granted to him, only the amount of P4,800 annually,
the maximum they would have spent for rental, should be considered as taxable income and the
excess treated as expense of the company; and that the trip to New York undertaken by his wife in
1952, for which she was granted by his employer-corporation travelling expense allowance of
P3,247.40, was made at the behest of his employer to assist its architect in the preparation of the
plans for a proposed building in Manila and procurement of supplies and materials for its use, hence
the said amount should not be considered as part of taxable income. In support of his claim, letters
written by his wife while in New York concerning the proposed building, inquiring about the progress
made in the acquisition of the lot, and informing him of the wishes of Mr. C. V. Starr, chairman of the
board of directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a letter written
by the witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1) were presented
in evidence.

Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every
Friday night at their apartment for about 18 to 20 people; that their guests were officials of her
husband's employer-corporation and other corporations; that during those parties movies for the
entertainment of the guests were shown after dinner; that they also entertained during luncheons
and breakfasts; that these involved and necessitated the services of additional servants; and that in
1952 she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the
proposed building and entertainment because her husband could not make the trip himself, and
because "the woman of the family is closer to those problems."

The evidence presented at the hearing of the case substantially supports the findings of the Court of
Tax Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore,
that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a
kitchen, sala dining room, two bedrooms and a bathroom, exceeded their personal needs. But the
exigencies of the husband-taxpayer's high executive position, not to mention social standing,
demanded and compelled them to live in amore spacious and pretentious quarters like the ones
they had occupied. Although entertaining and putting up houseguests and guests of the husbnad-
taxpayer's employer-corporation were not his predominand occupation as president, yet he and his
wife had to entertain and put up houseguests in their apartments. That is why his employer-
corporation had to grant him allowances for rental and utilities in addition to his annual basic salary
to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence,
the fact that the taxpayers had to live or did not have to live in the apartments chosen by the
husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question
redounded to their personal benefit or was retained by them. Their bills for rental and utilities were
paid directly by the employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104,
170-193, t.s.n.). Neverthelss, as correctly held by the Court of Tax Appeals, the taxpayers are
entitled only to a ratable value of the allowances in question, and only the amount of P4,800
annually, the reasonable amount they would have spent for house rental and utilities such as light,
water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses
of the corporation.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New
York at the behest of her husband's employer-corporation to help in drawing up the plans and
specificatins of a proposed building, is also supported by the evidence. The parts of the letters
written by the wife-taxpayer to her husband while in New York and the letter written by the husband-
taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of the
allowance for travellking expenses redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on for tumors while in New York
wsa but incidental to her stay there and she must have merely taken advantage of her presence in
that city to undergo the operation.

The taxpayers' appeal:

The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and
P1,849.32, or a total of P3,249.32, for "manager's residential expense" in 1948 as taxable income
despite the fact "that they were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily incidental to the apartment
furnished to him by his employer."

Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the
books of accound of the American International Underwriters for the Philippines, Inc., testified that
he total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur
Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as
manager's residential expense while the amount of P1,849.32 was entered as profit and loss
account."

Buenaventura Loberiza, acting head of the accouting department of the American International
Underwriters for the Philippines, Inc., testified that rentals, utilities, water, telephone and electric bills
of executives of the corporation were entered in the books of account as "subsistence allowances
and expenses;" that there was a separate account for salaries and wages of employees and
officers; and that expenses for rentals and other utilities were not charged to salary accounts.

The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's
residential expense" in 1948 should be treated as rentals for apartments and utilities and should not
form part of the ratable value subject to tax.

The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net
income per return, the amount of P6,500, the bonus received in 1948, and P4,800, the taxable
ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom
the amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to
income tax. The income tax due on this amount is P6,957.19 only. Deducting the amount of income
tax due, P6,957.19, from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of
P1,605.28 is the amount refundable to the taxpayers. Add this amount to P563.33, P1,294.00,
P354.00 and P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is
P5,986.61.

The judgment under review is modified as above indicated. The Collector of Internal Revenue is
ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.
G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Vicente L. San Luis for petitioner.

Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete, Solicitor A. B.
Afurong and Atty. V. G. Saldajeno for respondents.

REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of
Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent
Commissioner of Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency
income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of
payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business
of leasing real properties. It commenced actual business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control
ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the
same Isabelo P. Lim.1wph1.t

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City,
all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes
of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the
sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they
discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and
P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in
the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings,
respondent Commissioner of Internal Revenue issued its letter-assessment and demand for
payment of deficiency income tax and surcharge against petitioner corporation, computed as
follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
Undeclared Rental Receipt
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00
Net income per investigation P27,746.00
 Tax due thereon P5,549.00
Less: Amount already assessed 657.00
Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57
Net income per audited return P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the

above assessment but the latter denied said request and reiterated its original assessment and
demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of
payment; hence, the corporation filed its petition for review before the Tax Appeals court,
questioning the correctness and validity of the above assessment of respondent Commissioner of
Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as
unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of
the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment of
rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied having received or
collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof,
explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax
return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain
tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that
a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the
corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought
not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent
Commissioner of its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G.
Solis, who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956
tax return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with
respect to the difference between this omitted income (P12,100.00) and the sum (P20,199.00)
found by respondent Commissioner as undeclared in 1956, petitioner corporation, through the same
witness (Solis), tried to establish that it did not collect or receive the same because, in view of the
refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de
Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner
corporation, on the other, had verbally agreed in 1956 to turn over to petitioner corporation six per
cent (6%) of the value of all its properties, computed at P21,630.00, in exchange for whatever
rentals the Lims may collect from the tenants. And, with respect to the difference between the
admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as
unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that
petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim,
collected part thereof and may have reported the same in his own personal income tax return; that
same Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a
certain tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation had
no actual or constructive control and which were withdrawn only in 1958; and that a sub-tenant paid
P4,200.00 which ought not be declared as rental income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that some of its buildings are old and out of style;
hence, they are entitled to higher rates of depreciation than those adopted by respondent in his
assessment.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the
respondent that he personally interviewed the tenants of petitioner and found that these tenants had
been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P.
Lim, but these payments were not declared in the corresponding returns; and that in applying rates
of depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue
Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and
demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner
has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the
following alleged errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental income
of P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income
of P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente
G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of
P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more
than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same
examiners as unreported rental income for the year 1957, contrary to its original claim to the
revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by clear
and convincing evidence, that in the case is lacking.
With respect to the balance, which petitioner denied having unreported in the disputed tax returns,
the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands
and only later transferred or disposed of the ownership of the buildings existing thereon to petitioner
corporation, so as to justify the alleged verbal agreement whereby they would turn over to petitioner
corporation six percent (6%) of the value of its properties to be applied to the rentals of the land and
in exchange for whatever rentals they may collect from the tenants who refused to recognize the
new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged
transferors, or by any document or unbiased evidence. Hence, the first assigned error is without
merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the
remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above
noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957
personal income tax return submitted in court to establish that the rental income which he allegedly
collected and received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to
the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is
deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in
1957 should have been reported as rental income in said year, since it is income just the same
regardless of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this respect should not be
disturbed when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal
Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown any
arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed
excessive depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in
accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court
pronounced as having strong persuasive effect in this jurisdiction, for having been the result of
scientific studies and observation for a long period in the United States, after whose Income Tax
Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of Internal Revenue
vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal Revenue vs.
E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing error is
devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-
appellant, Limpan Investment Corporation.
COMMISSIONER OF G.R. No. 160528
INTERNAL REVENUE,
Petitioner, Present:
PANGANIBAN,CJ, Chairperson,
YNARES-SANTIAGO,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ
PHILIPPINE AIRLINES, INC., Promulgated:
Respondent. October 9, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ:

A franchise is a legislative grant to operate a public utility. Like those of any other statute, the

ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature. In

the present case, Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two

alternatives: (a) the basic corporate income tax based on PALs annual net taxable income computed in

accordance with the provisions of the National Internal Revenue Code or (b) a franchise tax of two percent of

gross revenues. Availment of either of these two alternatives shall exempt the airline from the payment of all

other taxes, including the 20 percent final withholding tax on bank deposits.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the September

30, 2003 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 67970. The CA reversed the June 13,

2001 Decision[3] and the November 13, 2001 Resolution[4] of the Court of Tax Appeals (CTA) in CTA Case

No. 5824. The assailed CA Decision disposed as follows:

WHEREFORE, the petition is GRANTED, and [the] Commissioner of Internal

Revenue is hereby directed to refund to the [respondent] the amount of P731,190.45
representing the 20% final withholding tax collected and deducted by depository banks on the
 petitioners interest income or, in the alternative, to allow the [respondent] a tax credit for the
same amount.[5]

The Facts

The CA narrates the facts thus:

[Respondent] Philippine Airlines, Inc. (PAL) is a domestic corporation organized in

accordance with the laws of the Republic of the Philippines, while [Petitioner] Commissioner
of Internal Revenue (CIR) is in-charge of the assessment and collection of the 20% final tax
on interest on Philippine currency bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements, imposed on domestic
corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code
(NIRC).

