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1. Hilado vs CIR the meaning of said Act which he is entitled to deduct as a loss in his return
for 1951. This claim is untenable.
[G.R. No. L-9408. October 31, 1956.] To begin with, assuming that said a mount represents a portion of the 75%
of his war damage claim which was not paid, the same would not be
EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL
deductible as a loss in 1951 because, according to Petitioner, the last
REVENUE and THE COURT OF TAX APPEALS, Respondents.
installment he received from the War Damage Commission, together with
the notice that no further payment would be made on his claim, was in
1950. In the circumstance, said amount would at most be a proper
DECISION deduction from his 1950 gross income. In the second place, said amount
BAUTISTA ANGELO, J.: cannot be considered as a “business asset” which can be deducted as a loss
in contemplation of law because its collection is not enforceable as a
On March 31, 1952, Petitioner filed his income tax return for 1951 with the matter of right, but is dependent merely upon the generosity and
treasurer of Bacolod City wherein he claimed, among other things, the magnanimity of the U. S. government. Note that, as of the end of 1945,
amount of P12,837.65 as a deductible item from his gross income pursuant there was absolutely no law under which Petitioner could claim
to General Circular No. V-123 issued by the Collector of Internal Revenue. compensation for the destruction of his properties during the battle for the
This circular was issued pursuant to certain rules laid down by the liberation of the Philippines. And under the Philippine Rehabilitation Act of
Secretary of Finance On the basis of said return, an assessment notice 1946, the payments of claims by the War Damage Commission merely
demanding the payment of P9,419 was sent to Petitioner, who paid the tax depended upon its discretion to be exercised in the manner it may see fit,
in monthly installments, the last payment having been made on January 2, but the non-payment of which cannot give rise to any enforceable right,
1953. for, under said Act, “All findings of the Commission concerning the amount
Meanwhile, on August 30, 1952, the Secretary of Finance, through the of loss or damage sustained, the cause of such loss or damage, the persons
Collector of Internal Revenue, issued General Circular No. V-139 which not to whom compensation pursuant to this title is payable, and the value of
only revoked and declared void his general Circular No. V- 123 but laid the property lost or damaged, shall be conclusive and shall not be
down the rule that losses of property which occurred during the period of reviewable by any court”. (section 113).
World War II from fires, storms, shipwreck or other casualty, or from It is true that under the authority of section 338 of the National Internal
robbery, theft, or embezzlement are deductible in the year of actual loss or Revenue Code the Secretary of Finance, in the exercise of his
destruction of said property. As a consequence, the amount of P12,837.65 administrative powers, caused the issuance of General Circular No. V-123
was disallowed as a deduction from the gross income of Petitioner for as an implementation or interpretative regulation of section 30 of the same
1951 and the Collector of Internal Revenue demanded from him the Code, under which the amount of P12,837.65 was allowed to be deducted
payment of the sum of P3,546 as deficiency income tax for said year. When “in the year the last installment was received with notice that no further
the petition for reconsideration filed by Petitioner was denied, he filed a payment would be made until the United States Congress makes further
petition for review with the Court of Tax Appeals. In due time, this court appropriation therefor”, but such circular was found later to be wrong and
rendered decision affirming the assessment made by Respondent Collector was revoked. Thus, when doubts arose as to the soundness or validity of
of Internal Revenue. This is an appeal from said decision. such circular, the Secretary of Finance sought the advice of the Secretary of
It appears that Petitioner claimed in his 1951 income tax return the Justice who, accordingly, gave his opinion the pertinent portion of which
deduction of the sum of P12,837.65 as a loss consisting in a portion of his reads as follows:chanroblesvirtuallawlibrary
war damage claim which had been duly approved by the Philippine War “Yet it might be argued that war losses were not included as deductions for
Damage Commission under the Philippine Rehabilitation Act of 1946 but the year when they were sustained because the taxpayers had prospects
which was not paid and never has been paid pursuant to a notice served that losses would be compensated for by the United States Government;
upon him by said Commission that said part of his claim will not be paid chan roblesvirtualawlibrarythat since only uncompensated losses are
until the United States Congress should make further appropriation. He deductible, they had to wait until after the determination by the Philippine
claims that said amount of P12,837.65 represents a “business asset” within War Damage Commission as to the compensability in part or in whole of
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their war losses so that they could exclude from the deductions those (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing
compensated for by the said Commission; chan roblesvirtualawlibraryand Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his
that, of necessity, such determination could be complete only much later Treatise on the Conflict of Laws (Cambridge, 1916, section
than in the year when the loss was sustained. This contention falls to the 131):chanroblesvirtuallawlibrary ‘There can be no break or interregnun in
ground when it is considered that the Philippine Rehabilitation Act which law. From the time the law comes into existence with the first-felt
authorized the payment by the United States Government of war losses corporateness of a primitive people it must last until the final
suffered by property owners in the Philippines was passed only on August disappearance of human society. Once created, it persists until a change
30, 1946, long after the losses were sustained. It cannot be said therefore, takes place, and when changed it continues in such changed condition until
that the property owners had any conclusive assurance during the years the next change and so forever. Conquest or colonization is impotent to
said losses were sustained, that the compensation was to be paid therefor. bring law to an end; chan roblesvirtualawlibraryinspite of change of
Whatever assurance they could have had, could have been based only on constitution, the law continues unchanged until the new sovereign by
some information less reliable and less conclusive than the passage of the legislative act creates a change.’“ (Co Kim Chan vs. Valdes Tan Keh and
Act itself. Hence, as diligent property owners, they should adopt the safest Dizon, 75 Phil., 113, 142-143.)
alternative by considering such losses deductible during the year when
It is likewise contended that the power to pass upon the validity of General
they were sustained.”
Circular No. V-123 is vested exclusively in our courts in view of the
In line with this opinion, the Secretary of Finance, through the Collector of principle of separation of powers and, therefore, the Secretary of Finance
Internal Revenue, issued General Circular No. V-139 which not only acted without valid authority in revoking it and approving in lieu thereof
revoked and declared void his previous Circular No. V — 123 but laid General Circular No. V-139. It cannot be denied, however, that the
down the rule that losses of property which occurred during the period of Secretary of Finance is vested with authority to revoke, repeal or abrogate
World War II from fires, storms, shipwreck or other casualty, or from the acts or previous rulings of his predecessor in office because the
robbery, theft, or embezzlement are deductible for income tax purposes in construction of a statute by those administering it is not binding on their
the year of actual destruction of said property. We can hardly argue successors if thereafter the latter become satisfied that a different
against this opinion. Since we have already stated that the amount claimed construction should be given. [Association of Clerical Employees vs.
does not represent a “business asset” that may be deducted as a loss in Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R.,
1951, it is clear that the loss of the corresponding asset or property could 345.]
only be deducted in the year it was actually sustained. This is in line with
“When the Commissioner determined in 1937 that the Petitioner was not
section 30 (d) of the National Internal Revenue Code which prescribes that
exempt and never had been, it was his duty to determine, assess and
losses sustained are allowable as deduction only within the corresponding
collect the tax due for all years not barred by the statutes of limitation. The
taxable year.
conclusion reached and announced by his predecessor in 1924 was not
Petitioner’s contention that during the last war and as a consequence of binding upon him. It did not exempt the Petitioner from tax, This same
enemy occupation in the Philippines “there was no taxable year” within the point was decided in this way in Stanford University Bookstore, 29 B. T. A.,
meaning of our internal revenue laws because during that period they 1280; chan roblesvirtualawlibraryaffd., 83 Fed. (2d) 710.” (Southern
were unenforceable, is without merit. It is well known that our internal Maryland Agricultural Fair Association vs. Commissioner of Internal
revenue laws are not political in nature and as such were continued in Revenue, 40 B. T. A., 549, 554).
force during the period of enemy occupation and in effect were actually
enforced by the occupation government. As a matter of fact, income tax With regard to the contention that General Circular No. V-139 cannot be
given retroactive effect because that would affect and obliterate the vested
returns were filed during that period and income tax payment were
right acquired by Petitioner under the previous circular, suffice it to say
effected and considered valid and legal. Such tax laws are deemed to be the
that General Circular No. V-123, having been issued on a wrong
laws of the occupied territory and not of the occupying enemy.
construction of the law, cannot give rise to a vested right that can be
“Furthermore, it is a legal maxim, that excepting that of a political nature, invoked by a taxpayer. The reason is obvious:chanroblesvirtuallawlibrary
‘Law once established continues until changed by some competent a vested right cannot spring from a wrong interpretation. This is too clear
legislative power. It is not changed merely by change of sovereignty.’ to require elaboration.
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“It seems too clear for serious argument that an administrative officer unit is the Institute of Philippine Culture (IPC), which
cannot change a law enacted by Congress. A regulation that is merely an has no legal personality separate and distinct from that
interpretation of the statute when once determined to have been of private respondent. The IPC is a Philippine unit
erroneous becomes nullity. An erroneous construction of the law by the engaged in social science studies of Philippine society
Treasury Department or the collector of internal revenue does not and culture. Occasionally, it accepts sponsorships for its
preclude or estop the government from collecting a tax which is legally research activities from international organizations,
due.” (Ben Stocker, et al., 12 B. T. A., 1351.) private foundations and government agencies.
“Art. 2254. — No vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of others.” On July 8, 1983, private respondent received from
(Article 2254, New Civil Code.) petitioner Commissioner of Internal Revenue a demand
letter dated June 3, 1983, assessing private respondent
Wherefore, the decision appealed from is affirmed Without the sum of P174,043.97 for alleged deficiency
pronouncement as to costs. contractor's tax, and an assessment dated June 27, 1983
2. CIR vs. CA in the sum of P1,141,837 for alleged deficiency income
tax, both for the fiscal year ended March 31, 1978.
G.R. No. 115349 April 18, 1997 Denying said tax liabilities, private respondent sent
petitioner a letter-protest and subsequently filed with
the latter a memorandum contesting the validity of the
COMMISSIONER OF INTERNAL REVENUE, petitioner,
assessments.
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO
DE MANILA UNIVERSITY, respondents. On March 17, 1988, petitioner rendered a letter-
decision canceling the assessment for deficiency income
tax but modifying the assessment for deficiency
PANGANIBAN, J.:
contractor's tax by increasing the amount due to
P193,475.55. Unsatisfied, private respondent requested
In conducting researches and studies of social organizations and cultural for a reconsideration or reinvestigation of the modified
values thru its Institute of Philippine Culture, is the Ateneo de Manila assessment. At the same time, it filed in the respondent
University performing the work of an independent contractor and thus court a petition for review of the said letter-decision of
taxable within the purview of then Section 205 of the National Internal the petitioner. While the petition was pending before
Revenue Code levying a three percent contractor's tax? This question is the respondent court, petitioner issued a final decision
answer by the Court in the negative as it resolves this petition assailing the dated August 3, 1988 reducing the assessment for
Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 deficiency contractor's tax from P193,475.55 to
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3 P46,516.41, exclusive of surcharge and interest.

The Antecedent Facts On July 12, 1993, the respondent court rendered the
questioned decision which dispositively reads:
The antecedents as found by the Court of Appeals are reproduced
hereinbelow, the same being largely undisputed by the parties. WHEREFORE, in view of the
foregoing, respondent's decision is
Private respondent is a non-stock, non-profit SET ASIDE. The deficiency
educational institution with auxiliary units and contractor's tax assessment in the
branches all over the Philippines. One such auxiliary amount of P46,516.41 exclusive of
surcharge and interest for the fiscal
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year ended March 31, 1978 is hereby Investments under Republic Act No.
CANCELED. No pronouncement as to 5186:
cost.
xxx xxx xxx
SO ORDERED.
The term "independent contractors"
Not in accord with said decision, petitioner has come to this include persons (juridical or natural)
Court via the present petition for review raising the following not enumerated above (but not
issues: including individuals subject to the
occupation tax under Section 12 of
1) WHETHER OR NOT PRIVATE the Local Tax Code) whose activity
RESPONDENT FALLS UNDER THE consists essentially of the sale of all
PURVIEW OF INDEPENDENT kinds of services for a fee regardless
CONTRACTOR PURSUANT TO of whether or not the performance of
SECTION 205 OF THE TAX CODE; the service calls for the exercise or
and use of the physical or mental
faculties of such contractors or their
employees.
2) WHETHER OR NOT PRIVATE
RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER xxx xxx xxx
SECTION 205 OF THE TAX CODE.
Petitioner contends that the respondent court erred in
The pertinent portions of Section 205 of the National Internal Revenue holding that private respondent is not an "independent
Code, as amended, provide: contractor" within the purview of Section 205 of the Tax
Code. To petitioner, the term "independent contractor",
as defined by the Code, encompasses all kinds of
Sec. 205. Contractor, proprietors or operators of services rendered for a fee and that the only exceptions
dockyards, and others. — A contractor's tax of three per are the following:
centum of the gross receipts is hereby imposed on the
following:
a. Persons, association and corporations under contract
for embroidery and apparel for export and gross
xxx xxx xxx receipts of or from pioneer industry registered with the
Board of Investment under R.A. No. 5186;
(16) Business agents and other
independent contractors except b. Individuals occupation tax under Section 12 of the
persons, associations and Local Tax Code (under the old Section 182 [b] of the Tax
corporations under contract for Code); and
embroidery and apparel for export,
as well as their agents and
contractors and except gross receipts c. Regional or area headquarters established in the
of or from a pioneer industry Philippines by multinational corporations, including
registered with the Board of their alien executives, and which headquarters do not
earn or derive income from the Philippines and which
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act as supervisory, communication and coordinating Sec. 205. Contractors, proprietors or operators of
centers for their affiliates, subsidiaries or branches in dockyards, and others. — A contractor's tax of three per
the Asia Pacific Region (Section 205 of the Tax Code). centum of the gross receipts is hereby imposed on the
following:
Petitioner thus submits that since private respondent
falls under the definition of an "independent contractor" xxx xxx xxx
and is not among the aforementioned exceptions,
private respondent is therefore subject to the 3% (16) Business agents and other independent
contractor's tax imposed under the same Code. 4 contractors, except persons, associations and
corporations under contract for embroidery and
The Court of Appeals disagreed with the Petitioner Commissioner of apparel for export, as well as their agents and
Internal Revenue and affirmed the assailed decision of the Court of Tax contractors, and except gross receipts of or from a
Appeals. Unfazed, petitioner now asks us to reverse the CA through this pioneer industry registered with the Board of
petition for review. Investments under the provisions of Republic Act No.
5186;
The Issues
xxx xxx xxx
Petitioner submits before us the following issues:
The term "independent contractors" include persons
1) Whether or not private respondent falls under the (juridical or natural) not enumerated above (but not
purview of independent contractor pursuant to Section including individuals subject to the occupation tax
205 of the Tax Code. under Section 12 of 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
2) Whether or not private respondent is subject to 3% the service calls for the exercise or use of the physical or
contractor's tax under Section 205 of the Tax Code. 5 mental faculties of such contractors or their employees.

In fine, these may be reduced to a single issue: Is Ateneo de Manila The term "independent contractor" shall not include
University, through its auxiliary unit or branch — the Institute of regional or area headquarters established in the
Philippine Culture — performing the work of an independent contractor Philippines by multinational corporations, including
and, thus, subject to the three percent contractor's tax levied by then their alien executives, and which headquarters do not
Section 205 of the National Internal Revenue Code? earn or derive income from the Philippines and which
act as supervisory, communications and coordinating
The Court's Ruling centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
The petition is unmeritorious.
The term "gross receipts" means all amounts received
Interpretation of Tax Laws by the prime or principal contractor as the total
contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross
The parts of then Section 205 of the National Internal Revenue Code receipts of the subcontractor.
germane to the case before us read:
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Petitioner Commissioner of Internal Revenue contends that Private petitioner's position. This is the main line of reasoning of the Court of Tax
Respondent Ateneo de Manila University "falls within the definition" of an Appeals in its decision, 10 which was affirmed by the CA.
independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied The Ateneo de Manila University Did Not Contract
by the foregoing provision of law. 6 Petitioner states that the "term for the Sale of the Service of its Institute of Philippine Culture
'independent contractor' is not specifically defined so as to delimit the
scope thereof, so much so that any person who . . . renders physical and
mental service for a fee, is now indubitably considered an independent After reviewing the records of this case, we find no evidence that Ateneo's
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo Institute of Philippine Culture ever sold its services for a fee to anyone or
has the burden of proof to show its exemption from the coverage of the law. was ever engaged in a business apart from and independently of the
academic purposes of the university.
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the well- Stressing that "it is not the Ateneo de Manila University per se which is
settled doctrine of strict interpretation in the imposition of taxes. It is being taxed," Petitioner Commissioner of Internal Revenue contends that
obviously both illogical and impractical to determine who are exempted "the tax is due on its activity of conducting researches for a fee. The tax is due
without first determining who are covered by the aforesaid provision. The on the gross receipts made in favor of IPC pursuant to the contracts the
Commissioner should have determined first if private respondent was latter entered to conduct researches for the benefit primarily of its clients.
covered by Section 205, applying the rule of strict interpretation of laws The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of
imposing taxes and other burdens on the populace, before asking Ateneo services of private respondent is made under a contract and the various
to prove its exemption therefrom. The Court takes this occasion to contracts entered into between private respondent and its clients are
reiterate the hornbook doctrine in the interpretation of tax laws that "(a) almost of the same terms, showing, among others, the compensation and
statute will not be construed as imposing a tax unless it does so clearly, terms of payment." 11 (Emphasis supplied.)
expressly, and unambiguously . . . (A) tax cannot be imposed without clear
and express words for that purpose. Accordingly, the general rule of In theory, the Commissioner of Internal Revenue may be correct. However,
requiring adherence to the letter in construing statutes applies with peculiar the records do not show that Ateneo's IPC in fact contracted to sell its
strictness to tax laws and the provisions of a taxing act are not to be research services for a fee. Clearly then, as found by the Court of Appeals
extended by implication." 8 Parenthetically, in answering the question of and the Court of Tax Appeals, petitioner's theory is inapplicable to the
who is subject to tax statutes, it is basic that "in case of doubt, such statutes established factual milieu obtaining in the instant case.
are to be construed most strongly against the government and in favor of
the subjects or citizens because burdens are not to be imposed nor In the first place, the petitioner has presented no evidence to prove its bare
presumed to be imposed beyond what statutes expressly and clearly contention that, indeed, contracts for sale of services were ever entered
import." 9 into by the private respondent. As appropriately pointed out by the latter:

To fall under its coverage, Section 205 of the National Internal Revenue An examination of the Commissioner's Written Formal
Code requires that the independent contractor be engaged in the business Offer of Evidence in the Court of Tax Appeals shows that
of selling its services. Hence, to impose the three percent contractor's tax only the following documentary evidence was
on Ateneo's Institute of Philippine Culture, it should be sufficiently proven presented:
that the private respondent is indeed selling its services for a fee in pursuit
of an independent business. And it is only after private respondent has
been found clearly to be subject to the provisions of Sec. 205 that the Exhibit 1 BIR letter of authority no. 331844
question of exemption therefrom would arise. Only after such coverage is
shown does the rule of construction — that tax exemptions are to be 2 Examiner's Field
strictly construed against the taxpayer — come into play, contrary to Audit Report
TAXATION CASES |7

3 Adjustments to research is done; and that private respondent retains not


Sales/Receipts only the absolute right to publish but also the ownership
of the results of the research conducted by the IPC. Quite
4 Letter-decision clearly, the aforementioned terms and conditions belie
of BIR the allegation that private respondent is a contractor or
Commissioner is engaged in business.
Bienvenido A. Tan
Jr. For another, it bears stressing that private respondent
is a non-stock, non-profit educational corporation. The
None of the foregoing evidence even comes close to fact that it accepted sponsorship for IPC's unfunded
purport to be contracts between private respondent projects is merely incidental. For, the main function of
and third parties. 12 the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover
the records do not show that in accepting sponsorship
Moreover, the Court of Tax Appeals accurately and correctly declared that of research work, IPC realized profits from such work.
the " funds received by the Ateneo de Manila University are technically not a On the contrary, the evidence shows that for about 30
fee. They may however fall as gifts or donations which are tax-exempt" as years, IPC had continuously operated at a loss, which
shown by private respondent's compliance with the requirement of means that sponsored funds are less than actual
Section 123 of the National Internal Revenue Code providing for the expenses for its research projects. That IPC has been
exemption of such gifts to an educational institution. 13 operating at a loss loudly bespeaks of the fact that
education and not profit is the motive for undertaking
Respondent Court of Appeals elucidated on the ruling of the Court of Tax the research projects.
Appeals:
Then, too, granting arguendo that IPC made profits from
To our mind, private respondent hardly fits into the the sponsored research projects, the fact still remains
definition of an "independent contractor". that there is no proof that part of such earnings or
profits was ever distributed as dividends to any
For one, the established facts show that IPC, as a unit of stockholder, as in fact none was so distributed because
the private respondent, is not engaged in business. they accrued to the benefit of the private respondent
Undisputedly, private respondent is mandated by law to which is a non-profit educational institution. 14
undertake research activities to maintain its university
status. In fact, the research activities being carried out Therefore, it is clear that the funds received by Ateneo's Institute of
by the IPC is focused not on business or profit but on Philippine Culture are not given in the concept of a fee or price in exchange
social sciences studies of Philippine society and culture. for the performance of a service or delivery of an object. Rather, the
Since it can only finance a limited number of IPC's amounts are in the nature of an endowment or donation given by IPC's
research projects, private respondent occasionally benefactors solely for the purpose of sponsoring or funding the research
accepts sponsorship for unfunded IPC research projects with no strings attached. As found by the two courts below, such
from international organizations, private foundations sponsorships are subject to IPC's terms and conditions. No proprietary or
and governmental agencies. However, such sponsorships commercial research is done, and IPC retains the ownership of the results
are subject to private respondent's terms and conditions, of the research, including the absolute right to publish the same. The
among which are, that the research is confined to topics copyrights over the results of the research are owned by
consistent with the private respondent's academic Ateneo and, consequently, no portion thereof may be reproduced without
agenda; that no proprietary or commercial purpose its permission. 15 The amounts given to IPC, therefore, may not be deemed,
TAXATION CASES |8

it bears stressing as fees or gross receipts that can be subjected to the (e) The institution must undertake research and operate
three percent contractor's tax. with a competent qualified staff at least three graduate
departments in accordance with the rules and standards
It is also well to stress that the questioned transactions of Ateneo's for graduate education. One of the departments shall be
Institute of Philippine Culture cannot be deemed either as a contract of science and technology. The competence of the staff shall
sale or a contract of a piece of work. "By the contract of sale, one of the be judged by their effective teaching, scholarly
contracting parties obligates himself to transfer the ownership of and to publications and research activities published in its
deliver a determinate thing, and the other to pay therefor a price certain in school journal as well as their leadership activities in the
money or its equivalent." 16 By its very nature, a contract of sale requires a profession.
transfer of ownership. Thus, Article 1458 of the Civil Code "expressly
makes the obligation to transfer ownership as an essential element of the (f) The institution must show evidence of adequate and
contract of sale, following modern codes, such as the German and the stable financial resources and support, a reasonable
Swiss. Even in the absence of this express requirement, however, most portion of which should be devoted to institutional
writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and development and research. (emphasis supplied)
Capitant, have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating that the xxx xxx xxx
delivery of the thing does not mean a mere physical transfer, but is a
means of transmitting ownership. Transfer of title or an agreement to
transfer it for a price paid or promised to be paid is the essence of sale." 17 32. University status may be withdrawn, after due
In the case of a contract for a piece of work, "the contractor binds himself notice and hearing, for failure to maintain satisfactorily
to execute a piece of work for the employer, in consideration of a certain the standards and requirements therefor. 20
price or compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing produced to the Petitioner's contention that it is the Institute of Philippine Culture that is
employer and transfer dominion over the thing, . . ." 18 Ineludably, whether being taxed and not the Ateneo is patently erroneous because the former is
the contract be one of sale or one for a piece of work, a transfer of not an independent juridical entity that is separate and distinct form the
ownership is involved and a party necessarily walks away with an object. latter.
19 In the case at bench, it is clear from the evidence on record that there

was no sale either of objects or services because, as adverted to earlier, Factual Findings and Conclusions of the Court of Tax Appeals
there was no transfer of ownership over the research data obtained or the Affirmed by the Court of Appeals Generally Conclusive
results of research projects undertaken by the Institute of Philippine
Culture.
In addition, we reiterate that the "Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax
Furthermore, it is clear that the research activity of the Institute of cases. Through its expertise, it is undeniably competent to determine the
Philippine Culture is done in pursuance of maintaining Ateneo's university issue of whether" 21 Ateneo de Manila University may be deemed a subject
status and not in the course of an independent business of selling such of the three percent contractor's tax "through the evidence presented
research with profit in mind. This is clear from a reading of the regulations before it." Consequently, "as a matter of principle, this Court will not set
governing universities: aside the conclusion reached by . . . the Court of Tax Appeals which is, by
the very nature of its function, dedicated exclusively to the study and
31. In addition to the legal requisites an institution must consideration of tax problems and has necessarily developed an expertise
meet, among others, the following requirements before on the subject unless there has been an abuse or improvident exercise of
an application for university status shall be considered: authority . . ." 22 This point becomes more evident in the case before us
where the findings and conclusions of both the Court of Tax Appeals and
xxx xxx xxx the Court of Appeals appear untainted by any abuse of authority, much less
TAXATION CASES |9

grave abuse of discretion. Thus, we find the decision of the latter affirming [IPC's] motive for undertaking the research
that of the former free from any palpable error. projects." 25

Public Service, Not Profit, is the Motive WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals is hereby AFFIRMED in full.
The records show that the Institute of Philippine Culture conducted its
research activities at a huge deficit of P1,624,014.00 as shown in its SO ORDERED.
statements of fund and disbursements for the period 1972 to 1985. 23 In
fact, it was Ateneo de Manila University itself that had funded the research respects, with costs against the defendant-appellant. So ordered.
projects of the institute, and it was only when Ateneo could no longer
produce the needed funds that the institute sought funding from outside.
The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit 3. Domingo vs. Hon. Garlitos
nature of the institute's research activities done in furtherance of the G.R. No. L-18994 June 29, 1963
university's purposes, as follows:
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
Q Now it was testified to earlier by Miss Thelma Padero HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
(Office Manager of the Institute of Philippine Culture) Instance of Leyte,
that as far as grants from sponsored research it is and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
possible that the grant sometimes is less than the actual Walter Scott Price, respondents.
cost. Will you please tell us in this case when the actual
cost is a lot less than the grant who shoulders the Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
additional cost? Benedicto and Martinez for respondents.

A The University. LABRADOR, J.:

Q Now, why is this done by the University? This is a petition for certiorari and mandamus against the Judge of the
Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking
to annul certain orders of the court and for an order in this Court directing
A Because of our faculty development program as a the respondent court below to execute the judgment in favor of the
university, because a university has to have its own Government against the estate of Walter Scott Price for internal revenue
research institute. 24 taxes.

So, why is it that Ateneo continues to operate and conduct researches It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No.
through its Institute of Philippine Culture when it undisputedly loses not L-14674, January 30, 1960, this Court declared as final and executory the
an insignificant amount in the process? The plain and simple answer is order for the payment by the estate of the estate and inheritance taxes,
that private respondent is not a contractor selling its services for a fee but charges and penalties, amounting to P40,058.55, issued by the Court of
an academic institution conducting these researches pursuant to its First Instance of Leyte in, special proceedings No. 14 entitled "In the
commitments to education and, ultimately, to public service. For the matter of the Intestate Estate of the Late Walter Scott Price." In order to
institute to have tenaciously continued operating for so long despite its enforce the claims against the estate the fiscal presented a petition dated
accumulation of significant losses, we can only agree with both the Court of June 21, 1961, to the court below for the execution of the judgment. The
Tax Appeals and the Court of Appeals that "education and not profit is petition was, however, denied by the court which held that the execution is
not justifiable as the Government is indebted to the estate under
TAXATION CASES |10

administration in the amount of P262,200. The orders of the court below procedure is for the court to order the sale of personal estate or the sale or
dated August 20, 1960 and September 28, 1960, respectively, are as mortgage of real property of the deceased and all debts or expenses of
follows: administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Rule 90, section 2. And when sale or mortgage of real estate is to be made,
Price, Administratrix of the estate of her late husband Walter Scott Price the regulations contained in Rule 90, section 7, should be complied
and Director Zoilo Castrillo of the Bureau of Lands dated September 19, with.1äwphï1.ñët
1956 and acknowledged before Notary Public Salvador V. Esguerra, legal
adviser in Malacañang to Executive Secretary De Leon dated December 14, Execution may issue only where the devisees, legatees or heirs have
1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo entered into possession of their respective portions in the estate prior to
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum settlement and payment of the debts and expenses of administration and it
ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 is later ascertained that there are such debts and expenses to be paid, in
appropriating the sum of P262.200.00 for the payment to the Leyte which case "the court having jurisdiction of the estate may, by order for
Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, that purpose, after hearing, settle the amount of their several liabilities,
as directed in the above note of the President. Considering these facts, the and order how much and in what manner each person shall contribute,
Court orders that the payment of inheritance taxes in the sum of and may issue execution if circumstances require" (Rule 89, section 6; see
P40,058.55 due the Collector of Internal Revenue as ordered paid by this also Rule 74, Section 4; Emphasis supplied.) And this is not the instant
Court on July 5, 1960 in accordance with the order of the Supreme Court case.
promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. The legal basis for such a procedure is the fact that in the testate or
Price, in this estate, the balance to be paid by the Government to her intestate proceedings to settle the estate of a deceased person, the
without further delay. (Order of August 20, 1960) properties belonging to the estate are under the jurisdiction of the court
and such jurisdiction continues until said properties have been distributed
The Court has nothing further to add to its order dated August 20, 1960 among the heirs entitled thereto. During the pendency of the proceedings
and it orders that the payment of the claim of the Collector of Internal all the estate is in custodia legis and the proper procedure is not to allow
Revenue be deferred until the Government shall have paid its accounts to the sheriff, in case of the court judgment, to seize the properties but to ask
the administratrix herein amounting to P262,200.00. It may not be amiss the court for an order to require the administrator to pay the amount due
to repeat that it is only fair for the Government, as a debtor, to its accounts from the estate and required to be paid.
to its citizens-creditors before it can insist in the prompt payment of the
latter's account to it, specially taking into consideration that the amount Another ground for denying the petition of the provincial fiscal is the fact
due to the Government draws interests while the credit due to the present that the court having jurisdiction of the estate had found that the claim of
state does not accrue any interest. (Order of September 28, 1960) the estate against the Government has been recognized and an amount of
P262,200 has already been appropriated for the purpose by a
The petition to set aside the above orders of the court below and for the corresponding law (Rep. Act No. 2700). Under the above circumstances,
execution of the claim of the Government against the estate must be denied both the claim of the Government for inheritance taxes and the claim of the
for lack of merit. The ordinary procedure by which to settle claims of intestate for services rendered have already become overdue and
indebtedness against the estate of a deceased person, as an inheritance tax, demandable is well as fully liquidated. Compensation, therefore, takes
is for the claimant to present a claim before the probate court so that said place by operation of law, in accordance with the provisions of Articles
court may order the administrator to pay the amount thereof. To such 1279 and 1290 of the Civil Code, and both debts are extinguished to the
effect is the decision of this Court in Aldamiz vs. Judge of the Court of First concurrent amount, thus:
Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
. . . a writ of execution is not the proper procedure allowed by the Rules of compensation takes effect by operation of law, and extinguished both
Court for the payment of debts and expenses of administration. The proper
TAXATION CASES |11

debts to the concurrent amount, eventhough the creditors and debtors are No. 464 known as the Real Property Tax Code in order to satisfy a tax
not aware of the compensation. delinquency of P2,400.00. Ho Fernandez was the highest bidder for the
property.
It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott Price. Francia was not present during the auction sale since he was in Iligan City
Furthermore, the petition for certiorari and mandamus is not the proper at that time helping his uncle ship bananas.
remedy for the petitioner. Appeal is the remedy.
On March 3, 1979, Francia received a notice of hearing of LRC Case No.
The petition is, therefore, dismissed, without costs. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho
Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the
4. Francia vs. IAC issuance in his name of a new certificate of title. Upon verification through
his lawyer, Francia discovered that a Final Bill of Sale had been issued in
G.R. No. L-67649 June 28, 1988 favor of Ho Fernandez by the City Treasurer on December 11, 1978. The
auction sale and the final bill of sale were both annotated at the back of
ENGRACIO FRANCIA, petitioner, TCT No. 4739 (37795) by the Register of Deeds.
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents. On March 20, 1979, Francia filed a complaint to annul the auction sale. He
later amended his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive
GUTIERREZ, JR., J.: portion of which reads:

The petitioner invokes legal and equitable grounds to reverse the WHEREFORE, in view of the foregoing, judgment is hereby rendered
questioned decision of the Intermediate Appellate Court, to set aside the dismissing the amended complaint and ordering:
auction sale of his property which took place on December 5, 1977, and to
allow him to recover a 203 square meter lot which was, sold at public (a) The Register of Deeds of Pasay City to issue a new Transfer Certificate
auction to Ho Fernandez and ordered titled in the latter's name. of Title in favor of the defendant Ho Fernandez over the parcel of land
including the improvements thereon, subject to whatever encumbrances
The antecedent facts are as follows: appearing at the back of TCT No. 4739 (37795) and ordering the same TCT
No. 4739 (37795) cancelled.
Engracio Francia is the registered owner of a residential lot and a two-
story house built upon it situated at Barrio San Isidro, now District of Sta. (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as
Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square attorney's fees. (p. 30, Record on Appeal)
meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City. The Intermediate Appellate Court affirmed the decision of the lower court
in toto.
On October 15, 1977, a 125 square meter portion of Francia's property
was expropriated by the Republic of the Philippines for the sum of Hence, this petition for review.
P4,116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion. Francia prefaced his arguments with the following assignments of grave
errors of law:
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his property was sold at public auction by the I
City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree
TAXATION CASES |12

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE circumstances of the case do not satisfy the requirements provided by
ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY Article 1279, to wit:
P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE
AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE (1) that each one of the obligors be bound principally and that he be at the
FORMER. same time a principal creditor of the other;

II xxx xxx xxx

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE (3) that the two debts be due.
AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT
PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS xxx xxx xxx
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00. This principal contention of the petitioner has no merit. We have
consistently ruled that there can be no off-setting of taxes against the
III claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER amount equal to or greater than the tax being collected. The collection of a
COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN tax cannot await the results of a lawsuit against the government.
NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT
HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF ruled that Internal Revenue Taxes can not be the subject of set-off or
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE compensation. We stated that:
AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
A claim for taxes is not such a debt, demand, contract or judgment as is
We gave due course to the petition for a more thorough inquiry into the allowed to be set-off under the statutes of set-off, which are construed
petitioner's allegations that his property was sold at public auction uniformly, in the light of public policy, to exclude the remedy in an action
without notice to him and that the price paid for the property was or any indebtedness of the state or municipality to one who is liable to the
shockingly inadequate, amounting to fraud and deprivation without due state or municipality for taxes. Neither are they a proper subject of
process of law. recoupment since they do not arise out of the contract or transaction sued
on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy
A careful review of the case, however, discloses that Mr. Francia brought is well-settled that no set-off admissible against demands for taxes levied
the problems raised in his petition upon himself. While we commiserate for general or local governmental purposes. The reason on which the
with him at the loss of his property, the law and the facts militate against general rule is based, is that taxes are not in the nature of contracts
the grant of his petition. We are constrained to dismiss it. between the party and party but grow out of duty to, and are the positive
acts of the government to the making and enforcing of which, the personal
Francia contends that his tax delinquency of P2,400.00 has been consent of individual taxpayers is not required. ..."
extinguished by legal compensation. He claims that the government owed
him P4,116.00 when a portion of his land was expropriated on October 15, We stated that a taxpayer cannot refuse to pay his tax when called upon by
1977. Hence, his tax obligation had been set-off by operation of law as of the collector because he has a claim against the governmental body not
October 15, 1977. included in the tax levy.