On November 5, 1997, [respondents] AVP-Revenue Operations and Tax Services

Officer, Atty. Edgardo P. Curbita, filed with the Office of the then Commissioner of Internal
Revenue, Mdm. Liwayway Vinzons-Chato, a written request for refund of the amount
of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld
from the [respondent] by various withholding agent banks, and which amount includes the
20% final withholding tax withheld by the United Coconut Planters Bank (UCPB) and Rizal
Commercial Banking Corporation (RCBC) for the period starting March 1995 through
February 1997.

On December 4, 1997, the [respondents] AVP-Revenue Operations and Tax Services

Officer again filed with [petitioner] CIR another written request for refund of the amount
of P1,048,047.23, representing the total amount of 20% final withholding tax withheld by
various depository banks of the [respondent] which amount includes the 20% withholding tax
withheld by the Philippine National Bank (PNB), Equitable Banking Corporation (EBC), and
the Jade Progressive Savings & Mortgage Bank (JPSMB) for the period starting March 1995
through November 1997.

The amounts, subject of this petition, and which represent the 20% final withholding
tax allegedly erroneously withheld and remitted to the BIR by the aforesaid banks may be
summarized as follows:

Bank Period Covered Source Amount

UCPB Jan. 9, 1997 Feb. Interest income on

21, 1997 prime savings
deposit P60,328.38
Interest income on
government securities
and/or commercial
papers 78,658.52 P131,986.65
RCBC Jan. 6, 1997 Feb. Interest income on
28, 1997 FBTB and Treasury
Bills placements 47,763.55
 PNB Feb. 19, Interest income on
1997 Nov. 14, PNBIG savings
1997 account 514,120.22
EBC Jan. 3, 1997 Feb. Interest income on
28, 1997 Treasury Bills
placement 33,357.25
JPSMB Jan. 1, 1997 Feb. Interest income on
28, 1997 deposits 3,962.78

[Petitioner] CIR failed to act on the [respondents] request for refund; thus, a petition
was filed before the CTA on April 23, 1999.[6]

Ruling of the Court of Tax Appeals

The CTA ruled that Respondent PAL was not entitled to the refund. Section 13 of Presidential Decree

No. 1590, PALs franchise,[7] allegedly gave respondent the option to pay either its corporate income tax under

the provisions of the NIRC or a franchise tax of two percent of its gross revenues.Payment of either tax would

be in lieu of all other taxes. Had respondent paid the two percent franchise tax, then the final withholding

taxes would have been considered as other taxes. Since it chose to pay its corporate income tax, payment of

the final withholding tax is deemed part of this liability and therefore not refundable.[8]

Ruling of the Court of Appeals

As stated earlier, the Court of Appeals reversed the Decision of the CTA. The CA held that PAL was

bound to pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. 1590

exempts respondent from paying all other taxes, duties, royalties and other fees of any kind. [9] Respondent

chose to pay its basic corporate income tax, which,

after considering the factors allowed by law, resulted in a zero tax liability.[10] This zero tax liability should

neither be taken against respondent nor deprive it of the exemption granted by the law.[11] Having chosen to

pay its corporate income tax liability, respondent should now be exempt from paying all other taxes including

the final withholding tax.

 Hence, this Petition.[12]

The Issue

The sole issue raised by petitioner is stated in this wise:

The Court of Appeals erred on a question of law ruling that the in lieu of all other
taxes provision in Section 13 of PD No. 1590 applies even if there were in fact no taxes paid
under any of subsections (A) and (B) of the said decree.[13]

The Courts Ruling

The Petition has no merit.

Sole Issue:
Tax Liability of PAL

The resolution of the instant case hinges on the interpretation of Section 13 of PALs franchise, which states in

part:

SEC. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the Philippine Government during the life of this franchise whichever of subsections (a) and
(b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee's annual net taxable
income computed in accordance with the provisions of the National
Internal Revenue Code; or

(b) A franchise tax of two percent (2%) of the gross revenues derived by the
grantee from all sources, without distinction as to transport or non-
transport operations; provided, that with respect to international air-
transport service, only the gross passenger, mail, and freight revenues
from its outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration, license, and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed, or collected by any municipal,
city, provincial, or national authority or government agency, now or in the future, x x x.[14]
 Two points are evident from this provision. First, as consideration for the franchise, PAL is liable to

pay either a) its basic corporate income tax based on its net taxable income, as computed under the National

Internal Revenue Code; or b) a franchise tax of two percent based on its gross revenues, whichever is

lower. Second, the tax paid is in lieu of all other taxes imposed by all government entities in the country.

Interpretation of PALs Franchise

According to the CA and PAL, the other taxes in lieu of all other taxes proviso includes final

withholding taxes.[15] When respondent availed itself of the basic corporate income tax as its chosen tax

liability, it became exempt from final withholding taxes.

On the other hand, the CTA held that the in lieu of all other taxes proviso implied the existence of

something for which a substitution would be made.[16] Final withholding taxes come under

basic corporate income tax liability; hence, payment of the latter cannot mean an exemption from the

former. To be exempt from final withholding taxes, PAL should have paid the franchise tax of two percent,

which would have been in lieu of all other taxes including the final withholding tax.

The CIR argues that the in lieu of all other taxes proviso is a mere incentive that applies only when

PAL actually pays something; that is, either the basic corporate income tax or the franchise tax.[17] Because of

the zero tax liability of respondent under the basic corporate income tax system, it was not eligible for

exemption from other taxes.[18]

Construing Subsection (a)

of Section 13 of PD 1590
Vis--vis the Corporate Income Tax

PAL availed itself of PD 1590, Section 13, Subsection (a), the crux of which hinged on the terms basic

corporate income tax and annual net taxable income.The applicable laws (PALs
franchise and the Tax Code) do not define the terms basic corporate income tax. [19] On the other hand, annual

net taxable income is computed in accordance with the provisions of the National Internal Revenue Code.

The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the National Internal

Revenue Code of 1997 under Chapter IV: Tax on Corporations. Section 27 enumerates the rate of income tax

on domestic corporations; Section 28, the rates for foreign corporations; Section 29, the taxes on improperly

accumulated earnings; and Section 30, the corporations exempt from tax.

Being a domestic corporation, PAL is subject to Section 27, which reads as follows:

Section 27. Rates of Income Tax on Domestic Corporations.

(A) In General. Except as otherwise provided in this Code, an income

tax of thirty-five percent (35%) is hereby imposed upon the taxable income
derived during each taxable year from all sources within and without the
Philippines by every corporation, x x x, organized in, or existing under the laws
of the Philippines x x x.[20]

The NIRC also imposes final taxes on certain passive incomes, as follows: 1) 20 percent on the

interests on currency bank deposits, other monetary benefits from deposit substitutes, trust funds and

similar arrangements, and royalties derived from sources within the Philippines; [21]2) 5 percent and 10

percent on the net capital gains realized from the sale of shares of stock in a domestic corporation not traded

in the stock exchange;[22]3) 10 percent on income derived by a depositary bank under the expanded foreign

currency deposit system;[23] and 4) 6 percent on the gain presumed to be realized on the sale or disposition of

lands and buildings treated as capital assets.[24] These final taxes are withheld at source.[25]

A corporate income tax liability, therefore, has two components: the general rate of 35 percent, which is not

disputed; and the specific final rates for certain passive incomes. PALs request for a refund in the present case

pertains to the passive income on bank deposits, which is subject to the specific final tax of 20 percent.[26]

Computation of Taxable
Income Under the Tax Code

Note that the tax liability of PAL under the option it chose (Item a of Section 13 of PD 1590) is to

be computed in accordance with the provisions of the National Internal Revenue Code, as follows:

(a) The basic corporate income tax based on the grantees annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code[.]

Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions

and/or personal and additional exemptions, if any, authorized for these types of income. [27] Under Section 32

of the Tax Code, gross income means income derived from whatever source, including compensation for

services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents;

royalties; dividends; annuities; prizes and winnings; pensions; and a partners distributive share in the net

income of a general professional partnership. Section 34 enumerates the allowable deductions; Section 35,

personal and additional exemptions.

The definition of gross income is broad enough to include all passive incomes subject to specific rates or final

taxes. However, since these passive incomes are already subject to different rates and taxed finally at

source, they are no longer included in the computation of gross income, which determines taxable income.

Basic Corporate Income Tax Based

on Annual Net Taxable Income

To repeat, the pertinent provision in the case at bar reads: basic corporate income tax based on the grantees

annual net

taxable income computed in accordance with the provisions of the National Internal Revenue Code. The Court

has already illustrated that, under the Tax Code, taxable income does not include passive income subjected to

final withholding taxes. Clearly, then, the basic corporate income tax identified in Section 13 (a) of the

franchise relates to the general rate of 35 percent as stipulated in Section 27 of the Tax Code. The final 20
percent taxes disputed in the present case are not covered under Section 13 (a) of PALs franchise; thus, a

refund is in order.

Substitution Theory
of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the in lieu of all other taxes proviso is a

mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give

respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option

excludes the payment of other taxes and dues imposed or collected by the national or the local

government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax

payment that exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as

earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By

basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which

taxable income may result in a negative amount and thus translate into a zero tax liability.

Notably, PAL was owned and operated by the government at the time the franchise was last

amended.[28] It can reasonably be contemplated that PD 1590 sought to assist the finances of the government

corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are

due; in this instance, it has a lower tax liability than that provided by Subsection (b).

The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one

peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would

not. There is no substantial distinction between a zero tax and a one-peso tax liability.
 The Court is bound to effectuate the lawmakers intent, which is the controlling factor in interpreting a

statute.[29] Significantly, this Court has held that the soul of the law is intent:

The intent of a statute is the law. If a statute is valid it is to have effect according to
the purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and
the primary rule of construction is to ascertain and give effect to the intent. The intention of
the legislature in enacting a law is the law itself, and must be enforced when ascertained,
although it may not be consistent with the strict letter of the statute. Courts will not follow the
letter of a statute when it leads away from the true intent and purpose of the legislature and to
conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives
life to a legislative enactment. In construing statutes the proper course is to start out and
follow the true intent of the legislature and to adopt that sense which harmonizes best with the
context and promotes in the fullest manner the apparent policy and objects of the
legislature.[30]

While the Court recognizes the general rule that the grant of tax exemptions is strictly construed

against the taxpayer and in favor of the taxing power,[31] Section 13 of the franchise of respondent leaves no

room for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either

the basic corporate income tax or the two percent gross revenue tax.

Determining whether this tax exemption is wise or advantageous is outside the realm of judicial

power. This matter is addressed to the sound discretion of the lawmaking department of government.

WHEREFORE, the Petition is DENIED. No pronouncement as to costs.

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of
Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private respondent
A. Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its
foreign stockholders cannot be considered as "essentially equivalent to a distribution of taxable
dividends" under, Section 83(b) of the 1939 Internal Revenue Act. 3

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and
controlled by the family of Don Andres, who are all non-resident aliens. 4 In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value of the additional 15,000 shares, only
10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in
favor of the former their pre-emptive rights to subscribe to the new issues. 6 This increased his
subscription to 14,963 common shares. 7 A month later, 8 Don Andres transferred 1,250 shares
each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. 9 Both sons are
foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made
between 1949 and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that date,
the records revealed that he has a total shareholdings of 185,154 shares 12 50,495 of which are
original issues and the balance of 134.659 shares as stock dividend
declarations. 13 Correspondingly, one-half of that shareholdings or 92,577 14 shares were transferred
to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate. 15

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further
increased it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and
46,287 shares were respectively received by the Don Andres estate 18 and Doa Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 19 common
shares each. 20

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue
Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a
tax avoidance scheme 21 under Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968,
ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000
preferred shares. 23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance. 24 Consequently, 25 on March 31, 1968 Doa Carmen exchanged
her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The
estate of Don Andres in turn, exchanged 11,140 of its common shares, for the remaining 11,140
preferred shares, thus reducing its (the estate) common shares to 127,727. 26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares
from the Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital
stock to P75M divided into 150,000 preferred shares and 600,000 common shares. 27 About a year
later, ANSCOR again redeemed 80,000 common shares from the Don Andres' estate, 28 further
reducing the latter's common shareholdings to 19,727. As stated in the Board Resolutions,
ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as
treasury shares in order to reduce the company's foreign exchange remittances in case cash
dividends are declared. 29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a
report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969
based on the transactions of exchange 31 and redemption of stocks. 31 The Bureau of Internal
Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR that it availed
of the tax amnesty under Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the invoked
decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under
which ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments was denied
in 1983 by petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on
the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling,
after finding sufficient evidence to overcome the prima facie correctness of the questioned
assessments. 36 In a petition for review the CA as mentioned, affirmed the ruling of the
CTA. 37 Hence, this petition.

The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act 38 which provides:

Sec. 83. Distribution of dividends or assets by corporations.

(b) Stock dividends A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen. (Emphasis supplied)

Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as
well as the exchange of common with preferred shares can be considered as "essentially
equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under
the provisions of the above-quoted law.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section
83(b) making the proceeds thereof taxable. It also argues that the Section applies to stock dividends
which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net
effect test," the estate of Don Andres gained from the redemption. Accordingly, it was the duty of
ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant to Section 53 and
54 of the 1939 Revenue Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate
or from Doa Carmen based on the two transactions, because the same were done for legitimate
business purposes which are (a) to reduce its foreign exchange remittances in the event the
company would declare cash dividends, 40 and to (b) subsequently "filipinized" ownership of
ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the amnesty provisions of
P.D. 67.

We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances
of each case.42 The findings of facts of a special court (CTA) exercising particular expertise on the
subject of tax, generally binds this Court, 43 considering that it is substantially similar to the findings
of the CA which is the final arbiter of questions of facts. 44 The issue in this case does not only deal
with facts but whether the law applies to a particular set of facts. Moreover, this Court is not
necessarily bound by the lower courts' conclusions of law drawn from such facts. 45

AMNESTY:

46
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 provides:

1. In all cases of voluntary disclosures of previously untaxed income and/or

wealth such as earnings, receipts, gifts, bequests or any other acquisitions from any
source whatsoever which are taxable under the National Internal Revenue Code, as
amended, realized here or abroad by any taxpayer, natural or judicial; the collection
of all internal revenue taxes including the increments or penalties or account of non-
payment as well as all civil, criminal or administrative liabilities arising from or
incident to such disclosures under the National Internal Revenue Code, the Revised
Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service laws and regulations, laws and regulations on Immigration
and Deportation, or any other applicable law or proclamation, are hereby condoned
and, in lieu thereof, a tax of ten (10%) per centum on such previously untaxed
income or wealth, is hereby imposed, subject to the following conditions: (conditions
omitted) [Emphasis supplied].

The decree condones "the collection of all internal revenue taxes including the increments or
penalties or account of non-payment as well as all civil, criminal or administrative liable
arising from or incident to" (voluntary) disclosures under the NIRC of previously untaxed
income and/or wealth "realized here or abroad by any taxpayer, natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty?
An income taxpayer covers all persons who derive taxable income. 47 ANSCOR was assessed by
petitioner for deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is
being held liable in its capacity as a withholding agent and not its personality as a taxpayer.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer he is the person subject to tax impose by law; 50 and the
payee is the taxing authority. 51 In other words, the withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of
law. His (agent) liability is direct and independent from the taxpayer, 52 because the income tax is
still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into
him he earned no income. The Tax Code only makes the agent personally liable for the
tax 53 arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax
since:
 the government's cause of action against the withholding is not for the collection of
income tax, but for the enforcement of the withholding provision of Section 53 of the
Tax Code, compliance with which is imposed on the withholding agent and not upon
the taxpayer. 54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected
by the amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent. 55 The taxpayer should not answer for the non-performance by the withholding agent of its
legal duty to withhold unless there is collusion or bad faith. The former could not be deemed to have
evaded the tax had the withholding agent performed its duty. This could be the situation for which
the amnesty decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to
reform, 56 it was deemed administratively feasible to grant tax amnesty in certain instances. In
addition, a "tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by a statute, the term of the amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing authority.57 The rule on strictissimi
juris equally applies. 58 So that, any doubt in the application of an amnesty law/decree should be
resolved in favor of the taxing authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules

of P.D. 370 which expanded amnesty on previously untaxed income under P.D. 23 is
very explicit, to wit:

Sec. 4. Cases not covered by amnesty. The following cases are not covered by
the amnesty subject of these regulations:

xxx xxx xxx

(2) Tax liabilities with or without assessments, on withholding tax at source provided
under Section 53 and 54 of the National Internal Revenue Code, as amended; 59

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific
provision of law, it is not covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule

Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of
1928. 60 It laid down the general rule known as the proportionate test 61 wherein stock dividends
once issued form part of the capital and, thus, subject to income tax.62 Specifically, the general rule
states that:

A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light.
Under the US Revenue Code, this provision originally referred to "stock dividends" only, without any
exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are nothing
but an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the "fund
represented by the new stock has been transferred from surplus to capital and no longer available
for actual distribution." 66 Income in tax law is "an amount of money coming to a person within a
specified time, whether as payment for services, interest, or profit from investment." 67 It means
cash or its equivalent. 68 It is gain derived and severed from capital, 69 from labor or from both
combined 70 so that to tax a stock dividend would be to tax a capital increase rather than the
income. 71 In a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before the realization,
stock dividends are nothing but a representation of an interest in the corporate properties. 72 As
capital, it is not yet subject to income tax. It should be noted that capital and income are different.
Capital is wealth or fund; whereas income is profit or gain or the flow of wealth.73 The determining
factor for the imposition of income tax is whether any gain or profit was derived from a
transaction. 74

The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time

and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v.
Macomber 75 (that pro rata stock dividends are not taxable income), the exempting clause above
quoted was added because provision corporation found a loophole in the original provision. They
resorted to devious means to circumvent the law and evade the tax. Corporate earnings would be
distributed under the guise of its initial capitalization by declaring the stock dividends previously
issued and later redeem said dividends by paying cash to the stockholder. This process of
issuance-redemption amounts to a distribution of taxable cash dividends which was lust delayed so
as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation.