There is no legal basis for the contention. By legal compensation, This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331)
obligations of persons, who in their own right are reciprocally debtors and where we stated that: "... internal revenue taxes can not be the subject of
creditors of each other, are extinguished (Art. 1278, Civil Code). The compensation: Reason: government and taxpayer are not mutually
TAXATION CASES |13

creditors and debtors of each other' under Article 1278 of the Civil Code Phil. 261). This is actually an exception to the rule that administrative
and a "claim for taxes is not such a debt, demand, contract or judgment as proceedings are presumed to be regular.
is allowed to be set-off."
But even if the burden of proof lies with the purchaser to show that all
There are other factors which compel us to rule against the petitioner. The legal prerequisites have been complied with, the petitioner can not,
tax was due to the city government while the expropriation was effected however, deny that he did receive the notice for the auction sale. The
by the national government. Moreover, the amount of P4,116.00 paid by records sustain the lower court's finding that:
the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public [T]he plaintiff claimed that it was illegal and irregular. He insisted that he
auction of his remaining property. Notice of the deposit dated September was not properly notified of the auction sale. Surprisingly, however, he
28, 1977 was received by the petitioner on September 30, 1977. The admitted in his testimony that he received the letter dated November 21,
petitioner admitted in his testimony that he knew about the P4,116.00 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He
deposited with the bank but he did not withdraw it. It would have been an claimed further that he was not present on December 5, 1977 the date of
easy matter to withdraw P2,400.00 from the deposit so that he could pay the auction sale because he went to Iligan City. As long as there was
the tax obligation thus aborting the sale at public auction. substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .
Petitioner had one year within which to redeem his property although, as
well be shown later, he claimed that he pocketed the notice of the auction We quote the following testimony of the petitioner on cross-examination,
sale without reading it. to wit:

Petitioner contends that "the auction sale in question was made without Q. My question to you is this letter marked as Exhibit I for Ho Fernandez
complying with the mandatory provisions of the statute governing tax sale. notified you that the property in question shall be sold at public auction to
No evidence, oral or otherwise, was presented that the procedure outlined the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464.
by law on sales of property for tax delinquency was followed. ... Since Will you tell the Court whether you received the original of this letter?
defendant Ho Fernandez has the affirmative of this issue, the burden of
proof therefore rests upon him to show that plaintiff was duly and A. I just signed it because I was not able to read the same. It was just sent
properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied) by mail carrier.

We agree with the petitioner's claim that Ho Fernandez, the purchaser at Q. So you admit that you received the original of Exhibit I and you signed
the auction sale, has the burden of proof to show that there was upon receipt thereof but you did not read the contents of it?
compliance with all the prescribed requisites for a tax sale.
A. Yes, sir, as I was in a hurry.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
Q. After you received that original where did you place it?
xxx xxx xxx
A. I placed it in the usual place where I place my mails.
... [D]ue process of law to be followed in tax proceedings must be
established by proof and the general rule is that the purchaser of a tax title Petitioner, therefore, was notified about the auction sale. It was negligence
is bound to take upon himself the burden of showing the regularity of all on his part when he ignored such notice. By his very own admission that
proceedings leading up to the sale. (emphasis supplied) he received the notice, his now coming to court assailing the validity of the
auction sale loses its force.
There is no presumption of the regularity of any administrative action
which results in depriving a taxpayer of his property through a tax sale. Petitioner's third assignment of grave error likewise lacks merit. As a
(Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 general rule, gross inadequacy of price is not material (De Leon v.
TAXATION CASES |14

Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance that the present rules are just, and that they bring hardship only to those
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See who have invited it by their own neglect.
also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held
that "alleged gross inadequacy of price is not material when the law gives We are inclined to believe the petitioner's claim that the value of the lot
the owner the right to redeem as when a sale is made at public auction, has greatly appreciated in value. Precisely because of the widening of
upon the theory that the lesser the price, the easier it is for the owner to Buendia Avenue in Pasay City, which necessitated the expropriation of
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held: adjoining areas, real estate values have gone up in the area. However, the
price quoted by the petitioner for a 203 square meter lot appears quite
... [R]espondent treasurer now claims that the prices for which the lands exaggerated. At any rate, the foregoing reasons which answer the
were sold are unconscionable considering the wide divergence between petitioner's claims lead us to deny the petition.
their assessed values and the amounts for which they had been actually
sold. However, while in ordinary sales for reasons of equity a transaction And finally, even if we are inclined to give relief to the petitioner on
may be invalidated on the ground of inadequacy of price, or when such equitable grounds, there are no strong considerations of substantial justice
inadequacy shocks one's conscience as to justify the courts to interfere, in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to
such does not follow when the law gives to the owner the right to redeem, the date of the auction sale. He claims to have pocketed the notice of sale
as when a sale is made at public auction, upon the theory that the lesser without reading it which, if true, is still an act of inexplicable negligence.
the price the easier it is for the owner to effect the redemption. And so it He did not withdraw from the expropriation payment deposited with the
was aptly said: "When there is the right to redeem, inadequacy of price Philippine National Bank an amount sufficient to pay for the back taxes.
should not be material, because the judgment debtor may reacquire the The petitioner did not pay attention to another notice sent by the City
property or also sell his right to redeem and thus recover the loss he Treasurer on November 3, 1978, during the period of redemption,
claims to have suffered by reason of the price obtained at the auction sale." regarding his tax delinquency. There is furthermore no showing of bad
faith or collusion in the purchase of the property by Mr. Fernandez. The
The reason behind the above rulings is well enunciated in the case of petitioner has no standing to invoke equity in his attempt to regain the
Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290): property by belatedly asking for the annulment of the sale.

If mere inadequacy of price is held to be a valid objection to a sale for WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is
taxes, the collection of taxes in this manner would be greatly embarrassed, DISMISSED. The decision of the respondent court is affirmed.
if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.)
238, the correct rule is stated as follows: "where land is sold for taxes, the SO ORDERED.
inadequacy of the price given is not a valid objection to the sale." This rule
arises from necessity, for, if a fair price for the land were essential to the 5. Philex vs CIR
sale, it would be useless to offer the property. Indeed, it is notorious that G.R. No. 125704 August 28, 1998
the prices habitually paid by purchasers at tax sales are grossly out of
proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. PHILEX MINING CORPORATION, petitioner,
307, 73 P. 367, 369). vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE
In this case now before us, we can aptly use the language of McGuire, et al. COURT OF TAX APPEALS, respondents.
v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of


hardship from which we would be glad to relieve, but do so would unsettle ROMERO, J.:
long-established rules and lead to uncertainty and difficulty in the
collection of taxes which are the life blood of the state. We are convinced Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the
TAXATION CASES |15

Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 amount of P119,977,037.02 plus interest. Therefore these claims for tax
2 ordering it to pay the amount of P110,677,668.52 as excise tax liability credit/refund should be applied against the tax liabilities, citing our ruling
for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in
Philex's position. Since these pending claims have not yet been established
The facts show that on August 5, 1992, the BIR sent a letter to Philex or determined with certainty, it follows that no legal compensation can
asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 take place. Hence, the BIR reiterated its demand that Philex settle the
as well as the 1st and 2nd quarter of 1992 in the total amount of amount plus interest within 30 days from the receipt of the letter.
P123,821.982.52 computed as follows:
In view of the BIR's denial of the offsetting of Philex's claim for VAT input
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE credit/refund against its excise tax obligation, Philex raised the issue to the
Court of Tax Appeals on November 6, 1992. 7 In the course of the
TAX DUE proceedings, the BIR issued Tax Credit Certificate SN 001795 in the
amount of P13,144,313.88 which, applied to the total tax liabilities of
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 Philex of P123,821,982.52; effectively lowered the latter's tax obligation to
P110,677,688.52.
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
Despite the reduction of its tax liabilities, the CTA still ordered Philex to
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88 pay the remaining balance of P110,677,688.52 plus interest, elucidating its
reason, to wit:
————— ————— —————— ——————
Thus, for legal compensation to take place, both obligations must be
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39 liquidated and demandable. "Liquidated" debts are those where the exact
amount has already been determined (PARAS, Civil Code of the
————— ————— —————— —————— Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case,
the claims of the Petitioner for VAT refund is still pending litigation, and
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori,
the liquidated debt of the Petitioner to the government cannot, therefore,
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88 be set-off against the unliquidated claim which Petitioner conceived to
exist in its favor (see Compañia General de Tabacos vs. French and Unson,
————— ————— —————— —————— No. 14027, November 8, 1918, 39 Phil. 34). 8

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13 Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to
set-off on compensation since claim for taxes is not a debt or contract." 9
————— ————— —————— —————— The dispositive portion of the CTA decision 10 provides:

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3 In all the foregoing, this Petition for Review is hereby DENIED for lack of
merit and Petitioner is hereby ORDERED to PAY the Respondent the
========= ========= ========= ========= amount of P110,677,668.52 representing excise tax liability for the period
from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
In a letter dated August 20, 1992, 4 Philex protested the demand for interest from August 6, 1994 until fully paid pursuant to Section 248 and
payment of the tax liabilities stating that it has pending claims for VAT 249 of the Tax Code, as amended.
input credit/refund for the taxes it paid for the years 1989 to 1991 in the
TAXATION CASES |16

Aggrieved with the decision, Philex appealed the case before the Court of taxes are due to the Government in its sovereign capacity. 18 We find no
Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, cogent reason to deviate from the aforementioned distinction.
1996, the Court of Appeals a Affirmed the Court of Tax Appeals
observation. The pertinent portion of which reads: 12 Prescinding from this premise, in Francia v. Intermediate Appellate Court,
19 we categorically held that taxes cannot be subject to set-off or
WHEREFORE, the appeal by way of petition for review is hereby compensation, thus:
DISMISSED and the decision dated March 16, 1995 is AFFIRMED.
We have consistently ruled that there can be no off-setting of taxes against
Philex filed a motion for reconsideration which was, nevertheless, denied the claims that the taxpayer may have against the government. A person
in a Resolution dated July 11, 1996. 13 cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a
However, a few days after the denial of its motion for reconsideration, tax cannot await the results of a lawsuit against the government.
Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994, computed as The ruling in Francia has been applied to the subsequent case of Caltex
follows: 14 Philippines, Inc. v. Commission on Audit, 20 which reiterated that:

Period Covered Tax Credit Date . . . a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
By Claims For Certificate of because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand,
VAT refund/credit Number Issue Amount contract or judgment as is allowed to be set-off.

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 Further, Philex's reliance on our holding in Commissioner of Internal
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 refund may be set off against an existing tax liability even though the
refund has not yet been approved by the Commissioner, 21 is no longer
1989 007732 11 July 1996 P37,322,799.19 without any support in statutory law.

1990-1991 007751 16 July 1996 P84,662,787.46 It is important to note, that the premise of our ruling in the
aforementioned case was anchored on Section 51 (d) of the National
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95 Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which the Itogon-
In view of the grant of its VAT input credit/refund, Philex now contends Suyoc pronouncement was based was omitted. 22 Accordingly, the
that the same should, ipso jure, off-set its excise tax liabilities 15 since both doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
had already become "due and demandable, as well as fully liquidated;" 16
hence, legal compensation can properly take place. Despite the foregoing rulings clearly adverse to Philex's position, it asserts
that the imposition of surcharge and interest for the non-payment of the
We see no merit in this contention. excise taxes within the time prescribed was unjustified. Philex posits the
theory that it had no obligation to pay the excise tax liabilities within the
In several instances prior to the instant case, we have already made the prescribed period since, after all, it still has pending claims for VAT input
pronouncement that taxes cannot be subject to compensation for the credit/refund with BIR. 23
simple reason that the government and the taxpayer are not creditors and
debtors of each other. 17 There is a material distinction between a tax and We fail to see the logic of Philex's claim for this is an outright disregard of
debt. Debts are due to the Government in its corporate capacity, while the basic principle in tax law that taxes are the lifeblood of the government
TAXATION CASES |17

and so should be collected without unnecessary hindrance. 24 Evidently, Obviously, had the BIR been more diligent and judicious with their duty, it
to countenance Philex's whimsical reason would render ineffective our tax could have granted the refund earlier. We need not remind the BIR that
collection system. Too simplistic, it finds no support in law or in simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
jurisprudence. dealing and nothing less, is expected by the taxpayer from the BIR in the
latter's discharge of its function. As aptly held in Roxas v. Court of Tax
To be sure, we cannot allow Philex to refuse the payment of its tax Appeals: 36
liabilities on the ground that it has a pending tax claim for refund or credit
against the government which has not yet been granted. It must be noted The power of taxation is sometimes called also the power to destroy.
that a distinguishing feature of a tax is that it is compulsory rather than a Therefore it should be exercised with caution to minimize injury to the
matter of bargain. 25 Hence, a tax does not depend upon the consent of the proprietary rights of a taxpayer. It must be exercised fairly, equally and
taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the uniformly, lest the tax collector kill the "hen that lays the golden egg" And,
defense that it still has a pending claim for refund or credit, this would in order to maintain the general public's trust and confidence in the
adversely affect the government revenue system. A taxpayer cannot refuse Government this power must be used justly and not treacherously.
to pay his taxes when they fall due simply because he has a claim against
the government or that the collection of the tax is contingent on the result Despite our concern with the lethargic manner by which the BIR handled
of the lawsuit it filed against the government. 27 Moreover, Philex's theory Philex's tax claim, it is a settled rule that in the performance of
that would automatically apply its VAT input credit/refund against its tax governmental function, the State is not bound by the neglect of its agents
liabilities can easily give rise to confusion and abuse, depriving the and officers. Nowhere is this more true than in the field of taxation. 37
government of authority over the manner by which taxpayers credit and Again, while we understand Philex's predicament, it must be stressed that
offset their tax liabilities. the same is not a valid reason for the non-payment of its tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input To be sure, this is not to state that the taxpayer is devoid of remedy against
claim/refund with the government is immaterial for the imposition of public servants or employees, especially BIR examiners who, in
charges and penalties prescribed under Section 248 and 249 of the Tax investigating tax claims are seen to drag their feet needlessly. First, if the
Code of 1977. The payment of the surcharge is mandatory and the BIR is BIR takes time in acting upon the taxpayer's claim for refund, the latter can
not vested with any authority to waive the collection thereof. 28 The same seek judicial remedy before the Court of Tax Appeals in the manner
cannot be condoned for flimsy reasons, 29 similar to the one advanced by prescribed by law. 38 Second, if the inaction can be characterized as willful
Philex in justifying its non-payment of its tax liabilities. neglect of duty, then recourse under the Civil Code and the Tax Code can
also be availed of.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the
National Internal Revenue Code of 1977, which requires the refund of Art. 27 of the Civil Code provides:
input taxes within 60 days, 31 when it took five years for the latter to grant
its tax claim for VAT input credit/refund. 32 Art. 27. Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to perform his
In this regard, we agree with Philex. While there is no dispute that a official duty may file an action for damages and other relief against the
claimant has the burden of proof to establish the factual basis of his or her latter, without prejudice to any disciplinary action that may be taken.
claim for tax credit or refund, 33 however, once the claimant has
submitted all the required documents it is the function of the BIR to assess More importantly, Section 269 (c) of the National Internal Revenue Act of
these documents with purposeful dispatch. After all, since taxpayers owe 1997 states:
honestly to government it is but just that government render fair service to
the taxpayers. 34 xxx xxx xxx

In the instant case, the VAT input taxes were paid between 1989 to 1991
but the refund of these erroneously paid taxes was only granted in 1996.
TAXATION CASES |18

(c) Wilfully neglecting to give receipts, as by law required for any sum 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00
collected in the performance of duty or wilfully neglecting to perform, any and P222, 260.64, or a total of P525,897.06.
other duties enjoyed by law.
During the period pertinent to this case, petitioner corporation was
Simply put, both provisions abhor official inaction, willful neglect and engaged in the business of telecasting local as well as foreign films
unreasonable delay in the performance of official duties. 39 In no acquired from foreign corporations not engaged in trade or business
uncertain terms must we stress that every public employee or servant within the Philippines. for which petitioner paid rentals after withholding
must strive to render service to the people with utmost diligence and income tax of 30%of one-half of the film rentals.
efficiency. Insolence and delay have no place in government service. The
BIR, being the government collecting arm, must and should do no less. It In so far as the income tax on non-resident corporations is concerned,
simply cannot be apathetic and laggard in rendering service to the section 24 (b) of the National Internal Revenue Code, as amended by
taxpayer if it wishes to remain true to its mission of hastening the Republic Act No. 2343 dated June 20, 1959, used to provide:
country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove (b) Tax on foreign corporations.—(1) Non-resident corporations.— There
its detractors wrong. shall be levied, collected, and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every
In sum, while we can never condone the BIR's apparent callousness in foreign corporation not engaged in trade or business within the
performing its duties, still, the same cannot justify Philex's non-payment of Philippines, from an sources within the Philippines, as interest, dividends,
its tax liabilities. The adage "no one should take the law into his own rents, salaries, wages, premiums, annuities, compensations,
hands" should have guided Philex's action. remunerations, emoluments, or other fixed or determinable annual or
periodical gains, profits, and income, a tax equal to thirty per centum of
WHEREFORE, in view of the foregoing, the instant petition is hereby such amount. (Emphasis supplied)
DISMISSED. The assailed decision of the Court of Appeals dated April 8,
1996 is hereby AFFIRMED. On April 12, 1961, in implementation of the aforequoted provision, the
Commissioner of Internal Revenue issued General Circular No. V-334
SO ORDERED. reading thus:

6. ABS CBN vs. Court of Tax Appeals In connection with Section 24 (b) of Tax Code, the amendment introduced
G.R. No. L-52306 October 12, 1981 by Republic Act No. 2343, under which an income tax equal to 30% is
levied upon the amount received by every foreign corporation not engaged
ABS-CBN BROADCASTING CORPORATION, petitioner, in trade or business within the Philippines from all sources within this
vs. country as interest, dividends, rents, salaries, wages, premiums, annuities,
COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL compensations, remunerations, emoluments, or other fixed or
REVENUE, respondents. determinable annual or periodical gains, profits, and income, it has been
determined that the tax is still imposed on income derived from capital, or
labor, or both combined, in accordance with the basic principle of income
taxation (Sec. 39, Income Tax Regulations), and that a mere return of
MELENCIO-HERRERA, J.: capital or investment is not income (Par. 5,06, 1 Mertens Law of Federal
'Taxation). Since according to the findings of the Special Team who
This is a Petition for Review on certiorari of the Decision of the Court of inquired into business of the non-resident foreign film distributors, the
Tax Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which distribution or exhibition right on a film is invariably acquired for a
affirmed the assessment by the Commissioner of Internal Revenue, dated consideration, either for a lump sum or a percentage of the film rentals,
April 16, 1971, of a deficiency withholding income tax against petitioner, whether from a parent company or an independent outside producer,
ABS-CBN Broadcasting Corporation, for the years 1965, 1966, 1967 and
TAXATION CASES |19

apart of the receipts of a non-resident foreign film distributor derived from of our Tax Code was patterned, this Office has come to the conclusion that
said film represents, therefore, a return of investment. the tax therein prescribed should be based on gross income without t
deduction whatever. Consequently, the ruling in General Circular No. V-
xxx xxx xxx 334, dated April 12, 1961, allowing the deduction of the proportionate cost
of production or exhibition of motion picture films from the rental income
4. The local distributor should withhold 30% of one-half of the film rentals of non- resident foreign corporations, is erroneous for lack of legal basis.
paid to the non-resident foreign film distributor and pay the same to this
office in accordance with law unless the non- resident foreign film In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby
distributor makes a prior settlement of its income tax liability. (Emphasis revoked and henceforth, local films distributors and exhibitors shall
ours). deduct and withhold 35% of the entire amount payable by them to non-
resident foreign corporations, as film rental or royalty, or whatever such
Pursuant to the foregoing, petitioner dutifully withheld and turned over to payment may be denominated, without any deduction whatever, pursuant
the Bureau of Internal Revenue the amount of 30% of one-half of the film to Section 24 (b), and pay the withheld taxes in accordance with Section 54
rentals paid by it to foreign corporations not engaged in trade or business of the Tax Code, as amended.
within the Philippines. The last year that petitioner withheld taxes
pursuant to the foregoing Circular was in 1968. All rulings inconsistent with this Circular is likewise revoked. (Emphasis
ours)
On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the
Tax Code increasing the tax rate from 30 % to 35 % and revising the tax On the basis of this new Circular, respondent Commissioner of Internal
basis from "such amount" referring to rents, etc. to "gross income," as Revenue issued against petitioner a letter of assessment and demand
follows: dated April 15, 1971, but allegedly released by it and received by
petitioner on April 12, 1971, requiring them to pay deficiency withholding
(b) Tax on foreign corporations.—(1) Non-resident corporations.—A income tax on the remitted film rentals for the years 1965 through 1968
foreign corporation not engaged in trade or business in the Philippines and film royalty as of the end of 1968 in the total amount of P525,897.06
including a foreign life insurance company not engaged in the life computed as follows:
insurance business in the Philippines shall pay a tax equal to thirty-five per
cent of the gross income received during each taxable year from all sources 1965
within the Philippines, as interests, dividends, rents, royalties, salaries,
wages, premiums, annuities, compensations, remunerations for technical Total amount remitted
services or otherwise, emoluments or other fixed or determinable annual,
periodical or casual gains, profits, and income, and capital gains, Provided P 511,059.48
however, That premiums shah not include reinsurance premiums.
(Emphasis supplied) Withholding tax due thereon

On February 8, 1971, the Commissioner of Internal Revenue issued 153,318.00


Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-
334, and holding that the latter was "erroneous for lack of legal basis," Less: Amount already assessed
because "the tax therein prescribed should be based on gross income
without deduction whatever," thus: 89,000.00

After a restudy and analysis of Section 24 (b) of the National Internal Balance
Revenue Code, as amended by Republic Act No. 5431, and guided by the
interpretation given by tax authorities to a similar provision in the Internal P64,318.00
Revenue Code of the United States, on which the aforementioned provision
TAXATION CASES |20

Add: 1/2% mo. int. fr. 4-16-66 to 4-16-69


71,448.00

11,577.24 Balance

Total amount due & collectible


108,900.00
P 75,895.24
Add: 1/2% mo. int. fr. 4-16-68 to 4-16-71
1966

Total amount remitted 19,602.00


P373,492.24
Withholding tax due thereon Total amount due & collectible
112,048.00
Less: Amount already assessed
27,947.00 P128,502.00
Balance
84,101.00 1968

Add: 11/2%mo. int. fr. 4-16-67 to 4-116-70 Total amount remitted

15,138.18 P881,816.92

Total amount due & collectible Withholding tax due thereon

P99,239.18 291,283.00

1967 Less: Amount already assessed

Total amount remitted


92,886.00

P601,160.65 Balance

Withholding tax due thereon


P198,447.00

180,348.00 Add: 1/2% mo. int. fr. 4-16-69 to 4-29-71

Less: Amount already assessed


23,813.64
TAXATION CASES |21

Total amount due & collectible In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by
Republic Act No. 6110 on August 9, 1969, it provides:

P222,260.44 1 Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or


reversal of and of the rules and regulations promulgated in accordance
On May 5, 1971, petitioner requested for a reconsideration and with the preceding section or any of the rulings or circulars promulgated
withdrawal of the assessment. However, without acting thereon, by the Commissioner of Internal Revenue shall not be given retroactive
respondent, on April 6, 1976, issued a warrant of distraint and levy over application if the relocation, modification, or reversal will be prejudicial to
petitioner's personal as well as real properties. The petitioner then filed its the taxpayers, except in the following cases: (a) where the taxpayer
Petition for Review with the Court of Tax Appeals whose Decision, dated deliberately mis-states or omits material facts from his return or any
November 29, 1979, is, in turn, the subject of this review. The Tax Court document required of him by the Bureau of Internal Revenue: (b) where
held: the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or (c)
For the reasons given, the Court finds the assessment issued by where the taxpayer acted in bad faith. (italics for emphasis)
respondent on April 16, 1971 against petitioner in the amounts of
P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a total of It is clear from the foregoing that rulings or circulars promulgated by the
P525,897.06 as deficiency withholding income tax for the years 1965, Commissioner of Internal Revenue have no retroactive application where
1966, 1967 and 1968, respectively, in accordance with law. As prayed for, to so apply them would be prejudicial to taxpayers. The prejudice to
the petition for review filed in this case is dismissed, and petitioner ABS- petitioner of the retroactive application of Memorandum Circular No. 4-71
CBN Broadcasting Corporation is hereby ordered to pay the sum of is beyond question. It was issued only in 1971, or three years after 1968,
P525,897.06 to respondent Commissioner of Internal Revenue as the last year that petitioner had withheld taxes under General Circular No.
deficiency withholding income tax for the taxable years 1965 thru 1968, V-334. The assessment and demand on petitioner to pay deficiency
plus the surcharge and interest which have accrued thereon incident to withholding income tax was also made three years after 1968 for a period
delinquency pursuant to Section 51 (e) of the National Internal Revenue of time commencing in 1965. Petitioner was no longer in a position to
Code, as amended. withhold taxes due from foreign corporations because it had already
remitted all film rentals and no longer had any control over them when the
WHEREFORE, the decision appealed from is hereby affirmed at petitioner's new Circular was issued. And in so far as the enumerated exceptions are
cost. concerned, admittedly, petitioner does not fall under any of them.

SO ORDERED. 2 Respondent claims, however, that the provision on non-retroactivity is


inapplicable in the present case in that General Circular No. V-334 is a
The issues raised are two-fold: nullity because in effect, it changed the law on the matter. The Court of Tax
Appeals sustained this position holding that: "Deductions are wholly and
I. Whether or not respondent can apply General Circular No. 4-71 exclusively within the power of Congress or the law-making body to grant,
retroactively and issue a deficiency assessment against petitioner in the condition or deny; and where the statute imposes a tax equal to a specified
amount of P 525,897.06 as deficiency withholding income tax for the years rate or percentage of the gross or entire amount received by the taxpayer,
1965, 1966, 1967 and 1968. the authority of some administrative officials to modify or change, much
less reduce, the basis or measure of the tax should not be read into law." 4
II. Whether or not the right of the Commissioner of Internal Revenue to Therefore, the Tax Court concluded, petitioner did not acquire any vested
assess the deficiency withholding income tax for the year 196,5 has right thereunder as the same was a nullity.
prescribed. 3
The rationale behind General Circular No. V-334 was clearly stated therein,
Upon the facts and circumstances of the case, review is warranted. however: "It ha(d) been determined that the tax is still imposed on income
TAXATION CASES |22

derived from capital, or labor, or both combined, in accordance with the tax equal to thirty per centum of such amount. 6 (double emphasis
basic principle of income taxation ...and that a mere return of capital or supplied)
investment is not income ... ." "A part of the receipts of a non-resident
foreign film distributor derived from said film represents, therefore, a The principle of legislative approval of administrative interpretation by re-
return of investment." The Circular thus fixed the return of capital at 50% enactment clearly obtains in this case. It provides that "the re-enactment of
to simplify the administrative chore of determining the portion of the a statute substantially unchanged is persuasive indication of the adoption
rentals covering the return of capital." 5 by Congress of a prior executive construction. 7 Note should be taken of
the fact that this case involves not a mere opinion of the Commissioner or
Were the "gross income" base clear from Sec. 24 (b), perhaps, the ruling rendered on a mere query, but a Circular formally issued to "all
ratiocination of the Tax Court could be upheld. It should be noted, internal revenue officials" by the then Commissioner of Internal Revenue.
however, that said Section was not too plain and simple to understand. The
fact that the issuance of the General Circular in question was rendered It was only on June 27, 1968 under Republic Act No. 5431, supra, which
necessary leads to no other conclusion than that it was not easy of became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24
comprehension and could be subjected to different interpretations. (b) was amended to refer specifically to 35% of the "gross income."

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the This Court is not unaware of the well-entrenched principle that the
basis of General Circular No. V-334, was just one in a series of enactments Government is never estopped from collecting taxes because of mistakes
regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on or errors on the part of its
June 22, 1963 without changing the basis but merely adding a proviso (in agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like
bold letters). other principles of law, this also admits of exceptions in the interest of
justice and fairplay. The insertion of Sec. 338-A into the National Internal
(b) Tax on foreign corporation.—(1) Non-resident corporations. — There Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative
shall be levied, collected and paid for each taxable year, in lieu of the tax of legislative intention to support the principle of good faith. In fact, in the
imposed by the preceding paragraph, upon the amount received by every United States, from where Sec. 24 (b) was patterned, it has been held that
foreign corporation not engaged in trade or business within the the Commissioner of Collector is precluded from adopting a position
Philippines, from all sources within the Philippines, as interest, dividends, inconsistent with one previously taken where injustice would result
rents, salaries, wages, premiums annuities, compensations, remunerations, therefrom, 11 or where there has been a misrepresentation to the
emoluments, or other fixed or determinable annual or periodical gains, taxpayer. 12
profits, and income, a tax equal to thirty per centum of such amount:
PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE We have also noted that in its Decision, the Court of Tax Appeals further
REINSURANCE PREMIUMS. (double emphasis ours). required the petitioner to pay interest and surcharge as provided for in
Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, P 525,897.06. This additional requirement is much less called for because
omitting the proviso and inserting some words (also in bold letters). the petitioner relied in good faith and religiously complied with no less
than a Circular issued "to all internal revenue officials" by the highest
(b) Tax on foreign corporations.—(1) Non-resident corporations.—There official of the Bureau of Internal Revenue and approved by the then
shall be levied, collected and paid for each taxable year, in lieu of the tax Secretary of Finance. 13
imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the With the foregoing conclusions arrived at, resolution of the issue of
Philippines, from all sources within the Philippines, as interest, dividends, prescription becomes unnecessary.
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed,
periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a and the questioned assessment set aside. No costs.
TAXATION CASES |23

SO ORDERED. On appeal by the Commissioner, the Court through its Second Division
reversed the decision of the CTA and held that:
7. CIR vs. Proctor and Gamble
G.R. No. L-66838 December 2, 1991 (a) P&G-USA, and not private respondent P&G-Phil., was the proper party
to claim the refund or tax credit here involved;
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. (b) there is nothing in Section 902 or other provisions of the US Tax Code
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and that allows a credit against the US tax due from P&G-USA of taxes deemed
THE COURT OF TAX APPEALS, respondents. to have been paid in the Philippines equivalent to twenty percent (20%)
which represents the difference between the regular tax of thirty-five
T.A. Tejada & C.N. Lim for private respondent. percent (35%) on corporations and the tax of fifteen percent (15%) on
dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions


RESOLUTION necessary in order that "the dividends received by its non-resident parent
company in the US (P&G-USA) may be subject to the preferential tax rate of
15% instead of 35%."

FELICIANO, J.:p These holdings were questioned in P&G-Phil.'s Motion for Re-
consideration and we will deal with them seriatim in this Resolution
For the taxable year 1974 ending on 30 June 1974, and the taxable year resolving that Motion.
1975 ending 30 June 1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends I
payable to its parent company and sole stockholder, Procter and Gamble
Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which 1. There are certain preliminary aspects of the question of the capacity of
dividends the amount of P8,457,731.21 representing the thirty-five P&G-Phil. to bring the present claim for refund or tax credit, which need to
percent (35%) withholding tax at source was deducted. be examined. This question was raised for the first time on appeal, i.e., in
the proceedings before this Court on the Petition for Review filed by the
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue. The question was not raised by the
Commissioner of Internal Revenue a claim for refund or tax credit in the Commissioner on the administrative level, and neither was it raised by him
amount of P4,832,989.26 claiming, among other things, that pursuant to before the CTA.
Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as
amended by Presidential Decree No. 369, the applicable rate of We believe that the Bureau of Internal Revenue ("BIR") should not be
withholding tax on the dividends remitted was only fifteen percent (15%) allowed to defeat an otherwise valid claim for refund by raising this
(and not thirty-five percent [35%]) of the dividends. question of alleged incapacity for the first time on appeal before this Court.
This is clearly a matter of procedure. Petitioner does not pretend that P&G-
There being no responsive action on the part of the Commissioner, P&G- Phil., should it succeed in the claim for refund, is likely to run away, as it
Phil., on 13 July 1977, filed a petition for review with public respondent were, with the refund instead of transmitting such refund or tax credit to
Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 its parent and sole stockholder. It is commonplace that in the absence of
January 1984, the CTA rendered a decision ordering petitioner explicit statutory provisions to the contrary, the government must follow
Commissioner to refund or grant the tax credit in the amount of the same rules of procedure which bind private parties. It is, for instance,
P4,832,989.00. clear that the government is held to compliance with the provisions of
Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of
TAXATION CASES |24

filing fees from which the Republic of the Philippines is exempt by the (3) credit or refund taxes erroneously or illegally received, . . . No credit or
Rules of Court. refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2)
More importantly, there arises here a question of fairness should the BIR, years after the payment of the tax or penalty. (As amended by P.D. No. 69)
unlike any other litigant, be allowed to raise for the first time on appeal (Emphasis supplied)
questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible Since the claim for refund was filed by P&G-Phil., the question which arises
opportunity, i.e., at the administrative level, demanded that P&G-Phil. is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term
produce an express authorization from its parent corporation to bring the "taxpayer" is defined in our NIRC as referring to "any person subject to tax
claim for refund, then P&G-Phil. would have been able forthwith to secure imposed by the Title [on Tax on Income]." 2 It thus becomes important to
and produce such authorization before filing the action in the instant case. note that under Section 53 (c) of the NIRC, the withholding agent who is
The action here was commenced just before expiration of the two (2)-year "required to deduct and withhold any tax" is made " personally liable for
prescriptive period. such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of
2. The question of the capacity of P&G-Phil. to bring the claim for refund payments effected by the withholding agent in accordance with the
has substantive dimensions as well which, as will be seen below, also provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
ultimately relate to fairness. independently liable 3 for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is,
Under Section 306 of the NIRC, a claim for refund or tax credit filed with moreover, subject to and liable for deficiency assessments, surcharges and
the Commissioner of Internal Revenue is essential for maintenance of a penalties should the amount of the tax withheld be finally found to be less
suit for recovery of taxes allegedly erroneously or illegally assessed or than the amount that should have been withheld under law.
collected:
A "person liable for tax" has been held to be a "person subject to tax" and
Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or properly considered a "taxpayer." 4 The terms liable for tax" and "subject
proceeding shall be maintained in any court for the recovery of any to tax" both connote legal obligation or duty to pay a tax. It is very difficult,
national internal revenue tax hereafter alleged to have been erroneously indeed conceptually impossible, to consider a person who is statutorily
or illegally assessed or collected, or of any penalty claimed to have been made "liable for tax" as not "subject to tax." By any reasonable standard,
collected without authority, or of any sum alleged to have been excessive such a person should be regarded as a party in interest, or as a person
or in any manner wrongfully collected, until a claim for refund or credit having sufficient legal interest, to bring a suit for refund of taxes he
has been duly filed with the Commissioner of Internal Revenue; but such believes were illegally collected from him.
suit or proceeding may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress. In any case, no such suit or In Philippine Guaranty Company, Inc. v. Commissioner of Internal
proceeding shall be begun after the expiration of two years from the date Revenue, 5 this Court pointed out that a withholding agent is in fact the
of payment of the tax or penalty regardless of any supervening cause that agent both of the government and of the taxpayer, and that the
may arise after payment: . . . (Emphasis supplied) withholding agent is not an ordinary government agent:

Section 309 (3) of the NIRC, in turn, provides: The law sets no condition for the personal liability of the withholding
agent to attach. The reason is to compel the withholding agent to withhold
Sec. 309. Authority of Commissioner to Take Compromises and to Refund the tax under all circumstances. In effect, the responsibility for the
Taxes.—The Commissioner may: collection of the tax as well as the payment thereof is concentrated upon
the person over whom the Government has jurisdiction. Thus, the
xxx xxx xxx withholding agent is constituted the agent of both the Government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is
the Government's agent. In regard to the filing of the necessary income tax
TAXATION CASES |25

return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government (1) Non-resident corporation. — A foreign corporation not engaged in
agent especially because under Section 53 (c) he is held personally liable trade and business in the Philippines, . . ., shall pay a tax equal to 35% of
for the tax he is duty bound to withhold; whereas the Commissioner and the gross income receipt during its taxable year from all sources within the
his deputies are not made liable by law. 6 (Emphasis supplied) Philippines, as . . . dividends . . . Provided, still further, that on dividends
received from a domestic corporation liable to tax under this Chapter, the
If, as pointed out in Philippine Guaranty, the withholding agent is also an tax shall be 15% of the dividends, which shall be collected and paid as
agent of the beneficial owner of the dividends with respect to the filing of provided in Section 53 (d) of this Code, subject to the condition that the
the necessary income tax return and with respect to actual payment of the country in which the non-resident foreign corporation, is domiciled shall
tax to the government, such authority may reasonably be held to include allow a credit against the tax due from the non-resident foreign
the authority to file a claim for refund and to bring an action for recovery corporation, taxes deemed to have been paid in the Philippines equivalent
of such claim. This implied authority is especially warranted where, is in to 20% which represents the difference between the regular tax (35%) on
the instant case, the withholding agent is the wholly owned subsidiary of corporations and the tax (15%) on dividends as provided in this Section . . .
the parent-stockholder and therefore, at all times, under the effective
control of such parent-stockholder. In the circumstances of this case, it The ordinary thirty-five percent (35%) tax rate applicable to dividend
seems particularly unreal to deny the implied authority of P&G-Phil. to remittances to non-resident corporate stockholders of a Philippine
claim a refund and to commence an action for such refund. corporation, goes down to fifteen percent (15%) if the country of domicile
of the foreign stockholder corporation "shall allow" such foreign
We believe that, even now, there is nothing to preclude the BIR from corporation a tax credit for "taxes deemed paid in the Philippines,"
requiring P&G-Phil. to show some written or telexed confirmation by P&G- applicable against the tax payable to the domiciliary country by the foreign
USA of the subsidiary's authority to claim the refund or tax credit and to stockholder corporation. In other words, in the instant case, the reduced
remit the proceeds of the refund., or to apply the tax credit to some fifteen percent (15%) dividend tax rate is applicable if the USA "shall
Philippine tax obligation of, P&G-USA, before actual payment of the refund allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines"
or issuance of a tax credit certificate. What appears to be vitiated by basic applicable against the US taxes of P&G-USA. The NIRC specifies that such
unfairness is petitioner's position that, although P&G-Phil. is directly and tax credit for "taxes deemed paid in the Philippines" must, as a minimum,
personally liable to the Government for the ataxes and any deficiency reach an amount equivalent to twenty (20) percentage points which
assessments to be collected, the Government is not legally liable for a represents the difference between the regular thirty-five percent (35%)
refund simply because it did not demand a written confirmation of P&G- dividend tax rate and the preferred fifteen percent (15%) dividend tax
Phil.'s implied authority from the very beginning. A sovereign government rate.
should act honorably and fairly at all times, even vis-a-vis taxpayers.
It is important to note that Section 24 (b) (1), NIRC, does not require that
We believe and so hold that, under the circumstances of this case, P&G- the US must give a "deemed paid" tax credit for the dividend tax (20
Phil. is properly regarded as a "taxpayer" within the meaning of Section percentage points) waived by the Philippines in making applicable the
309, NIRC, and as impliedly authorized to file the claim for refund and the preferred divided tax rate of fifteen percent (15%). In other words, our
suit to recover such claim. NIRC does not require that the US tax law deem the parent-corporation to
have paid the twenty (20) percentage points of dividend tax waived by the
II Philippines. The NIRC only requires that the US "shall allow" P&G-USA a
"deemed paid" tax credit in an amount equivalent to the twenty (20)
1. We turn to the principal substantive question before us: the applicability percentage points waived by the Philippines.
to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent
(15%) tax rate provided for in the following portion of Section 24 (b) (1) of 2. The question arises: Did the US law comply with the above requirement?
the NIRC: The relevant provisions of the US Intemal Revenue Code ("Tax Code") are
the following:
(b) Tax on foreign corporations.—
TAXATION CASES |26

Sec. 901 — Taxes of foreign countries and possessions of United States. xxx xxx xxx

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of (c) Applicable Rules
this subpart, the tax imposed by this chapter shall, subject to the applicable
limitation of section 904, be credited with the amounts provided in the (1) Accumulated profits defined. — For purposes of this section, the term
applicable paragraph of subsection (b) plus, in the case of a corporation, "accumulated profits" means with respect to any foreign corporation,
the taxes deemed to have been paid under sections 902 and 960. Such
choice for any taxable year may be made or changed at any time before the (A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
expiration of the period prescribed for making a claim for credit or refund profits, or income computed without reduction by the amount of the
of the tax imposed by this chapter for such taxable year. The credit shall income, war profits, and excess profits taxes imposed on or with respect to
not be allowed against the tax imposed by section 531 (relating to the tax such profits or income by any foreign country. . . .; and
on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under (B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
section 1351 (relating to recoveries of foreign expropriation losses), or profits, or income in excess of the income, war profits, and excess profits
against the personal holding company tax imposed by section 541. taxes imposed on or with respect to such profits or income.

(b) Amount allowed. — Subject to the applicable limitation of section 904, The Secretary or his delegate shall have full power to determine from the
the following amounts shall be allowed as the credit under subsection (a): accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been paid
(a) Citizens and domestic corporations. — In the case of a citizen of the from the accumulated profits of the preceding year or years (unless to his
United States and of a domestic corporation, the amount of any income, satisfaction shows otherwise), and in other respects treating dividends as
war profits, and excess profits taxes paid or accrued during the taxable having been paid from the most recently accumulated gains, profits, or
year to any foreign country or to any possession of the United States; and earning. . . . (Emphasis supplied)

xxx xxx xxx Close examination of the above quoted provisions of the US Tax Code 7
shows the following:
Sec. 902. — Credit for corporate stockholders in foreign corporation.
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of amount of the dividend tax actually paid (i.e., withheld) from the dividend
this subject, a domestic corporation which owns at least 10 percent of the remittances to P&G-USA;
voting stock of a foreign corporation from which it receives dividends in
any taxable year shall — b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid'
tax credit 8 for a proportionate part of the corporate income tax actually
xxx xxx xxx paid to the Philippines by P&G-Phil.

(2) to the extent such dividends are paid by such foreign corporation out of The parent-corporation P&G-USA is "deemed to have paid" a portion of the
accumulated profits [as defined in subsection (c) (1) (b)] of a year for Philippine corporate income tax although that tax was actually paid by its
which such foreign corporation is a less developed country corporation, be Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid"
deemed to have paid the same proportion of any income, war profits, or concept merely reflects economic reality, since the Philippine corporate
excess profits taxes paid or deemed to be paid by such foreign corporation income tax was in fact paid and deducted from revenues earned in the
to any foreign country or to any possession of the United States on or with Philippines, thus reducing the amount remittable as dividends to P&G-USA.
respect to such accumulated profits, which the amount of such dividends In other words, US tax law treats the Philippine corporate income tax as if
bears to the amount of such accumulated profits. it came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the
TAXATION CASES |27

medium of P&G-Phil. and here earning profits. What is, under US law, ——— (b) (1), NIRC
deemed paid by P&G- USA are not "phantom taxes" but instead Philippine P22.75 — Regular dividend tax
corporate income taxes actually paid here by P&G-Phil., which are very
real indeed. P65.00 — Dividends remittable to P&G-USA
x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
It is also useful to note that both (i) the tax credit for the Philippine ———
dividend tax actually withheld, and (ii) the tax credit for the Philippine P9.75 — Reduced dividend tax
corporate income tax actually paid by P&G Phil. but "deemed paid" by
P&G-USA, are tax credits available or applicable against the US corporate P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC
income tax of P&G-USA. These tax credits are allowed because of the US -9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
congressional desire to avoid or reduce double taxation of the same ———
income stream. 9 P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
In order to determine whether US tax law complies with the requirements
for applicability of the reduced or preferential fifteen percent (15%) Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income
dividend tax rate under Section 24 (b) (1), NIRC, it is necessary: earned by P&G-Phil. Amount (a) is also the minimum amount of the
"deemed paid" tax credit that US tax law shall allow if P&G-USA is to
a. to determine the amount of the 20 percentage points dividend tax qualify for the reduced or preferential dividend tax rate under Section 24
waived by the Philippine government under Section 24 (b) (1), NIRC, and (b) (1), NIRC.
which hence goes to P&G-USA;
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which
b. to determine the amount of the "deemed paid" tax credit which US tax US tax law allows under Section 902, Tax Code, may be computed
law must allow to P&G-USA; and arithmetically as follows:

c. to ascertain that the amount of the "deemed paid" tax credit allowed by P65.00 — Dividends remittable to P&G-USA
US law is at least equal to the amount of the dividend tax waived by the - 9.75 — Dividend tax withheld at the reduced (15%) rate
Philippine Government. ———
P55.25 — Dividends actually remitted to P&G-USA
Amount (a), i.e., the amount of the dividend tax waived by the Philippine
government is arithmetically determined in the following manner: P35.00 — Philippine corporate income tax paid by P&G-Phil.
to the BIR
P100.00 — Pretax net corporate income earned by P&G-Phil.
x 35% — Regular Philippine corporate income tax rate Dividends actually
——— remitted by P&G-Phil.
P35.00 — Paid to the BIR by P&G-Phil. as Philippine to P&G-USA P55.25
corporate income tax. ——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
P100.00 profits earned by
-35.00 P&G-Phil. in excess
——— of income tax
P65.00 — Available for remittance as dividends to P&G-USA
Thus, for every P55.25 of dividends actually remitted (after withholding at
P65.00 — Dividends remittable to P&G-USA the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of
x 35% — Regular Philippine dividend tax rate under Section 24 P29.75 is allowed by Section 902 US Tax Code for Philippine corporate
TAXATION CASES |28

income tax "deemed paid" by the parent but actually paid by the wholly-
owned subsidiary. (2) The amount of 15% of
P75,000 withheld = 11,250
Since P29.75 is much higher than P13.00 (the amount of dividend tax ———
waived by the Philippine government), Section 902, US Tax Code, P30,000
specifically and clearly complies with the requirements of Section 24 (b)
(1), NIRC. The amount of P18,750 deemed paid and to be credited against the U.S. tax
on the dividends received by the U.S. corporation from a Philippine
3. It is important to note also that the foregoing reading of Sections 901 subsidiary is clearly more than 20% requirement of Presidential Decree
and 902 of the US Tax Code is identical with the reading of the BIR of No. 369 as 20% of P75,000.00 the dividends to be remitted under the
Sections 901 and 902 of the US Tax Code is identical with the reading of above example, amounts to P15,000.00 only.
the BIR of Sections 901 and 902 as shown by administrative rulings issued
by the BIR. In the light of the foregoing, BIR Ruling No. 75-005 dated September 10,
1975 is hereby amended in the sense that the dividends to be remitted by
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by your client to its parent company shall be subject to the withholding tax at
then Acting Commissioner of Intemal Revenue Efren I. Plana, later the rate of 15% only.
Associate Justice of this Court, the relevant portion of which stated:
This ruling shall have force and effect only for as long as the present
However, after a restudy of the decision in the American Chicle Company pertinent provisions of the U.S. Federal Tax Code, which are the bases of
case and the provisions of Section 901 and 902 of the U.S. Internal Revenue the ruling, are not revoked, amended and modified, the effect of which will
Code, we find merit in your contention that our computation of the credit reduce the percentage of tax deemed paid and creditable against the U.S.
which the U.S. tax law allows in such cases is erroneous as the amount of tax on dividends remitted by a foreign corporation to a U.S. corporation.
tax "deemed paid" to the Philippine government for purposes of credit (Emphasis supplied)
against the U.S. tax by the recipient of dividends includes a portion of the
amount of income tax paid by the corporation declaring the dividend in The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981
addition to the tax withheld from the dividend remitted. In other words, addressed to Basic Foods Corporation and BIR Ruling dated 20 October
the U.S. government will allow a credit to the U.S. corporation or recipient 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the
of the dividend, in addition to the amount of tax actually withheld, a 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the
portion of the income tax paid by the corporation declaring the dividend. case at bar was pending before the CTA and this Court.
Thus, if a Philippine corporation wholly owned by a U.S. corporation has a
net income of P100,000, it will pay P25,000 Philippine income tax thereon 4. We should not overlook the fact that the concept of "deemed paid" tax
in accordance with Section 24(a) of the Tax Code. The net income, after credit, which is embodied in Section 902, US Tax Code, is exactly the same
income tax, which is P75,000, will then be declared as dividend to the U.S. "deemed paid" tax credit found in our NIRC and which Philippine tax law
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the allows to Philippine corporations which have operations abroad (say, in
aforementioned sections of the U.S. Internal Revenue Code, U.S. the United States) and which, therefore, pay income taxes to the US
corporation receiving the dividend can utilize as credit against its U.S. tax government.
payable on said dividends the amount of P30,000 composed of:
Section 30 (c) (3) and (8), NIRC, provides:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as
follows: (d) Sec. 30. Deductions from Gross Income.—In computing net income,
there shall be allowed as deductions — . . .
P75,000 x P25,000 = P18,750
——— (c) Taxes. — . . .
100,000 **
TAXATION CASES |29

xxx xxx xxx accounting period of less than one year, the word "year" as used in this
subsection shall be construed to mean such accounting period. (Emphasis
(3) Credits against tax for taxes of foreign countries. — If the taxpayer supplied)
signifies in his return his desire to have the benefits of this paragraphs, the
tax imposed by this Title shall be credited with . . . Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax
credit to a Philippine parent corporation for taxes "deemed paid" by it, that
(a) Citizen and Domestic Corporation. — In the case of a citizen of the is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent
Philippines and of domestic corporation, the amount of net income, war corporation. The Philippine parent or corporate stockholder is "deemed"
profits or excess profits, taxes paid or accrued during the taxable year to under our NIRC to have paid a proportionate part of the US corporate
any foreign country. (Emphasis supplied) income tax paid by its US subsidiary, although such US tax was actually
paid by the subsidiary and not by the Philippine parent.
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to
a Philippine corporation for taxes actually paid by it to the US Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC,
government—e.g., for taxes collected by the US government on dividend must be allowed by US law to P&G-USA, is the same "deemed paid" tax
remittances to the Philippine corporation. This Section of the NIRC is the credit that Philippine law allows to a Philippine corporation with a wholly-
equivalent of Section 901 of the US Tax Code. or majority-owned subsidiary in (for instance) the US. The "deemed paid"
tax credit allowed in Section 902, US Tax Code, is no more a credit for
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US "phantom taxes" than is the "deemed paid" tax credit granted in Section 30
Tax Code, and provides as follows: (c) (8), NIRC.