Thus, to plug the loophole the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the "time" and "manner" it was made, is essentially
equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to
the extent it represents profits". The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made
use of as a device for the actual distribution of cash dividends, which is taxable. 76Thus,

the provision had the obvious purpose of preventing a corporation from avoiding
dividend tax treatment by distributing earnings to its shareholders in two transactions
a pro rata stock dividend followed by a pro rata redemption that would have the
same economic consequences as a simple dividend. 77

Although redemption and cancellation are generally considered capital transactions, as

such. they are not subject to tax. However, it does not necessarily mean that a shareholder
may not realize a taxable gain from such transactions. 78 Simply put, depending on the
circumstances, the proceeds of redemption of stock dividends are essentially distribution of
cash dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of
choice. 79 Having realized gain from that redemption, the income earner cannot escape
income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividend. 81 So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, 82 which is determinable on "the basis of the
particular facts of the transaction in question. 83 No decisive test can be used to determine the
application of the exemption under Section 83(b). The use of the words "such manner" and
"essentially equivalent" negative any idea that a weighted formula can resolve a crucial issue
Should the distribution be treated as taxable dividend. 84 On this aspect, American courts developed
certain recognized criteria, which includes the following: 85

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a

regular dividends and the corporation's past record with respect to the
declaration of dividends,

3) the effect of the distribution, as compared with the declaration of

regular dividend,

4) the lapse of time between issuance and redemption, 86

5) the presence of a substantial surplus 87 and a generous supply of

cash which invites suspicion as does a meager policy in relation both
to current earnings and accumulated surplus, 88

REDEMPTION AND CANCELLATION

For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and
manner" of the transaction makes it "essentially equivalent to a distribution of taxable
dividends." Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in

exchange for property, whether or not the acquired stock is cancelled, retired or held in the
treasury. 90Essentially, the corporation gets back some of its stock, distributes cash or property to
the shareholder in payment for the stock, and continues in business as before. The redemption of
stock dividends previously issued is used as a veil for the constructive distribution of cash dividends.
In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder
(Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come
from? If its source is the original capital subscriptions upon establishment of the corporation or from
initial capital investment in an existing enterprise, its redemption to the concurrent value of
acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income
but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend
declarations other than as initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of the last redemption, the original common shares
owned by the estate were only 25,247.5 91 This means that from the total of 108,000 shares
redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from
stock dividends. Besides, in the absence of evidence to the contrary, the Tax Code presumes that
every distribution of corporate property, in whole or in part, is made out of corporate profits 92such
as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine wherein the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate creditors. 93 Once
capital, it is always capital. 94 That doctrine was intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years
earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to
determine taxability. It is a must to consider the factual circumstances as to the manner of both the
issuance and the redemption. The "time" element is a factor to show a device to evade tax and the
scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the
end sought. 96 Was this transaction used as a "continuing plan," "device" or "artifice" to evade
payment of tax? It is necessary to determine the "net effect" of the transaction between the
shareholder-income taxpayer and the acquiring (redeeming) corporation. 97 The "net effect" test is
not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to
be reached. 98 It is also important to know whether the issuance of stock dividends was dictated by
legitimate business reasons, the presence of which might negate a tax evasion plan. 99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not
related, for the redemption to be considered a legitimate tax scheme. 100Redemption cannot be
used as a cloak to distribute corporate earnings. 101 Otherwise, the apparent intention to avoid tax
becomes doubtful as the intention to evade becomes manifest. It has been ruled that:

[A]n operation with no business or corporate purpose is a mere devise which put
on the form of a corporate reorganization as a disguise for concealing its real
character, and the sole object and accomplishment of which was the consummation
of a preconceived plan, not to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to a stockholder. 102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be
applicable if the redeemed shares were issued with bona fide business purpose, 103which is judged
after each and every step of the transaction have been considered and the whole transaction does
not amount to a tax evasion scheme.

ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program
and (2) the reduction of foreign exchange remittances in case cash dividends are declared. The
Court is not concerned with the wisdom of these purposes but on their relevance to the whole
transaction which can be inferred from the outcome thereof. Again, it is the "net effect rather than
the motives and plans of the taxpayer or his corporation" 104 that is the fundamental guide in
administering Sec. 83(b). This tax provision is aimed at the result. 105 It also applies even if at the
time of the issuance of the stock dividend, there was no intention to redeem it as a means of
distributing profit or avoiding tax on dividends.106 The existence of legitimate business purposes in
support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in
determining "dividend equivalence". 107 Such purposes may be material only upon the issuance of
the stock dividends. The test of taxability under the exempting clause, when it provides "such time
and manner" as would make the redemption "essentially equivalent to the distribution of a taxable
dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized from the
redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v.
Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the tree.

The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that
the gain or profit is realized or received, actually or constructively, 108 and (3) it is not exempted by
law or treaty from income tax. Any business purpose as to why or how the income was earned by
the taxpayer is not a requirement. Income tax is assessed on income received from any property,
activity or service that produces the income because the Tax Code stands as an indifferent neutral
party on the matter of where income comes
from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether
income was realized through the redemption of stock dividends. The redemption converts into
money the stock dividends which become a realized profit or gain and consequently, the
stockholder's separate property. 110 Profits derived from the capital invested cannot escape income
tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule
that the said proceeds are exempt from income tax when the redemption is supported by legitimate
business reasons would defeat the very purpose of imposing tax on income. Such argument would
open the door for income earners not to pay tax so long as the person from whom the income was
derived has legitimate business reasons. In other words, the payment of tax under the exempting
clause of Section 83(b) would be made to depend not on the income of the taxpayer, but on the
business purposes of a third party (the corporation herein) from whom the income was earned. This
is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be
pestered with instances in determining the legitimacy of business reasons that every income earner
may interposed. It is not administratively feasible and cannot therefore be allowed.

The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are
the equivalent of dividend only if the shares were not issued for genuine business purposes", 111 or
the "redeemed shares have been issued by a corporation bona fide" 112 bears no relevance in
determining the non-taxability of the proceeds of redemption ANSCOR, relying heavily and applying
said cases, argued that so long as the redemption is supported by valid corporate purposes the
proceeds are not subject to tax. 113 The adoption by the courts below 114 of such argument is
misleading if not misplaced. A review of the cited American cases shows that the presence or
absence of "genuine business purposes" may be material with respect to the issuance or
declaration of stock dividends but not on its subsequent redemption. The issuance and the
redemption of stocks are two different transactions. Although the existence of legitimate corporate
purposes may justify a corporation's acquisition of its own shares under Section 41 of the
Corporation Code, 115 such purposes cannot excuse the stockholder from the effects of taxation
arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the redemption becomes suspicious which exempting clause.
The substance of the whole transaction, not its form, usually controls the tax consequences. 116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax
liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption. Such
corporate plan was not stated in nor supported by any Board Resolution but a mere afterthought
interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only
through its Board of Directors. 117 The Board Resolutions authorizing the redemptions state only one
purpose reduction of foreign exchange remittances in case cash dividends are declared. Not
even this purpose can be given credence. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started
making assessments in the early 1970's. Although a corporation under certain exceptions, has the
prerogative when to issue dividends, yet when no cash dividends was issued for about three
decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to
issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary
to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions were held by Don Andres' foreign
heirs.

Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a
valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be
made to depend upon a third person who did not earn the income being taxed. Furthermore, even if
the said purposes support the redemption and justify the issuance of stock dividends, the same has
no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the
redemption are deemed taxable dividends since it was shown that income was generated
therefrom.

Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock
dividends would be to impose on such stock an undisclosed lien and would be extremely unfair to
intervening purchase, i.e. those who buys the stock dividends after their issuance. 118 Such
argument, however, bears no relevance in this case as no intervening buyer is involved. And even if
there is an intervening buyer, it is necessary to look into the factual milieu of the case if income was
realized from the transaction. Again, we reiterate that the dividend equivalence test depends on
such "time and manner" of the transaction and its net effect. The undisclosed lien 119 may be unfair
to a subsequent stock buyer who has no capital interest in the company. But the unfairness may not
be true to an original subscriber like Don Andres, who holds stock dividends as gains from his
investments. The subsequent buyer who buys stock dividends is investing capital. It just so happen
that what he bought is stock dividends. The effect of its (stock dividends) redemption from that
subsequent buyer is merely to return his capital subscription, which is income if redeemed from the
original subscriber.

After considering the manner and the circumstances by which the issuance and redemption of stock
dividends were made, there is no other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section
83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Section 21 120 of
the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross
income". As income, it is subject to income tax which is required to be withheld at source. The 1997
Tax Code may have altered the situation but it does not change this disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES 121

Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer 123 and is
generally considered as a taxable transaction. The exchange of common stocks with preferred
stocks, or preferred for common or a combination of either for both, may not produce a recognized
gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade
between two (2) persons as well as a trade between a stockholder and a corporation. In general,
this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or
corporate reorganizations. No taxable gain or loss may be recognized on exchange of property,
stock or securities related to reorganizations. 124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and all of
Doa Carmen's shares were exchanged for the whole 150.000 preferred shares. Thereafter, both
the Don Andres estate and Doa Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in their proportional interest after
the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein,
any difference in their market value would be immaterial at the time of exchange because no
income is yet realized it was a mere corporate paper transaction. It would have been different, if
the exchange transaction resulted into a flow of wealth, in which case income tax may be
imposed. 125

Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits. 126Preferred stocks are those which entitle the shareholder to some priority
on dividends and asset distribution. 127

Both shares are part of the corporation's capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and losses of the
enterprise. 128 Moreover, under the doctrine of equality of shares all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the subscriber.
There is only a modification of the subscriber's rights and privileges which is not a flow of wealth
for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his
entire interest and not when there is still maintenance of proprietary interest. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that
ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to
a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The
decision is AFFIRMED in all other respects.
G.R. No. 102967 February 10, 2000

BIBIANO V. BAAS, JR., petitioner,

vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO
TALON, respondents.

QUISUMBING, J.:

For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on
November 29, 1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39,
Manila, in Civil Case No. 82-12107. Said judgment disposed as follows:

FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment
DISMISSING the complaint against all the defendants and ordering plaintiff [herein
petitioner] to pay defendant Larin the amount of P200,000.00 (Two Hundred Thousand
Pesos) as actual and compensatory damages; P200,000.00 as moral damages; and
P50,000.00 as exemplary damages and attorneys fees of P100,000.00.1

The facts, which we find supported by the records, have been summarized by the Court of Appeals
as follows:

On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation
(AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three
hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided
that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven
hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty-seven
thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive annual
installments, with twelve (12%) percent interest per annum on the outstanding balance. AYALA
issued one promissory note covering four equal annual installments. Each periodic payment of
P461,754.00 pesos shall be payable starting on February 20, 1977, and every year thereafter, or
until February 20, 1980.

The same day, petitioner discounted the promissory note with AYALA, for its face value of
P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA
issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the
Philippine Islands with the uniform amount of two hundred five thousand, two hundred twenty-four
(P205,224.00) pesos.

In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from
disposition of capital asset.2

Selling Price of Land P2,308,770.00

3
Less Initial Payment 461,754.00

Unrealized Gain P1,847,016.00

1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00
Less: Cost of land and other incidental Expenses ( 76,547.90)
 Income P385,206.10

Income subject to tax (P385,206. 10 x 50%) P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty
thousand, eight hundred seventy-seven (P230,877.00) pesos4 as gain from sale of capital asset. In
his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as
the realized gain on disposition of capital asset for the year.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo
Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They
discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and
concluded that the sale was cash and the entire profit should have been taxable in 1976 since the
income was wholly derived in 1976.

Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five
thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They
recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six
hundred seventy-three (P2,473,673.00) pesos.

Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After
reviewing the examiners' report, Larin directed the revision of the audit report, with instruction to
consider the land as capital asset. The tax due was only fifty (50%) percent of the total gain from
sale of the property held by the taxpayer beyond twelve months pursuant to Section 345 of the 1977
National Internal Revenue Code (NIRC). The deficiency tax assessment was reduced to nine
hundred thirty six thousand, five hundred ninety-eight pesos and fifty centavos (P936,598.50),
inclusive of surcharges and penalties for the year 1976.

On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency
that must be settled him immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of
his land to AYALA was on installment.

On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National
Office of the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case
for conspiring to file false and fraudulent returns, in violation of Section 51 of the Tax Code against
petitioner and his accountants, Andres P. Alejandre and Conrado Baas.

On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.

On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR
Charges Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2
accountants." Another news item also appeared in the July 2, 1981, issue of the Bulletin Today
entitled: "3-face P1-M tax evasion raps." All news items mentioned petitioner's false income tax
return concerning the sale of land to AYALA.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of
forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On
November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an
additional amount of one thousand, five hundred twenty-five pesos and sixty-two centavos
(P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.

Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of
Manila an action6 for damages against respondents Larin, Tuazon and Talon for extortion and
malicious publication of the BIR's tax audit report. He claimed that the filing of criminal complaints
against him for violation of tax laws were improper because he had already availed of two tax
amnesty decrees, Presidential Decree Nos. 1740 and 1840.

The trial court decided in favor of the respondents and awarded Larin damages, as already stated.
Petitioner seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the
respondent court affirmed the trial court's decision, thus:

The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee
Larin were unwarranted and baseless and as a result thereof, defendant-appellee Larin was
subjected to unnecessary anxiety and humiliation is therefore supported by the evidence on
record.1wphi1.nt

Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact, the
criminal charges filed against him in the Tanodbayan and in the City Fiscal's Office were all
dismissed.

WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7

Hence this petition, wherein petitioner raises before us the following queries:

I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF

PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND
ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM THE SALE
OF THE LAND TO AYALA.

II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS
AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE
RESPONDENTS.

III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF

PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S
IMMUNITY FROM CRIMINAL PROSECUTION.

IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELL-

ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD
OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT
LARIN.

In essence, petitioner asks the Court to resolve seriatim the following issues:

1. Whether respondent court erred in ruling that there was no extortion attempt by BIR
officials;

2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax
amnesties did not grant immunity from tax suits;
 3. Whether respondent court erred in finding that petitioner's income from the sale of land in
1976 should be declared as a cash transaction in his tax return for the same year (because
the buyer discounted the promissory note issued to the seller on future installment payments
of the sale, on the same day of the sale);

4. Whether respondent court erred and committed grave abuse of discretion in awarding
damages to respondent Larin.

The first issue, on whether the Court of Appeals erred in finding that there was no extortion, involves
a determination of fact. The Court of Appeals observed,

The only evidence to establish the alleged extortion attempt by defendants-appellees is the
plaintiff-appellant's self serving declarations.

As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and
counsel on record, yet, said counsel did not take the witness stand to corroborate the
testimony of plaintiff."8

As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings
of the trial court will not be disturbed by this Court, unless these findings are not supported by
evidence.9 Similarly, neither should we disturb a finding of the trial court and appellate court that an
allegation is not supported by evidence on record. Thus, we agree with the conclusion of
respondent court that herein private respondents, on the basis of evidence, could not be held liable
for extortion.

On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also
granted immunity from criminal prosecution against tax offenses, the pertinent sections of these
laws state:

P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE

INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED
INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC
SUBMISSION OF NET WORTH STATEMENT.

xxx xxx xxx

Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any or all
of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to file a return
for each of the aforesaid taxable years and accurately declare therein the true and correct
income, deductions and exemptions and pay the income tax due per return. Likewise, any
individual who filed a false or fraudulent return for any taxable year in the period mentioned
above may amend his return and pay the correct amount of tax due after deducting the taxes
already paid, if any, in the original declaration. (emphasis ours)

xxx xxx xxx

Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under this
Decree and pays the income tax due thereon shall be immune from the penalties, civil or
criminal, under the National Internal Revenue Code arising from failure to pay the correct
income tax with respect to the taxable years from which an amended return was filed or for
which an original return was filed in cases where no return has been filed for any of the
taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in
cases where the amount of net taxable income declared under this Decree is understated to
the extent of 25% or more of the correct net taxable income. (emphasis ours)
 P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR
WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980
AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES,
AND NET WORTH.

Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income and/or

wealth such as earnings, receipts, gifts, bequests or any other acquisition from any source
whatsoever, realized here or abroad, by any individual taxpayer, which are taxable under the
National Internal Revenue Code, as amended, the assessment and collection of all internal
revenue taxes, including the increments or penalties on account of non-payment, as well as
all civil, criminal or administrative liabilities arising from or incident thereto under the National
Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall
pay. (emphasis ours) . . .

Sec. 2. Conditions for Immunity. The immunity granted under Section one of this Decree
shall apply only under the following conditions:

a) Such previously untaxed income and/or wealth must have been earned or realized
in any of the years 1974 to 1980;

b) The taxpayer must file an amnesty return on or before November 30, 1981, and
fully pay the tax due thereon;

c) The amnesty tax paid by the taxpayer under this Decree shall not be less than
P1,000.00 per taxable year; and

d) The taxpayer must file a statement of assets, liabilities and net worth as of
December 31, 1980, as required under Section 6 hereof. (emphasis ours)

It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same
day, he discounted the promissory note covering the future installments. The discounting seems
questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial
institution) charges or deducts a certain percentage from the principal value as its compensation.
Here, the discounting was done by the buyer. On July 2, 1981, two weeks after the filing of the tax
evasion complaint against him by respondent Larin on June 17, 1981, petitioner availed of the tax
amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the
BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was
located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not
include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale
was on installment. He did not amend his income tax return. He did not pay the tax which was
considerably increased by the income derived from the discounting. He did not meet the twin
requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due
thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere
filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity
against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax
slate. It also gives the government a chance to collect uncollected tax from tax evaders without
having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the
government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily
disclosed his previously untaxed income and must have paid the corresponding tax on such
previously untaxed income.10

It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in
law and if granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. 11 Hence, on this
matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing
tax amnesty is untenable.

On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but
on installment as clearly specified in the Deed of Sale which states:

That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT
THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to
be paid as follows:

1. P461,754.00, upon the signing of the Deed of Sale; and,

2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual

installments with interest thereon at the rate of twelve percent (12%) per annum,
beginning on February 20, 1976, said installments to be evidenced by four (4)
negotiable promissory notes.12

Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support
his claim.

Sec. 43 of the 1977 NIRC states,

Installment basis. (a) Dealers in personal property. . . .

(b) Sales of realty and casual sales of personalty In the case (1) of a casual sale or other
casual disposition of personal property (other than property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a
price exceeding one thousand pesos, or (2) of a sale or other disposition of real property if in
either case the initial payments do not exceed twenty-five percentum of the selling price, the
income may, under regulations prescribed by the Minister of Finance, be returned on the
basis and in the manner above prescribed in this section. As used in this section the term
"initial payment" means the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made. . . . (emphasis ours)

Revenue Regulation No. 2, Section 175 provides,

Sale of real property involving deferred payments. Under section 43 deferred-payment

sales of real property include (1) agreements of purchase and sale which contemplate that a
conveyance is not to be made at the outset, but only after all or a substantial portion of the
selling price has been paid, and (b) sales in which there is an immediate transfer of title, the
vendor being protected by a mortgage or other lien as to deferred payments. Such sales
either under (a) or (b), fall into two classes when considered with respect to the terms of
sale, as follows:

(1) Sales of property on the installment plan, that is, sales in which the payments
received in cash or property other than evidences of indebtedness of the purchaser
during the taxable year in which the sale is made do not exceed 25 per cent of the
selling price;

(2) Deferred-payment sales not on the installment plan, that is sales in which the
payments received in cash or property other than evidences of indebtedness of the
 purchaser during the taxable year in which the sale is made exceed 25 per cent of
the selling price;

In the sale of mortgaged property the amount of the mortgage, whether the property is
merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser,
shall be included as a part of the "selling price" but the amount of the mortgage, to the extent
it does not exceed the basis to the vendor of the property sold, shall not be considered as a
part of the "initial payments" or of the "total contract price," as those terms are used in
section 43 of the Code, in sections 174 and 176 of these regulations, and in this section. The
term "initial payments" does not include amounts received by the vendor in the year of sale
from the disposition to a third person of notes given by the vendee as part of the purchase
price which are due and payable in subsequent years. Commissions and other selling
expenses paid or incurred by the vendor are not to be deducted or taken into account in
determining the amount of the "initial payments," the "total contract price," or the "selling
price." The term "initial payments" contemplates at least one other payment in addition to the
initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there
being no payment during the year, the income may not be returned on the installment basis.
Income may not be returned on the installment basis where no payment in cash or property,
other than evidences of indebtedness of the purchaser, is received during the first year, the
purchaser having promised to make two or more payments, in later years.

Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the
respective installments as provided by the deed of sale between him and AYALA. Consequently, he
religiously reported his yearly income from sale of capital asset, subject to tax, as follows:

Year 1977 (50% of P461,754) P230,877.00

1978 230,877.00
1979 230,877.00
1980 230,877.00

Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the
Revenue Regulations (RR) No. 2. The term "initial payment", he argues, does not include amounts
received by the vendor which are part of the complete purchase price, still due and payable in
subsequent years. Thus, the proceeds of the promissory notes, not yet due which he discounted to
AYALA should not be included as income realized in 1976. Petitioner states that the original
agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill.

On the other hand, respondents assert that taxation is a matter of substance and not of form.
Returns are scrutinized to determine if transactions are what they are and not declared to evade
taxes. Considering the progressive nature of our income taxation, when income is spread over
several installment payments through the years, the taxable income goes down and the tax due
correspondingly decreases. When payment is in lump sum the tax for the year proportionately
increases. Ultimately, a declaration that a sale is on installment diminishes government taxes for the
year of initial installment as against a declaration of cash sale where taxes to the government is
larger.

As a general rule, the whole profit accruing from a sale of property is taxable as income in the year
the sale is made. But, if not all of the sale price is received during such year, and a statute provides
that income shall be taxable in the year in which it is "received," the profit from an installment sale is
to be apportioned between or among the years in which such installments are paid and received.13
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment
method is a seller of real property who disposes his property on installment, provided that the initial
payment does not exceed 25% of the selling price. They also state what may be regarded as
installment payment and what constitutes initial payment. Initial payment means the payment
received in cash or property excluding evidences of indebtedness due and payable in subsequent
years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale.
Initial payment does not include amounts received by the vendor in the year of sale from the
disposition to a third person of notes given by the vendee as part of the purchase price which are
due and payable in subsequent years.14 Such disposition or discounting of receivable is material
only as to the computation of the initial payment. If the initial payment is within 25% of total contract
price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale,
otherwise it is a deferred sale.15

Although the proceed of a discounted promissory note is not considered part of the initial payment, it
is still taxable income for the year it was converted into cash. The subsequent payments or
liquidation of certificates of indebtedness is reported using the installment method in computing the
proportionate income16 to be returned, during the respective year it was realized. Non-dealer sales
of real or personal property may be reported as income under the installment method provided that
the obligation is still outstanding at the close of that year. If the seller disposes the entire installment
obligation by discounting the bill or the promissory note, he necessarily must report the balance of
the income from the discounting not only income from the initial installment payment.

Where an installment obligation is discounted at a bank or finance company, a taxable disposition

results, even if the seller guarantees its payment, continues to collect on the installment obligation,
or handles repossession of merchandise in case of default.17 This rule prevails in the United
States.18 Since our income tax laws are of American origin,19 interpretations by American courts an
our parallel tax laws have persuasive effect on the interpretation of these laws.20 Thus, by analogy,
all the more would a taxable disposition result when the discounting of the promissory note is done
by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires
money for the settlement of his receivables. Logically then, the income should be reported at the
time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of
wealth.21 Although the proceeds of a discounted promissory note is not considered initial payment,
still it must be included as taxable income on the year it was converted to cash. When petitioner had
the promissory notes covering the succeeding installment payments of the land issued by AYALA,
discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a
sale on installment since, a taxable disposition resulted and petitioner was required by law to report
in his returns the income derived from the discounting. What petitioner did is tantamount to an
attempt to circumvent the rule on payment of income taxes gained from the sale of the land to
AYALA for the year 1976.

Lastly, petitioner questions the damages awarded to respondent Larin.