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a III
domestic corporation which owns a majority of the voting stock of a
foreign corporation from which it receives dividends in any taxable year 1. The Second Division of the Court, in holding that the applicable dividend
shall be deemed to have paid the same proportion of any income, war- tax rate in the instant case was the regular thirty-five percent (35%) rate
profits, or excess-profits taxes paid by such foreign corporation to any rather than the reduced rate of fifteen percent (15%), held that P&G-Phil.
foreign country, upon or with respect to the accumulated profits of such had failed to prove that its parent, P&G-USA, had in fact been given by the
foreign corporation from which such dividends were paid, which the US tax authorities a "deemed paid" tax credit in the amount required by
amount of such dividends bears to the amount of such accumulated Section 24 (b) (1), NIRC.
profits: Provided, That the amount of tax deemed to have been paid under
this subsection shall in no case exceed the same proportion of the tax We believe, in the first place, that we must distinguish between the legal
against which credit is taken which the amount of such dividends bears to question before this Court from questions of administrative
the amount of the entire net income of the domestic corporation in which implementation arising after the legal question has been answered. The
such dividends are included. The term "accumulated profits" when used in basic legal issue is of course, this: which is the applicable dividend tax rate
this subsection reference to a foreign corporation, means the amount of its in the instant case: the regular thirty-five percent (35%) rate or the
gains, profits, or income in excess of the income, war-profits, and excess- reduced fifteen percent (15%) rate? The question of whether or not P&G-
profits taxes imposed upon or with respect to such profits or income; and USA is in fact given by the US tax authorities a "deemed paid" tax credit in
the Commissioner of Internal Revenue shall have full power to determine the required amount, relates to the administrative implementation of the
from the accumulated profits of what year or years such dividends were applicable reduced tax rate.
paid; treating dividends paid in the first sixty days of any year as having
been paid from the accumulated profits of the preceding year or years In the second place, Section 24 (b) (1), NIRC, does not in fact require that
(unless to his satisfaction shown otherwise), and in other respects treating the "deemed paid" tax credit shall have actually been granted before the
dividends as having been paid from the most recently accumulated gains, applicable dividend tax rate goes down from thirty-five percent (35%) to
profits, or earnings. In the case of a foreign corporation, the income, war- fifteen percent (15%). As noted several times earlier, Section 24 (b) (1),
profits, and excess-profits taxes of which are determined on the basis of an
TAXATION CASES |30

NIRC, merely requires, in the case at bar, that the USA "shall allow a credit 2. An interpretation of a tax statute that produces a revenue flow for the
against the government is not, for that reason alone, necessarily the correct reading of
tax due from [P&G-USA for] taxes deemed to have been paid in the the statute. There are many tax statutes or provisions which are designed,
Philippines . . ." There is neither statutory provision nor revenue not to trigger off an instant surge of revenues, but rather to achieve longer-
regulation issued by the Secretary of Finance requiring the actual grant of term and broader-gauge fiscal and economic objectives. The task of our
the "deemed paid" tax credit by the US Internal Revenue Service to P&G- Court is to give effect to the legislative design and objectives as they are
USA before the preferential fifteen percent (15%) dividend rate becomes written into the statute even if, as in the case at bar, some revenues have to
applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor be foregone in that process.
does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable. The economic objectives sought to be achieved by the Philippine
Government by reducing the thirty-five percent (35%) dividend rate to
In the third place, the position originally taken by the Second Division fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369
results in a severe practical problem of administrative circularity. The which amended Section 24 (b) (1), NIRC, into its present form:
Second Division in effect held that the reduced dividend tax rate is not
applicable until the US tax credit for "deemed paid" taxes is actually given WHEREAS, it is imperative to adopt measures responsive to the
in the required minimum amount by the US Internal Revenue Service to requirements of a developing economy foremost of which is the financing
P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US of economic development programs;
tax authorities unless dividends have actually been remitted to the US,
which means that the Philippine dividend tax, at the rate here applicable, WHEREAS, nonresident foreign corporations with investments in the
was actually imposed and collected. 11 It is this practical or operating Philippines are taxed on their earnings from dividends at the rate of 35%;
circularity that is in fact avoided by our BIR when it issues rulings that the
tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 WHEREAS, in order to encourage more capital investment for large
Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in projects an appropriate tax need be imposed on dividends received by
Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax non-resident foreign corporations in the same manner as the tax imposed
rate. Once such a ruling is rendered, the Philippine subsidiary begins to on interest on foreign loans;
withhold at the reduced dividend tax rate.
xxx xxx xxx
A requirement relating to administrative implementation is not properly
imposed as a condition for the applicability, as a matter of law, of a (Emphasis supplied)
particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of
prevent the BIR from issuing implementing regulations that would require foreign equity investment in the Philippines by reducing the tax cost of
P&G Phil., or any Philippine corporation similarly situated, to certify to the earning profits here and thereby increasing the net dividends remittable to
BIR the amount of the "deemed paid" tax credit actually subsequently the investor. The foreign investor, however, would not benefit from the
granted by the US tax authorities to P&G-USA or a US parent corporation reduction of the Philippine dividend tax rate unless its home country gives
for the taxable year involved. Since the US tax laws can and do change, it some relief from double taxation (i.e., second-tier taxation) (the home
such implementing regulations could also provide that failure of P&G-Phil. country would simply have more "post-R.P. tax" income to subject to its
to submit such certification within a certain period of time, would result in own taxing power) by allowing the investor additional tax credits which
the imposition of a deficiency assessment for the twenty (20) percentage would be applicable against the tax payable to such home country.
points differential. The task of this Court is to settle which tax rate is Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary
applicable, considering the state of US law at a given time. We should leave country to give the investor corporation a "deemed paid" tax credit at least
details relating to administrative implementation where they properly equal in amount to the twenty (20) percentage points of dividend tax
belong — with the BIR. foregone by the Philippines, in the assumption that a positive incentive
effect would thereby be felt by the investor.
TAXATION CASES |31

dividends remitted to P&G-USA net of Philippine taxes. In the calculation of


The net effect upon the foreign investor may be shown arithmetically in the Philippine Government, this should encourage additional investment
the following manner: or re-investment in the Philippines by P&G-USA.

P65.00 — Dividends remittable to P&G-USA (please 3. It remains only to note that under the Philippines-United States
see page 392 above Convention "With Respect to Taxes on Income," 15 the Philippines, by a
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil. treaty commitment, reduced the regular rate of dividend tax to a maximum
——— of twenty percent (20%) of the gross amount of dividends paid to US
P55.25 — Dividends actually remitted to P&G-USA parent corporations:

P55.25 Art 11. — Dividends


x 46% — Maximum US corporate income tax rate
——— xxx xxx xxx
P25.415—US corporate tax payable by P&G-USA
without tax credits (2) The rate of tax imposed by one of the Contracting States on dividends
derived from sources within that Contracting State by a resident of the
P25.415 other Contracting State shall not exceed —
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code) (a) 25 percent of the gross amount of the dividend; or
———
P15.66 — US corporate income tax payable after Section 901 (b) When the recipient is a corporation, 20 percent of the gross amount of
——— tax credit. the dividend if during the part of the paying corporation's taxable year
which precedes the date of payment of the dividend and during the whole
P55.25 of its prior taxable year (if any), at least 10 percent of the outstanding
- 15.66 shares of the voting stock of the paying corporation was owned by the
——— recipient corporation.
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit. xxx xxx xxx

P25.415 (Emphasis supplied)


- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above) The Tax Convention, at the same time, established a treaty obligation on
the part of the United States that it "shall allow" to a US parent corporation
- 0 - — US corporate income tax payable on dividends receiving dividends from its Philippine subsidiary "a [tax] credit for the
====== remitted by P&G-Phil. to P&G-USA after appropriate amount of taxes paid or accrued to the Philippines by the
Section 902 tax credit. Philippine [subsidiary] —.16 This is, of course, precisely the "deemed
paid" tax credit provided for in Section 902, US Tax Code, discussed above.
P55.25 — Amount received by P&G-USA net of RP and US Clearly, there is here on the part of the Philippines a deliberate
====== taxes after Section 902 tax credit. undertaking to reduce the regular dividend tax rate of twenty percent
(20%) is a maximum rate, there is still a differential or additional
It will be seen that the "deemed paid" tax credit allowed by Section 902, US reduction of five (5) percentage points which compliance of US law
Tax Code, could offset the US corporate income tax payable on the (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA available in respect of dividends from a Philippine subsidiary.
would after US tax credits, still wind up with P55.25, the full amount of the
TAXATION CASES |32

We conclude that private respondent P&G-Phil, is entitled to the tax refund 1950 12,813.00 Feb. 16, 1953
or tax credit which it seeks.
due and payable on dates indicated in the accompanying notices of
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private assessment. The assessments for 1948 and 1950 carried the surcharge of
respondent's Motion for Reconsideration dated 11 May 1988, to SET 50% authorized under Section 72 of the Tax Code for the filing of
ASIDE the Decision of the and Division of the Court promulgated on 15 fraudulent returns.
April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of
the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the
to DENY the Petition for Review for lack of merit. No pronouncement as to Bureau of Internal Revenue reduced the assessments for the year 1947
costs. from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to
P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated
8. Republic vs. Ker & Company the same surcharge from the assessment for the year 1950. The
assessments for years 1948 and 1949 remained the same.
G.R. No. L-21609 September 29, 1966
On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, petition for review with preliminary injunction. No preliminary injunction
vs. was issued, for said court dismissed the appeal for having been instituted
KER & COMPANY, LTD., defendant-appellant. beyond the 30-day period provided for in Section 11 of Republic Act 1125.
We affirmed the order of dismissal of L-12396. 1
Office of the Solicitor General for plaintiff-appellant.
Leido, Andrada, Perez and Associates for defendant-appellant. On March 15, 1962, the Bureau of Internal Revenue demanded payment of
the aforesaid assessments together with a surcharge of 5% for late
payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to
pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up
BENGZON, J.P., J.: the defense of prescription of the Commissioner's right to collect the tax.
Subsequently, the Republic of the Philippines filed on March 27, 1962 a
Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the complaint with the Court of First Instance of Manila seeking collection of
years 1947, 1948, 1949 and 1950 on the following dates: the aforesaid deficiency income tax for the years 1947, 1948, 1949 and
Year Date Filed 1950. The complaint did not allege fraud in the filing of any of the income
1947 April 12, 1948 tax returns for the years involved, nor did it pray for the payment of the
1948 April 30, 1949 corresponding 50% surcharge, but it prayed for the payment of 5%
1949 May 15, 1950 surcharge for late payment and interest of 1% per month without however
1950 May 9, 1951 specifying from what date interest started to accrue.

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and Summons was served not on the defendant taxpayer but upon Messrs.
June 30, 1950, respectively. Leido and Associates, its counsel in the proceedings before the Bureau of
Internal Revenue and the Court of Tax Appeals.
In 1953 the Bureau of Internal Revenue examined and audited Ker & Co.,
Ltd.'s returns and books of accounts and subsequently issued the following On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez
assessments for deficiency income tax: & Associates, moved for the dismissal of the complaint on the ground that
Year Amount Date Assessed the court did not acquire jurisdiction over the person of the defendant and
1947 P42,342.30 July 25, 1953 that plaintiff's cause of action has prescribed. This motion was denied and
1948 18,651.87 Feb. 16, 1953 defendant filed a motion for reconsideration. Resolution on said motion,
1949 139.67 Feb. 16, 1953 however, was deferred until trial of the case on the merits.
TAXATION CASES |33

1. Did the Court of First Instance acquire jurisdiction over the person of
On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint defendant Ker & Co., Ltd.? .
interposing therein the defense set up in its motion to dismiss of April 14,
1962. 2. Did the right of the Commissioner of Internal Revenue to assess
deficiency income tax for the year 1947 prescribe? .
On September 18, 1962 the Republic of the Philippines amended its
complaint, in answer to which Ker & Co., Ltd. adopted the same answer 3. Did the filing of a petition for review by the taxpayer in the Court of Tax
which it had filed on May 18, 1962. Appeals suspend the running of the statute of limitations to collect the
deficiency income for the years 1948, 1949 and 1950?
On January 30, 1963 the Court of First Instance rendered judgment, the
dispositive portion of which states: 4. When did the delinquency interest on the deficiency income tax for the
years 1948, 1949 and 1950 accrue?
WHEREFORE, this Court dismisses the claim for the collection of deficiency
income taxes for 1947, but orders defendant taxpayer to pay the deficiency First Issue
income taxes for 1948, 1949 and 1950, in the amounts of P18,651.87,
P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction
amount and interest of 1% a month computed from March 27, 1962 and over its person inasmuch as summons was not served upon it but upon
until full payment thereof is made, plus the costs of suit. Messrs. Leido and Associates who do not come under any of the class of
persons upon whom summons should be served as enumerated in Section
On February 20, 1963 the Republic of the Philippines filed a motion for 13, Rule 7 of the Rules of Court, 2 which reads:
reconsideration contending that the right of the Commissioner of Internal
Revenue to collect the deficiency assessment for 1947 has not prescribed SEC. 13. Service upon private domestic corporation or partnership.—If the
by a lapse of merely five years and three months, because the taxpayer's defendant is a corporation formed under the laws of the Philippines or a
income tax return was fraudulent in which case prescription sets in ten partnership duly registered, service may be made on the president,
years from October 31, 1951, the date of discovery of the fraud, pursuant manager, secretary, cashier, agent, or any of its directors.
to Section 332 (a) of the Tax Codes and that the payment of delinquency
interest of 1% per month should commence from the date it fell due as Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this
indicated in the assessment notices instead of on the date the complaint tax case was in its administrative stage. The same counsel represented Ker
was filed. & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later
to this Court. Subsequently, when the Deputy Commissioner of Internal
On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration Revenue, by letter dated March 15, 1962, demanded the payment of the
reiterating its assertion that the Court of First Instance did not acquire deficiency income tax in question, it was Messrs. Leido, Andrada, Perez &
jurisdiction over its person, and maintaining that since the complaint was Associates who replied in behalf of Ker & Co., Ltd. in two letters, dated
filed nine years, one month and eleven days after the deficiency March 28, 1962 and April 10, 1962, both after the complaint in this case
assessments for 1948, 1949 and 1950 were made and since the filing of its was filed. At least therefore on April 2, 1962 when Messrs. Leido and
petition for review in the Court of Tax Appeals did not stop the running of Associates received the summons, they were still acting for and in behalf of
the period of limitations, the right of the Commissioner of Internal Ker & Co., Ltd. in connection with its tax liability involved in this case.
Revenue to collect the tax in question has prescribed. Perforce, they were the taxpayer's agent when summons was served.
Under Section 13 of Rule 7, aforequoted, service upon the agent of a
The two motions for reconsideration having been denied, both parties corporation is sufficient.
appealed directly to this Court.
We observe that the motion to dismiss filed on April 14, 1962, aside from
The issues in this case are: disputing the lower court's jurisdiction over defendant's person, prayed
for dismissal of the complaint on the ground that plaintiff's cause of action
TAXATION CASES |34

has prescribed. By interposing such second ground in its motion to authority against the aforequoted explicit and mandatory limitations of
dismiss, Ker & Co., Ltd. availed of an affirmative defense on the basis of statutory law. Settled in our system is the rule that acts committed against
which it prayed the court to resolve controversy in its favor. For the court the provisions of mandatory or prohibitory laws shall be void (Art. 5, New
to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily Civil Code). . . .
had to acquire jurisdiction upon the latter's person, who, being the
proponent of the affirmative defense, should be deemed to have Said court resolved the issue without touching upon fraudulence of the
abandoned its special appearance and voluntarily submitted itself to the return. The reason is that the complaint alleged no fraud, nor did the
jurisdiction of the court.3 plaintiff present evidence to prove fraud.

Voluntary appearance cures defects of summons, if any.4 Such defect, if In reply to the lower court's conclusion, the Republic of the Philippines
any, was further cured when defendant filed its answer to the complaint.5 maintains in its brief that Ker & Co., Ltd. filed a false return and since the
A defendant can not be permitted to speculate upon the judgment of the fraud penalty of 50% surcharge was imposed in the deficiency income tax
court by objecting to the court's jurisdiction over its person if the assessment, which has become final and executory, the finding of the
judgment is adverse to it, and acceding to jurisdiction over its person if and Commissioner of Internal Revenue as to the existence of the fraud has also
when the judgment sustains its defenses. become final and need not be proved. This contention suffers from a flaw
in that it fails to consider the well-settled principle that fraud is a question
Second Issue of fact6 which must be alleged and proved.7 Fraud is a serious charge and,
to be sustained, it must be supported by clear and convincing proof.8
Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of Accordingly, fraud should have been alleged and proved in the lower court.
the Commissioner of Internal Revenue to assess against it a deficiency On these premises We therefore sustain the ruling of the lower court upon
income tax for the year 1947 has prescribed because the assessment was the point of prescription.
issued on July 25, 1953 after a lapse of five years, three months and
thirteen days from the date (April 12, 1948) it filed its income tax return. It would be worth mentioning that since the assessment for deficiency
On the other hand, the Republic of the Philippines insists that the income tax for 1947 has become final and executory, Ker & Co., Ltd. may
taxpayer's income tax return was fraudulent, therefore the Commissioner not anymore raise defenses which go into the merits of the assessment, i.e.,
of Internal Revenue may assess the tax within ten years from discovery of prescription of the Commissioner's right to assess the tax. Such was our
the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code. ruling in previous cases.9 In this case however, Ker & Co., Ltd. raised the
defense of prescription in the proceedings below and the Republic of the
The stand of the Republic of the Philippines hinges on whether or not Philippines, instead of questioning the right of the defendant to raise such
taxpayer's income tax return for 1947 was fraudulent. defense, litigated on it and submitted the issue for resolution of the court.
By its actuation, the Republic of the Philippines should be considered to
The court a quo, confining itself to determining whether or not the have waived its right to object to the setting up of such defense.
assessment of the tax for 1947 was issued within the five-year period
provided for in Section 331 of the Tax Code, ruled that the right of the Third Issue
Commissioner of Internal Revenue to assess the tax has prescribed. Said
the lower court: Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines
filed the complaint for the collection of the deficiency income tax for the
The Court resolves the second issue in the negative, because Section 331 of years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one
the Revenue Code explicitly provides, in mandatory terms, that "Internal month and eleven days from February 16, 1953, the date the tax was
Revenue taxes shall be assessed within 5 years after the return was filed, assessed, the right to collect the same has prescribed pursuant to Section
and no proceedings in court without assessment, for the collection of such 332 (c) of the Tax Code. The Republic of the Philippines however contends
taxes, shall be begun after expiration of such period. The attempt by the that the running of the prescriptive period was interrupted by the filing of
Commissioner of Internal Revenue to make an assessment on July 25, the taxpayer's petition for review in the Court of Tax Appeals on March 1,
1953, on the basis of a return filed on April 12, 1948, is an exercise of 1956.
TAXATION CASES |35