Any person who seeks to be awarded actual or compensatory damages due to acts of another has
the burden of proving said damages as well as the amount thereof.22 Larin says the extortion cases
filed against him hampered his immediate promotion, caused him strong anxiety and social
humiliation. The trial court awarded him two hundred thousand (P200,000,00) pesos as actual
damages. However, the appellate court stated that, despite pendency of this case, Larin was given
a promotion at the BIR. Said respondent court:

We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7,
11 December 1985), to show that he suffered loss of seniority that allegedly barred his
promotion. In fact, he was promoted to his present position despite the pendency of the
instant case (TSN, pp. 35-39, 04 November 1985).23
Moreover, the records of the case contain no statement whatsoever of the amount of the actual
damages sustained by the respondents. Actual damages cannot be allowed unless supported by
evidence on the record.24 The court cannot rely on speculation, conjectures or guesswork as to the
fact and amount of damages.25 To justify a grant of actual or compensatory damages, it is
necessary to prove with a reasonable degree of certainty, the actual amount of loss.26 Since we
have no basis with which to assess, with certainty, the actual or compensatory damages counter-
claimed by respondent Larin, the award of such damages should be deleted.

Moral damages may be recovered in cases involving acts referred to in Article 2127 of the Civil
Code.28 As a rule, a public official may not recover damages for charges of falsehood related to his
official conduct unless he proves that the statement was made with actual malice.
In Babst, et. al. vs. National Intelligence Board, et. al., 132 SCRA 316, 330 (1984), we reiterated the
test for actual malice as set forth in the landmark American case of New York Times
vs. Sullivan,29 which we have long adopted, in defamation and libel cases, viz.:

. . . with knowledge that it was false or with reckless disregard of whether it was false or not.

We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly
believed that the law allowed him to declare the sale of the land, in installment. We can further grant
that the pertinent tax laws needed construction, as we have earlier done. That petitioner was
offended by the headlines alluding to him as tax evader is also fully understandable. All these,
however, do not justify what amounted to a baseless prosecution of respondent Larin. Petitioner
presented no evidence to prove Larin extorted money from him. He even admitted that he never met
nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin was
not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's instruction,
petitioner's tax assessment was considered one involving a sale of capital asset, the income from
which was subjected to only fifty percent (50%) assessment, thus reducing the original tax
assessment by half. These circumstances may be taken to show that Larin's involvement in
extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in
different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial
court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.

Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of
moral and exemplary damages in favor of respondent Larin. The appellate court believed
respondent Larin when he said he suffered anxiety and humiliation because of the unfounded
charges against him. Petitioner's actions against Larin were found "unwarranted and baseless," and
the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all
dismissed.30 Hence, there is adequate support for respondent court's conclusion that moral
damages have been proved.

Now, however, what would be a fair amount to be paid as compensation for moral damages also
requires determination. Each case must be governed by its own peculiar circumstances.31 On this
score, Del Rosario vs. Court of Appeals,32 cites several cases where no actual damages were
adjudicated, and where moral and exemplary damages were reduced for being "too excessive,"
thus:

In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the
following observation from RCPI v. Rodriguez, viz:

** **. Nevertheless, we find the award of P100,000.00 as moral damages in favor of

respondent Rodriguez excessive and unconscionable. In the case of Prudenciado
v. Alliance Transport System,Inc. (148 SCRA 440 [1987]) we said: . . . [I]t is
undisputed that the trial courts are given discretion to determine the amount of moral
damages (Alcantara v. Surro, 93 Phil. 472) and that the Court of Appeals can only
 modify or change the amount awarded when they are palpably and scandalously
excessive "so as to indicate that it was the result of passion, prejudice or corruption
on the part of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347,
7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v. Bacharach
Motor Co., Inc., 57 O.G. 656). But in more recent cases where the awards of moral
and exemplary damages are far too excessive compared to the actual loses
sustained by the aggrieved party, this Court ruled that they should be reduced to
more reasonable amounts. . . . . (Emphasis ours.)

In other words, the moral damages awarded must be commensurate with the loss or
injury suffered.

In the same case (PNB v. CA), this Court found the amount of exemplary damages required
to be paid (P1,000,000,00) "too excessive" and reduced it to an "equitable level"
(P25,000.00).

It will be noted that in above cases, the parties who were awarded moral damages were not public
officials. Considering that here, the award is in favor of a government official in connection with his
official function, it is with caution that we affirm granting moral damages, for it might open the
floodgates for government officials counter-claiming damages in suits filed against them in
connection with their functions. Moreover, we must be careful lest the amounts awarded make
citizens hesitate to expose corruption in the government, for fear of lawsuits from vindictive
government officials. Thus, conformably with our declaration that moral damages are not intended
to enrich anyone,33 we hereby reduce the moral damages award in this case from two hundred
thousand (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary
damage is set at P25,000.00 only.

The law allows the award of attorney's fees when exemplary damages are awarded, and when the
party to a suit was compelled to incur expenses to protect his interest.34 Though government officers
are usually represented by the Solicitor General in cases connected with the performance of official
functions, considering the nature of the charges, herein respondent Larin was compelled to hire a
private lawyer for the conduct of his defense as well as the successful pursuit of his counterclaims.
In our view, given the circumstances of this case, there is ample ground to award in his favor
P50,000,00 as reasonable attorney's fees.

WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby
AFFIRMED with MODIFICATION so that the award of actual damages are deleted; and that
petitioner is hereby ORDERED to pay to respondent Larin moral damages in the amount of
P75,000.00, exemplary damages in the amount of P25,000.00, and attorney's fees in the amount of
P50,000.00 only.1wphi1.nt

No pronouncement as to costs.
COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,

Petitioner, Present:

Panganiban, J.,

Chairman,

Sandoval-Gutierrez,

- versus - Corona,

Carpio Morales, and

Garcia, JJ

CENTRAL LUZON DRUG Promulgated:

CORPORATION,

Respondent. April 15, 2005

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax

deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private
T
establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432

unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that

withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke

the law.
 The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August

29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439.

The assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from

is AFFIRMED in toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation primarily engaged in retailing of medicines and

other pharmaceutical products. In 1996, it operated six (6) drugstores under the
business name and style Mercury Drug.

From January to December 1996, respondent granted twenty (20%) percent sales
discount to qualified senior citizens on their purchases of medicines pursuant to
Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the
said period, the amount allegedly representing the 20% sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year
1996 declaring therein that it incurred net losses from its operations.

On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in
the amount of P904,769.00 allegedly arising from the 20% sales discount granted by
respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to
obtain affirmative response from petitioner, respondent elevated its claim to the Court
of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents
Petition for lack of merit. In said decision, the [CTA] justified its ruling with the
following ratiocination:

x x x, if no tax has been paid to the government, erroneously or

illegally, or if no amount is due and collectible from the taxpayer, tax
refund or tax credit is unavailing. Moreover, whether the recovery of
the tax is made by means of a claim for refund or tax credit, before
recovery is allowed[,] it must be first established that there was an
actual collection and receipt by the government of the tax sought to be
recovered. x x x.

xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax

credit is premised on the existence of tax liability on the part of
taxpayer. In other words, if there is no tax liability, tax credit is not
available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed

resolution,[6] granted respondents motion for reconsideration and ordered herein
petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of
the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled Central
[Luzon] Drug Corporation vs. Commissioner of Internal Revenue promulgated on
May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case because
the tax sought to be refunded or credited by petitioner was not
erroneously paid or illegally collected. We take exception to the CTAs
sweeping but unfounded statement that both tax refund and tax credit
are modes of recovering taxes which are either erroneously or illegally
 paid to the government. Tax refunds or credits do not exclusively
pertain to illegally collected or erroneously paid taxes as they may be
other circumstances where a refund is warranted. The tax refund
provided under Section 229 deals exclusively with illegally collected or
erroneously paid taxes but there are other possible situations, such as
the refund of excess estimated corporate quarterly income tax paid, or
that of excess input tax paid by a VAT-registered person, or that of
excise tax paid on goods locally produced or manufactured but
actually exported. The standards and mechanics for the grant of a
refund or credit under these situations are different from that under
Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax
credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit

certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA)

7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax

credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just

compensation for the taking of private property for public use.

Hence this Petition.[8]

The Issues
 Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondent may claim the 20%
sales discount as a tax credit instead of as a deduction from gross income or gross
sales.

Whether the Court of Appeals erred in holding that respondent is entitled to a

refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim

the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount

as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount on their

purchase of medicine from any private establishment in the country.[11] The latter may then claim the cost of the

discount as a tax credit.[12] But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an amount that is

subtracted directly from ones total tax liability.[14] It is an allowance against the tax itself[15] or a deduction from

what is owed[16] by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated

tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a

subtraction from income for tax purposes,[18] or an amount that is allowed by law to reduce income prior to [the]

application of the tax rate to compute the amount of tax which is due.[19] An example of a tax deduction is any of

the allowable deductions enumerated in Section 34[20] of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever

applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income.[21] A tax

deduction, on the other, reduces the income that is subject to tax[22] in order to arrive at taxable income.[23] To think of
the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been

computed; a tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax

credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for

deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be

presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit.

While the grant is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously

be no tax liability against which any tax creditcan be applied.[24] For the establishment to choose the immediate

availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under

RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that

calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen,

simply because no reduction of taxes can instantly be effected. By its nature, the tax creditmay still be deducted

from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move.

But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary,

for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code

is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for

estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again

when paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude to the

prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not

subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly

attributable to either activity. This input tax may either be the VAT on the purchase or importation of goods or

services that is merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or

business; or the transitional input tax determined in accordance with Section 111(A). The latter type may in fact be

an amount equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of

goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said

items.[25]Clearly from this provision, the tax credit refers to an input tax that is either due only or given a value by

mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid prior to the availment

of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase

of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into

with the government, again, no prior tax payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section

112(A), apply for the issuance of a tax creditcertificate for the amount of creditable input taxes merely due -- again

not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not

been applied against output taxes.[26] Where a taxpayer

is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of

creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be

proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT

purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a

requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even

though no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding

tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic

corporation is subjected to the condition that a foreign tax credit will be given by the domiciliary country in an

amount equivalent to taxes that are merely deemed paid.[27] Although true, this provision actually refers to the tax

credit as a condition only for the imposition of a lower tax rate, not as a deductionfrom the corresponding tax liability.

Besides, it is not our government but the domiciliary country that credits against the income tax payable to the

latter by the foreign corporation, the tax to be foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income

tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic
corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes

incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply

give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further

conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or

allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in

the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit

against the tax levied in the latter.[29] Apparently, payment is made to the state of source, not the state of residence. No

tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the

incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg.

(BP) 391, include tax credits equivalent to either five percent of the net value earned, or five or ten percent of the

net local content of exports.[30] In order to avail of such credits under the said law and still achieve its objectives,

no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of

a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by

private establishments concerned.[31] However, we do not agree with its finding[32] that the carry-over of tax
credits under the said special law to succeeding taxable periods, and even their application against internal revenue

taxes, did not necessitate the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant, of

a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no

different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432,

since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply

such credit, where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.[33] In

turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its

availment.[34] To deny such credit, despite the plain mandate of the law and the regulations carrying out that

mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20

percent discount that shall be deducted by the said establishments from their gross income for income tax purposes

and from their gross sales for value-added tax or other percentage tax purposes.[35] In ordinary business language,

the tax credit represents the amount of such discount. However, the manner by which the discount shall be

credited against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of

anything.[36] To be more precise, it is in business parlance a deduction or lowering of an amount of money; [37] or a

reduction from the full amount or value of something, especially a price.[38] In business there are many kinds of

discount, the most common of which is that affecting the income statement[39] or financial report upon which

the income tax is based.

Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for their prompt

payment.[40] It is a reduction in price offered to the purchaser if payment is made within a shorter period of time

than the maximum time specified.[41] Also referred to as a sales discount on the part of the seller and a purchase

discount on the part of the buyer, it may be expressed in such

terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for purchases made in large quantities, justified by

savings in packaging, shipping, and handling.[43] It is also called a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to

retailers[45] is known as a trade discount. No entry for it need be made in the manual or computerized books of

accounts, since the purchase or sale is already valued at the net price actually charged the buyer.[46] The purpose for

the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold

are also suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at net.[48]
Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a purchaser based on

the [latters] role in the [formers] distribution system.[49] This role usually involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted

accounting principles (GAAP) in the country, this type of discount is reflected in the income statement[50] as a line

item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive at net

sales.[51] This type of presentation is resorted to, because the accounts receivable and sales figures that arise from sales

discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and computerized books of

accounts and reflected in the financial statements at the gross amounts of the invoices.[52] This manner of recording

credit sales -- known as the gross method -- is most widely used, because it is simple, more convenient to apply than

the net method, and produces no material errors over time.[53]

However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the

invoices -- after the discounts have been deducted -- are recorded in the books of accounts[54] and reflected in the

financial statements. A separate line item cannot be shown,[55] because the transactions themselves involving

both accounts receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum

-- along with sales returns, allowances and cost of goods sold[56] -- is deducted from gross sales to come up with the gross

income, profit or margin[57] derived from business.[58] In another provision therein, sales discounts that are granted and

indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event --

may be excluded from the gross sales within the same quarter they were given.[59] While determinative only of the

VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in
the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible

from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction of

the discount from the invoice price of the medicine sold to the senior citizen.[60] It is, therefore, expected that for

each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -

- and the net amount thereof collected -- immediately upon perfection of the sale.[61] Although prompt payment is

made for an arms-length transaction by the senior citizen, the real and compelling reason for the private

establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above

discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant.

To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the

private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax

authorities, this benefit has been erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount.

However, to a private establishment, the effect is different from a simple reduction in price that results from such

discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier

discourse, this benefit cannot and should not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by RA

7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a

deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not

necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like

a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to

distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible

from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,

the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering

that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and

cannot be deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when

claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax

credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount-- which is not

even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful

purpose. The definition must, therefore, be stricken down.

Laws Not Amended

by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a rule out of

harmony with

the statute is a mere nullity;[62] it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a statute by

the executive officers whose duty it is to enforce it x x x.[63] In the scheme of judicial tax administration, the need

for certainty and predictability in the implementation of tax laws is crucial.[64] Our tax authorities fill in the details

that Congress may not have the opportunity or competence to provide.[65] The regulations these authorities issue

are relied upon by taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will not

uphold these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning

utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in

granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not

enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not

contemplated by the legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is law.[69] Conversely, a regulation

or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.[70]

Availment of Tax

Credit Voluntary
Third, the word may in the text of the statute[71] implies that the

availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute right conferred

upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither does

it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at

the sole control and discretion of the taxpayer.[73] For the tax authorities to compel respondent to deduct the 20

percent discount from either its gross income or its gross sales[74] is, therefore, not only to make an imposition without

basis in law, but also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent

is given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even

ignore the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be

applied. If there is none, the credit cannot be used and will just have to be carried over and

revalidated[75] accordingly. If, however, the business continues to operate at a loss and no other taxes are due, thus

compelling it to close shop, the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts

can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit

whenever it pleases. Neither does it allow our tax administrators to expand or contract the legislative

mandate. The plain meaning rule or verba legis in statutory construction is thus applicable x x x. Where the words

of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without

attempted interpretation.[76]
Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed

that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private

establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as

their just compensation for private property taken by the State for public use.[77]

The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous

with public interest, public benefit, public welfare, and public convenience.[78] The discount privilege to which our senior

citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The

discounts given would have entered the coffers and formed part of the gross sales of the private establishments

concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy

corresponding to the taking of private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation.

This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts

given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such

issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just

compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its

revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the

reduction in its revenues.[79]

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent

domain.[80] Tax measures are but enforced contributions exacted on pain of penal sanctions [81] and clearly imposed

for a public purpose.[82] In recent years, the power to tax has indeed become a most effective tool to realize social

justice, public welfare, and the equitable distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on the

rights of property owners who under our Constitution and laws are also entitled to protection. The social justice

consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another

who is not entitled thereto.[84] For this reason, a just compensation for income that is taken away from respondent

becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no

administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even[85] -- without the discounts yet -- will surely

start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent,

and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already raised

earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from

either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax

credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a

better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the

latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole

and to establish a program beneficial to them.[86]These objectives are consonant with the constitutional policy of

making health x x x services available to all the people at affordable cost[87] and of giving priority for the needs of

the x x x elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory

objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash

outlay is required from the government for the availment or use of such credit. The deliberations on February 5,

1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the

true intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We

quote from those deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from
taxable income. I think we incorporated there a provision na -
on the responsibility of the private hospitals and drugstores,
hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here
about the deductions from taxable income of that private
hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government
and public institutions, so, puwede na po nating hindi isama
yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung
isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount,
provided that, the private hospitals can claim the expense as a
tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of

(inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments
na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

 REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon.
Can we go back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount
from all establishments et cetera, et cetera, provided that said
establishments - provided that private establishments may
claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x x [T]he rule is

that on a specific matter the special law shall prevail over the general law, which shall

be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two statutes, the earlier

special and the later general -- the terms of the general broad enough to include the matter provided for in the

special -- the fact that one is special and the other is general creates a presumption that the special is to be

considered as remaining an exception to the general,[91] one as a general law of the land, the other as the law of a

particular case.[92] It is a canon of statutory construction that a later statute, general in its terms and not expressly

repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later

law. When the former states that a tax creditmay be claimed, then the requirement of prior tax payments under

certain provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or

references to a tax deduction under the Tax Code[94] be made to restrict RA 7432. No provision of any revenue

regulation can supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of

Appeals AFFIRMED. No pronouncement as to costs.