It would be interesting to note that when the Commissioner of Internal


If the period during which the case was pending in the Court of Tax Revenue issued the final deficiency assessments on January 5, 1954, he
Appeals and in the Supreme Court were not counted in reckoning the had already lost, by prescription, the right to collect the tax (except that for
prescriptive period, less than five years would have elapsed, hence, the 1950) by the summary method of warrant of distraint and levy. Ker & Co.,
right to collect the tax has not prescribed. Ltd. immediately thereafter requested suspension of the collection of the
tax without penalty incident to late payment pending the filing of a
The taxpayer counters that the filing of the petition for review in the Court memorandum in support of its views. As requested, no tax was collected.
of Tax Appeals could not have stopped the running of the prescriptive On May 22, 1954 the projected memorandum was filed, but as of that date
period to collect because said court did not have jurisdiction over the case, the Commissioner's right to collect by warrant of distraint and levy the
the appeal having been interposed beyond the 30-day period set forth in deficiency tax for 1950 had already prescribed. So much so, that on March
Section 11 of Republic Act 1125. Precisely, it adds, the Tax Court dismissed 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax
the appeal for lack of jurisdiction and said dismissal was affirmed by the Appeals, the Commissioner of Internal Revenue had but one remedy left to
Supreme Court in L-12396 aforementioned. collect the tax, that is, by judicial action. 12 However, as stated, an
independent ordinary action in the Court of First Instance was not
Under Section 333 of the Tax Code, quoted hereunder: available to the Commissioner pursuant to Our ruling in Ledesma, et al. v.
Court of Tax Appeals, supra, in view of the pendency of the taxpayer's
SEC. 333. Suspension of running of statute.—The running of the statute of petition for review in the Court of Tax Appeals. Precisely he urgently filed a
limitations provided in Section 331 or three hundred thirty-two on the motion to dismiss the taxpayer's petition for review with a view to
making of assessments and the beginning, of distraint or levy or a terminating therein the proceedings in the shortest possible time in order
proceeding in court for collection, in respect of any deficiency, shall be that he could file a collection case in the Court of First Instance before his
suspended for the period during which the Collector of Internal Revenue is right to do so is cut off by the passage of time. As moved, the Tax Court
prohibited from making the assessment or beginning distraint or levy or a dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court. By
proceeding in court, and for sixty days thereafter. the time the Supreme Court affirmed the order of dismissal of the Court of
Tax Appeals in L-12396 on January 31, 1962 more than five years had
the running of the prescriptive period to collect the tax shall be suspended elapsed since the final assessments were made on January 5, 1954.
for the period during which the Commissioner of Internal Revenue is Thereafter, the Commissioner of Internal Revenue demanded extra-
prohibited from beginning a distraint and levy or instituting a proceeding judicially the payment of the deficiency tax in question and in reply the
in court, and for sixty days thereafter. taxpayer, by its letter dated March 28, 1962, advised the Commissioner of
Internal Revenue that the right to collect the tax has prescribed pursuant
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and to Section 332 (c) of the Tax Code.1awphîl.nèt
in the Supreme Court have the effect of legally preventing the
Commissioner of Internal Revenue from instituting an action in the Court Thus, did the taxpayer produce the effect of temporarily staying the hands
of First Instance for the collection of the tax? Our view is that it did. of the Commissioner of Internal Revenue simply through a choice of
remedy. And, if We were to sustain the taxpayer's stand, We would be
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the encouraging taxpayers to delay the payment of taxes in the hope of
Court of Tax Appeals contesting the legality of the assessments in question, ultimately avoiding the same.
until the termination of its appeal in the Supreme Court, the Commissioner
of Internal Revenue was prevented, as recognized in this Court's ruling in Under the circumstances, the Commissioner of Internal Revenue was in
Ledesma, et al. v. Court of Tax Appeals, 10 from filing an ordinary action in effect prohibited from collecting the tax in question. This being so, the
the Court of First Instance to collect the tax. Besides, to do so would be to provisions of Section 333 of the Tax Code will apply.
violate the judicial policy of avoiding multiplicity of suits and the rule on lis
pendens. 11 Fourth Issue
TAXATION CASES |36

The Republic of the Philippines maintains that the delinquency interest on COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and
the deficiency income tax for 1948, 1949 and 1950 accrued and should LAND BANK OF THE PHILIPPINES, Respondents.
commence from the date of the assessments as shown in the assessment
notices, pursuant to Section 51(e) of the Tax Code, instead of from the date DECISION
the complaint was filed as determined in the decision appealed from.
DEL CASTILLO, J.:
Section 51 (e) of the Tax Code states:
The decision to entertain a taxpayer’s suit is discretionary upon the Court.
SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or It can choose to strictly apply the rule or take a liberal stance depending on
sums due and unpaid after the dates prescribed in subsections (b), (c) and the controversy involved. Advocates for a strict application of the rule
(d) for the payment of the same, there shall be added the sum of five per believe that leniency would open floodgates to numerous suits, which
centum on the amount of tax unpaid and interest at the rate of one per could hamper the government from performing its job. Such possibility,
centum a month upon said tax from the time the same became due, except however, is not only remote but also negligible compared to what is at
from the estates of insane, deceased, or insolvent persons. (emphasis stake - "the lifeblood of the State". For this reason, when the issue hinges
supplied) on the illegal disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.
Exhibit "F" — the letter of assessment — shows that the deficiency income
tax for 1948 and 1949 became due on March 15, 1953 and that for 1950 This Petition for Review on Certiorari with prayer for a Temporary
accrued on February 15, 1954 in accordance with Section 51(d) of the Tax Restraining Order/Writ of Preliminary Injunction, under Rule 45 of the
Code. Since the tax in question remained unpaid, delinquency interest Rules of Court, seeks to set aside the April 27, 2004 Order 1 of the Regional
accrued and became due starting from said due dates. The decision Trial Court (RTC), Branch 5, Tuguegarao City, dismissing the Petition for
appealed from should therefore be modified accordingly. Annulment of Contracts and Injunction with prayer for the issuance of a
Temporary Restraining Order/Writ of Preliminary Injunction, 2 docketed
WHEREFORE, the decision appealed from is affirmed with the modification as Civil Case No. 6283. Likewise assailed in this Petition is the August 20,
that the delinquency interest at the rate of 1% per month shall be 2004 Resolution 3 of RTC, Branch 1, Tuguegarao City denying the Motion
computed from March 15, 1953 for the deficiency income tax for 1948 and for Reconsideration of the dismissal.
1949 and from February 15, 1954 for the deficiency income tax for 1950.
With costs against Ker & Co., Ltd. So ordered. Factual Antecedents

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed
Sanchez and Castro, JJ., concur. Resolution No. 2001-272 4 authorizing Governor Edgar R. Lara (Gov. Lara)
to engage the services of and appoint Preferred Ventures Corporation as
9. Mamba vs. Lara financial advisor or consultant for the issuance and flotation of bonds to
fund the priority projects of the governor without cost and commitment.
G.R. No. 165109 December 14, 2009
On November 19, 2001, the Sangguniang Panlalawigan, through Resolution
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO, No. 290-2001, 5 ratified the Memorandum of Agreement (MOA) 6 entered
Petitioners, into by Gov. Lara and Preferred Ventures Corporation. The MOA provided
vs. that the provincial government of Cagayan shall pay Preferred Ventures
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, Corporation a one-time fee of 3% of the amount of bonds floated.
ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.
FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. On February 15, 2002, the Sangguniang Panlalawigan approved Resolution
LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL No. 2002-061-A 7 authorizing Gov. Lara to negotiate, sign and execute
contracts or agreements pertinent to the flotation of the bonds of the
TAXATION CASES |37

provincial government in an amount not to exceed P500 million for the


construction and improvement of priority projects to be approved by the On December 12, 2003, petitioners Manuel N. Mamba, Raymund P.
Sangguniang Panlalawigan. Guzman and Leonides N. Fausto filed a Petition for Annulment of Contracts
and Injunction with prayer for a Temporary Restraining Order/Writ of
On May 20, 2002, the majority of the members of the Sangguniang Preliminary Injunction 13 against Edgar R. Lara, Jenerwin C. Bacuyag,
Panlalawigan of Cagayan approved Ordinance No. 19-2002, 8 authorizing Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.
the bond flotation of the provincial government in an amount not to Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. Layos,
exceed P500 million to fund the construction and development of the new Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO
Cagayan Town Center. The Resolution likewise granted authority to Gov. and LBP.1avvphi1
Lara to negotiate, sign and execute contracts and agreements necessary
and related to the bond flotation subject to the approval and ratification by At the time of the filing of the petition, Manuel N. Mamba was the
the Sangguniang Panlalawigan. Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were
On October 20, 2003, the Sangguniang Panlalawigan approved Resolution members of the Sangguniang Panlalawigan of Cagayan. 15
No. 350-2003 9 ratifying the Cagayan Provincial Bond Agreements entered
into by the provincial government, represented by Gov. Lara, to wit: Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman
a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and
– Trust and Investment Division and Malayan Insurance Company, Inc. Cecilia Maeve T. Layos were sued as members of the Sangguniang
(MICO). Panlalawigan of Cagayan. 17 Respondents Preferred Ventures Corporation,
Asset Builders Corporation, RCBC, MICO and LBP were all impleaded as
b. Deed of Assignment by way of security with the RCBC and the Land Bank indispensable or necessary parties.
of the Philippines (LBP).
Respondent Preferred Ventures Corporation is the financial advisor of the
c. Transfer and Paying Agency Agreement with the RCBC – Trust and province of Cagayan regarding the bond flotation undertaken by the
Investment Division. province. 18 Respondent Asset Builders Corporation was awarded the
right to plan, design, construct and develop the proposed town center. 19
d. Guarantee Agreement with the RCBC – Trust and Investment Division Respondent RCBC, through its Trust and Investment Division, is the
and MICO. trustee of the seven-year bond flotation undertaken by the province for the
construction of the town center, 20 while respondent MICO is the
e. Underwriting Agreement with RCBC Capital Corporation. guarantor. 21 Lastly, respondent LBP is the official depositary bank of the
province. 22
On even date, the Sangguniang Panlalawigan also approved Resolution No.
351-2003, 10 ratifying the Agreement for the Planning, Design, In response to the petition, public respondents filed an Answer with
Construction, and Site Development of the New Cagayan Town Center 11 Motion to Dismiss, 23 raising the following defenses: a) petitioners are not
entered into by the provincial government, represented by Gov. Lara and the proper parties or they lack locus standi in court; b) the action is barred
Asset Builders Corporation, represented by its President, Mr. Rogelio P. by the rule on state immunity from suit and c) the issues raised are not
Centeno. justiciable questions but purely political.

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders For its part, respondent Preferred Ventures Corporation filed a Motion to
Corporation, giving to the latter the planning, design, construction and site Dismiss 24 on the following grounds: a) petitioners have no cause of action
development of the town center project for a fee of P213,795,732.39. 12 for injunction; b) failure to join an indispensable party; c) lack of
personality to sue and d) lack of locus standi. Respondent MICO likewise
Proceedings before the Regional Trial Court filed a Motion to Dismiss 25 raising the grounds of lack of cause of action
TAXATION CASES |38

and legal standing. Respondent RCBC similarly argued in its Motion to parties who execute them. Only a party to the contract can maintain an
Dismiss 26 that: a) petitioners are not the real parties-in-interest or have action to enforce the obligations arising under said contract (Young vs. CA,
no legal standing to institute the petition; b) petitioners have no cause of 169 SCRA 213). Since a contract is binding only upon the parties thereto, a
action as the flotation of the bonds are within the right and power of both third person cannot ask for its rescission if it is in fraud of his rights. One
respondent RCBC and the province of Cagayan and c) the viability of the who is not a party to a contract has no rights under such contract and even
construction of a town center is not a justiciable question but a political if the contrary may be voidable, its nullity can be asserted only by one who
question. is a party thereto; a third person would have absolutely no personality to
ask for the annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibañez
Respondent Asset Builders Corporation, on the other hand, filed an vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-
Answer 27 interposing special and affirmative defenses of lack of legal 6501 & 6599, May 21, 1955).
standing and cause of action. Respondent LBP also filed an Answer 28
alleging in the main that petitioners have no cause of action against it as it It was, however, held that a person who is not a party obliged principally
is not an indispensable party or a necessary party to the case. or subsidiarily in a contract may exercise an action for nullity of the
contract if he is prejudiced in his rights with respect to one of the
Two days after the filing of respondents’ respective memoranda on the contracting parties and can show the detriment which would positively
issues raised during the hearing of the special and/or affirmative defenses, result to him from the contract in which he had no intervention (Bañez vs.
petitioners filed a Motion to Admit Amended Petition 29 attaching thereto CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs.
the amended petition. 30 Public respondents opposed the motion for the CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that
following reasons: 1) the motion was belatedly filed; 2) the Amended they were prejudiced in their rights [or that a] detriment x x x would
Petition is not sufficient in form and in substance; 3) the motion is patently positively result to them. Hence, they lack locus standi in court.
dilatory and 4) the Amended Petition was filed to cure the defect in the
original petition. 31 xxxx

Petitioners also filed a Consolidated Opposition to the Motion to Dismiss To the mind of the Court, procedural matters in the present controversy
32 followed by supplemental pleadings 33 in support of their prayer for a may be dispensed with, stressing that the instant case is a political
writ of preliminary injunction. question, a question which the court cannot, in any manner, take judicial
cognizance. Courts will not interfere with purely political questions
On April 27, 2004, the RTC issued the assailed Order denying the Motion to because of the principle of separation of powers (Tañada vs. Cuenco, 103
Admit Amended Petition and dismissing the petition for lack of cause of Phil. 1051). Political questions are those questions which, under the
action. It ruled that: Constitution, are to be decided by the people in their sovereign capacity or
in regard to which full discretionary authority has been delegated to the
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure legislative or [to the] executive branch of the government (Nuclear Free
dealing on the filing of an amended pleading is quite clear. As such, the Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152
Court rules that the motion was belatedly filed. The granting of leave to file SCRA 272; Citizen’s Alliance for Consumer Protection vs. Energy
amended pleadings is a matter peculiarly within the sound discretion of Regulatory Board, G.R. No. 78888-90, June 23, 1988).
the trial court. But the rule allowing amendments to pleadings is subject to
the general but inflexible limitation that the cause of action or defense The citation made by the provincial government[, to] which this Court is
shall not be substantially changed or the theory of the case altered to the inclined to agree, is that the matter falls under the discretion of another
prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666). department, hence the decision reached is in the category of a political
question and consequently may not be the subject of judicial jurisdiction
On the assumption that the controversy presents justiciable issues which (Cruz in Political Law, 1998 Ed., page 81) is correct.
this Court may take cognizance of, petitioners in the present case who
presumably presented legitimate interests in the controversy are not
parties to the questioned contract. Contracts produce effect as between the
TAXATION CASES |39

It is [a] well-recognized principle that purely administrative and For lack of cause of action, the case should be dismissed.
discretionary functions may not be interfered with by the courts (Adm.
Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.). The facts and allegations [necessarily] suggest also that this court may
dismiss the case for want of jurisdiction.
The case therefore calls for the doctrine of ripeness for judicial review.
This determines the point at which courts may review administrative The rule has to be so because it can motu propio dismiss it as its only
action. The basic principle of ripeness is that the judicial machinery should jurisdiction is to dismiss it if it has no jurisdiction. This is in line with the
be conserved for problems which are real and present or imminent and ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993
should not be squandered on problems which are future, imaginary or where the court may dismiss a complaint even without a motion to dismiss
remote. This case is not ripe for judicial determination since there is no or answer.
imminently x x x substantial injury to the petitioners.
Upon the foregoing considerations, the case is hereby dismissed without
In other words, the putting up of the New Cagayan Town Center by the costs.
province over the land fully owned by it and the concomitant contracts
entered into by the same is within the bounds of its corporate power, an SO ORDERED. 34
undertaking which falls within the ambit of its discretion and therefore a
purely political issue which is beyond the province of the court x x x. Petitioners filed a Motion for Reconsideration 35 to which respondents
[Consequently, the court cannot,] in any manner, take judicial cognizance filed their respective Oppositions. 36 Petitioners then filed a Motion to
over it. The act of the provincial government was in pursuance of the Inhibit, which the court granted. Accordingly, the case was re-raffled to
mandate of the Local Government Code of 1991. Branch 1 of the RTC of Tuguegarao City. 37

xxxx On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a
Resolution denying petitioners’ plea for reconsideration. The court found
Indeed, adjudication of the procedural issues presented for resolution by the motion to be a mere scrap of paper as the notice of hearing was
the present action would be a futile exercise in exegesis. addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the
Rules of Court. As to the merits, the court sustained the findings of Branch
What defeats the plea of the petitioners for the issuance of a writ of 5 that petitioners lack legal standing to sue and that the issue involved is
preliminary injunction is the fact that their averments are merely political.
speculative and founded on conjectures. An injunction is not intended to
protect contingent or future rights nor is it a remedy to enforce an abstract Issues
right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An
injunction, whether preliminary or final, will not issue to protect a right Hence, the present recourse where petitioners argue that:
not in in esse and which may never arise, or to restrain an act which does
not give rise to a cause of action. The complainant’s right on title, A. The lower court decided a question of substance in a way not in accord
moreover, must be clear and unquestioned [since] equity, as a rule, will not with law and with the applicable decision of the Supreme Court, and
take cognizance of suits to establish title and will not lend its preventive
aid by injunction where the complainant’s title or right is doubtful or B. The lower court has so far departed from the accepted and usual course
disputed. The possibility of irreparable damage, without proof of violation of judicial proceedings as to call for an exercise of the power of supervision
of an actual existing right, is no ground for injunction being a mere in that:
damnum, absque injuria (Talisay-Silay Milling Company, Inc. vs. CFI of
Negros Occidental, et. al. 42 SCRA 577, 582). I. It denied locus standi to petitioners;

xxxx II. [It] determined that the matter of contract entered into by the
provincial government is in the nature of a political question;
TAXATION CASES |40

appropriate an amount of P25 million for the interest of the bond. 46


III. [It] denied the admission of Amended Petition; and Clearly, the first requisite has been met.

IV. [It] found a defect of substance in the petitioners’ Motion for As to the second requisite, the court, in recent cases, has relaxed the
Reconsideration. 38 stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance",
Our Ruling "paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show
The petition is partially meritorious. direct injury. 48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the court did not
Petitioners have legal standing to sue as taxpayers hesitate to give standing to taxpayers. 49

A taxpayer is allowed to sue where there is a claim that public funds are We find no reason to deviate from the jurisprudential trend.
illegally disbursed, or that the public money is being deflected to any
improper purpose, or that there is wastage of public funds through the To begin with, the amount involved in this case is substantial. Under the
enforcement of an invalid or unconstitutional law. 39 A person suing as a various agreements entered into by the governor, which were ratified by
taxpayer, however, must show that the act complained of directly involves the Sangguniang Panlalawigan, the provincial government of Cagayan
the illegal disbursement of public funds derived from taxation. 40 He must would incur the following costs: 50
also prove that he has sufficient interest in preventing the illegal Compensation to Preferred Ventures - P 6,150,000.00
expenditure of money raised by taxation and that he will sustain a direct (3% of P205M) 51 Resolution No. 290-2001
injury because of the enforcement of the questioned statute or contract. 41 Management and Underwriting Fees - 3,075,000.00
In other words, for a taxpayer’s suit to prosper, two requisites must be (1.5% of P205M) 52
met: (1) public funds derived from taxation are disbursed by a political Documentary Tax - 1,537,500.00
subdivision or instrumentality and in doing so, a law is violated or some (0.75% of P205M) 53
irregularity is committed and (2) the petitioner is directly affected by the Guarantee Fee 54 - 7,350,000.00
alleged act. 42 Construction and Design of town center 55 - 213,795,732.39
Total Cost - P231,908,232.39
In light of the foregoing, it is apparent that contrary to the view of the RTC,
What is more, the provincial government would be shelling out a total
a taxpayer need not be a party to the contract to challenge its validity. 43 amount of P187 million for the period of seven years by way of subsidy for
As long as taxes are involved, people have a right to question contracts the interest of the bonds. Without a doubt, the resolution of the present
entered into by the government. petition is of paramount importance to the people of Cagayan who at the
end of the day would bear the brunt of these agreements.
In this case, although the construction of the town center would be
primarily sourced from the proceeds of the bonds, which respondents Another point to consider is that local government units now possess more
insist are not taxpayer’s money, a government support in the amount of powers, authority and resources at their disposal, 56 which in the hands of
P187 million would still be spent for paying the interest of the bonds. 44 In unscrupulous officials may be abused and misused to the detriment of the
fact, a Deed of Assignment 45 was executed by the governor in favor of public. To protect the interest of the people and to prevent taxes from
respondent RCBC over the Internal Revenue Allotment (IRA) and other being squandered or wasted under the guise of government projects, a
revenues of the provincial government as payment and/or security for the liberal approach must therefore be adopted in determining locus standi in
obligations of the provincial government under the Trust Indenture public suits.
Agreement dated September 17, 2003. Records also show that on March 4,
2004, the governor requested the Sangguniang Panlalawigan to
TAXATION CASES |41

In view of the foregoing, we are convinced that petitioners have sufficient considering that public respondents are being sued in their official
standing to file the present suit. Accordingly, they should be given the capacity.
opportunity to present their case before the RTC.
In any case, there is no need to amend the petition because petitioners, as
Having resolved the core issue, we shall now proceed to the remaining we have said, have legal standing to sue as taxpayers.
issues.
Section 5, Rule 15 of the Rules of Court was substantially complied with
The controversy involved is justiciable
This brings us to the fourth and final issue.
A political question is a question of policy, which is to be decided by the
people in their sovereign capacity or by the legislative or the executive A perusal of the Motion for Reconsideration filed by petitioners would
branch of the government to which full discretionary authority has been show that the notice of hearing was addressed only to the Clerk of Court in
delegated. 57 violation of Section 5, Rule 15 of the Rules of Court, which requires the
notice of hearing to be addressed to all parties concerned. This defect,
In filing the instant case before the RTC, petitioners seek to restrain public however, did not make the motion a mere scrap of paper. The rule is not a
respondents from implementing the bond flotation and to declare null and ritual to be followed blindly. 59 The purpose of a notice of hearing is
void all contracts related to the bond flotation and construction of the simply to afford the adverse parties a chance to be heard before a motion
town center. In the petition before the RTC, they alleged grave abuse of is resolved by the court. 60 In this case, respondents were furnished copies
discretion and clear violations of law by public respondents. They put in of the motion, and consequently, notified of the scheduled hearing. Counsel
issue the overpriced construction of the town center; the grossly for public respondents in fact moved for the postponement of the hearing,
disadvantageous bond flotation; the irrevocable assignment of the which the court granted. 61 Moreover, respondents were afforded
provincial government’s annual regular income, including the IRA, to procedural due process as they were given sufficient time to file their
respondent RCBC to cover and secure the payment of the bonds floated; respective comments or oppositions to the motion. From the foregoing, it
and the lack of consultation and discussion with the community regarding is clear that the rule requiring notice to all parties was substantially
the proposed project, as well as a proper and legitimate bidding for the complied with. 62 In effect, the defect in the Motion for Reconsideration
construction of the town center. was cured.

Obviously, the issues raised in the petition do not refer to the wisdom but We cannot overemphasize that procedural rules are mere tools to aid the
to the legality of the acts complained of. Thus, we find the instant courts in the speedy, just and inexpensive resolution of cases. 63
controversy within the ambit of judicial review. Besides, even if the issues Procedural defects or lapses, if negligible, should be excused in the higher
were political in nature, it would still come within our powers of review interest of justice as technicalities should not override the merits of the
under the expanded jurisdiction conferred upon us by Section 1, Article case. Dismissal of cases due to technicalities should also be avoided to
VIII of the Constitution, which includes the authority to determine whether afford the parties the opportunity to present their case. Courts must be
grave abuse of discretion amounting to excess or lack of jurisdiction has reminded that the swift unclogging of the dockets although a laudable
been committed by any branch or instrumentality of the government. 58 objective must not be done at the expense of substantial justice. 64

The Motion to Admit Amended Petition was properly denied WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27,
2004 Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of
However, as to the denial of petitioners’ Motion to Admit Amended the Regional Trial Court of Tuguegarao City are hereby REVERSED and SET
Petition, we find no reason to reverse the same. The inclusion of the ASIDE insofar as the dismissal of the petition is concerned. Accordingly,
province of Cagayan as a petitioner would not only change the theory of the case is hereby REMANDED to the court a quo for further proceedings.
the case but would also result in an absurd situation. The provincial
government, if included as a petitioner, would in effect be suing itself SO ORDERED.
TAXATION CASES |42

G.R. No. 191667 April 17, 2013 Loan. All previous representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan10were ratified on September 5, 2006
LAND BANK OF THE PHILIPPINES, Petitioner, through Resolution No. 128-2006.11 In consequence, Land Bank granted a second
vs. loan in favor of the Municipality on October 20, 2006 in the principal amount of
EDUARDO M. CACAYURAN, Respondent. ₱28,000,000.00 (Second Loan).12

DECISION Unlike phase 1 of the Redevelopment Plan, the construction of the commercial
center at the Agoo Plaza was vehemently objected to by some residents of the
Municipality. Led by respondent Eduardo Cacayuran (Cacayuran), these residents
PERLAS-BERNABE, J.: claimed that the conversion of the Agoo Plaza into a commercial center, as funded
by the proceeds from the First and Second Loans (Subject Loans), were "highly
Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of irregular, violative of the law, and detrimental to public interests, and will result to
the Court of Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification wanton desecration of the said historical and public park."13 The foregoing was
the April 10, 2007 Decision3 of the Regional Trial Court (RTC) of Agoo, La Union, embodied in a Manifesto,14 launched through a signature campaign conducted by
Branch 31, declaring inter alia the nullity of the loan agreements entered into by the residents and Cacayuran.
petitioner Land Bank of the Philippines (Land Bank) and the Municipality of Agoo,
La Union (Municipality). In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor
Eriguel, Vice Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB
The Facts namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy,
Crisogono Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo
From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain Villanueva, and Gerard Mamuyac (Implicated Officers), expressing the growing
resolutions to implement a multi-phased plan (Redevelopment Plan) to redevelop public clamor against the conversion of the Agoo Plaza into a commercial center. He
the Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal then requested the foregoing officers to furnish him certified copies of various
Monument were situated. documents related to the aforementioned conversion including, among others, the
resolutions approving the Redevelopment Plan as well as the loan agreements for
the sake of public information and transparency.
To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-
20054 on April 19, 2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel)
to obtain a loan from Land Bank and incidental thereto, mortgage a 2,323.75 square Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a
meter lot situated at the southeastern portion of the Agoo Plaza (Plaza Lot) as Complaint16 against the Implicated Officers and Land Bank, assailing, among others,
collateral. To serve as additional security, it further authorized the assignment of a the validity of the Subject Loans on the ground that the Plaza Lot used as collateral
portion of its internal revenue allotment (IRA) and the monthly income from the thereof is property of public dominion and therefore, beyond the commerce of
proposed project in favor of Land Bank.5 The foregoing terms were confirmed, man.17
approved and ratified on October 4, 2005 through Resolution No. 139-
2005.6 Consequently, on November 21, 2005, Land Bank extended a ₱4,000,000.00 Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated
loan in favor of the Municipality (First Loan),7 the proceeds of which were used to Officers and Land Bank filed their respective Answers.
construct ten (10) kiosks at the northern and southern portions of the Imelda
Garden. After completion, these kiosks were rented out.8 For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of
destroying the Agoo Plaza. It further asserted that Cacayuran did not have a cause of
On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the action against it since he was not privy to any of the Subject Loans.19
construction of a commercial center on the Plaza Lot as part of phase II of the
Redevelopment Plan. To finance the project, Mayor Eriguel was again authorized to
obtain a loan from Land Bank, posting as well the same securities as that of the First
TAXATION CASES |43

During the pendency of the proceedings, the construction of the commercial center The following issues have been raised for the Court’s resolution: (1) whether
was completed and the said structure later became known as the Agoo’s People Cacayuran has standing to sue; (2) whether the Subject Resolutions were validly
Center (APC). passed; and (3) whether the Subject Loans are ultra vires.

On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the The Court’s Ruling
area where the APC stood as patrimonial property of the Municipality.
The petition lacks merit.
The Ruling of the RTC
A. Cacayuran’s standing to sue
In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring
the nullity of the Subject Loans.22 It found that the resolutions approving the said Land Bank claims that Cacayuran did not have any standing to contest the
loans were passed in a highly irregular manner and thus, ultra vires; as such, the construction of the APC as it was funded through the proceeds coming from the
Municipality is not bound by the same.23 Moreover, it found that the Plaza Lot is Subject Loans and not from public funds. Besides, Cacayuran was not even a party to
proscribed from collateralization given its nature as property for public use.24 any of the Subject Loans and is thus, precluded from questioning the same.

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On the other The argument is untenable.
hand, the Implicated Officers’ appeal was deemed abandoned and dismissed for
their failure to file an appellants’ brief despite due notice.26 In this regard, only Land
Bank’s appeal was given due course by the CA. It is hornbook principle that a taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that public money is being deflected to any
improper purpose, or that there is wastage of public funds through the enforcement
Ruling of the CA of an invalid or unconstitutional law. A person suing as a taxpayer, however, must
show that the act complained of directly involves the illegal disbursement of public
In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s funds derived from taxation. In other words, for a taxpayer’s suit to prosper, two
ruling, excluding Vice Mayor Eslao from any personal liability arising from the requisites must be met namely, (1) public funds derived from taxation are disbursed
Subject Loans.28 by a political subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and (2) the petitioner is directly affected by the
It held, among others, that: (1) Cacayuran had locus standi to file his complaint, alleged act.31
considering that (a) he was born, raised and a bona fide resident of the Municipality;
and (b) the issue at hand involved public interest of transcendental Records reveal that the foregoing requisites are present in the instant case.
importance;29 (2) Resolution Nos. 68-2005, 139-2005, 58-2006, 128-2006 and all
other related resolutions (Subject Resolutions) were invalidly passed due to the SB’s First, although the construction of the APC would be primarily sourced from the
non-compliance with certain sections of Republic Act No. 7160, otherwise known as proceeds of the Subject Loans, which Land Bank insists are not taxpayer’s money,
the "Local Government Code of 1991" (LGC); (3) the Plaza Lot, which served as there is no denying that public funds derived from taxation are bound to be
collateral for the Subject Loans, is property of public dominion and thus, cannot be expended as the Municipality assigned a portion of its IRA as a security for the
appropriated either by the State or by private persons;30 and (4) the Subject Loans foregoing loans. Needless to state, the Municipality’s IRA, which serves as the local
are ultra vires because they were transacted without proper authority and their government unit’s just share in the national taxes,32 is in the nature of public funds
collateralization constituted improper disbursement of public funds. derived from taxation. The Court believes, however, that although these funds may
be posted as a security, its collateralization should only be deemed effective during
Dissatisfied, Land Bank filed the instant petition. the incumbency of the public officers who approved the same, else those who
succeed them be effectively deprived of its use.
Issues Before the Court
TAXATION CASES |44

In any event, it is observed that the proceeds from the Subject Loans had already xxxx
been converted into public funds by the Municipality’s receipt thereof. Funds
coming from private sources become impressed with the characteristics of public (vi) Upon authorization by the sangguniang bayan, represent the municipality in all
funds when they are under official custody.33 its business transactions and sign on its behalf all bonds, contracts, and obligations,
and such other documents made pursuant to law or ordinance; (Emphasis and
Accordingly, the first requisite has been clearly met. underscoring supplied)

Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by In the present case, while Mayor Eriguel’s authorization to contract the Subject
the conversion of the Agoo Plaza which was funded by the proceeds of the Subject Loans was not contained – as it need not be contained – in the form of an ordinance,
Loans. It is well-settled that public plazas are properties for public use34 and the said loans and even the Redevelopment Plan itself were not approved pursuant
therefore, belongs to the public dominion.35 As such, it can be used by anybody and to any law or ordinance but through mere resolutions. The distinction between
no one can exercise over it the rights of a private owner.36 In this light, Cacayuran ordinances and resolutions is well-perceived. While ordinances are laws and
had a direct interest in ensuring that the Agoo Plaza would not be exploited for possess a general and permanent character, resolutions are merely declarations of
commercial purposes through the APC’s construction. Moreover, Cacayuran need the sentiment or opinion of a lawmaking body on a specific matter and are
not be privy to the Subject Loans in order to proffer his objections thereto. In temporary in nature.39 As opposed to ordinances, "no rights can be conferred by and
Mamba v. Lara, it has been held that a taxpayer need not be a party to the contract to be inferred from a resolution."40 In this accord, it cannot be denied that the SB
challenge its validity; as long as taxes are involved, people have a right to question violated Section 444(b)(1)(vi) of the LGC altogether.
contracts entered into by the government.37
Noticeably, the passage of the Subject Resolutions was also tainted with other
Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing irregularities, such as (1) the SB’s failure to submit the Subject Resolutions to the
to file the instant suit. Sangguniang Panlalawigan of La Union for its review contrary to Section 56 of the
LGC;41 and (2) the lack of publication and posting in contravention of Section 59 of
B. Validity of the Subject Resolutions the LGC.42

Land Bank avers that the Subject Resolutions provided ample authority for Mayor In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the
Eriguel to contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC Subject Loans.
merely requires that the municipal mayor be authorized by the SB concerned and
that such authorization need not be embodied in an ordinance.38 C. Ultra vires nature of the Subject

A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the Loans
authorization of the municipal mayor need not be in the form of an ordinance, the
obligation which the said local executive is authorized to enter into must be made Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts
pursuant to a law or ordinance, viz: of the officers who approved the same.

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. - Generally, an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore
xxxx beyond the powers conferred upon it by law.43 There are two (2) types of ultra vires
acts. As held in Middletown Policemen's Benevolent Association v. Township of
(b) For efficient, effective and economical governance the purpose of which is the Middletown:44
general welfare of the municipality and its inhabitants pursuant to Section 16 of this
Code, the municipal mayor shall:
TAXATION CASES |45

There is a distinction between an act utterly beyond the jurisdiction of a municipal Redevelopment Plan, they are considered as ultra vires in the primary sense thus,
corporation and the irregular exercise of a basic power under the legislative grant in rendering them void and in effect, non-binding on the Municipality.
matters not in themselves jurisdictional. The former are ultra vires in the primary
sense and void; the latter, ultra vires only in a secondary sense which does not At this juncture, it is equally observed that the land on which the Agoo Plaza is
preclude ratification or the application of the doctrine of estoppel in the interest of situated cannot be converted into patrimonial property – as the SB tried to when it
equity and essential justice. (Emphasis and underscoring supplied) passed Municipal Ordinance No. 02-200752 – absent any express grant by the
national government.53 As public land used for public use, the foregoing lot
In other words, an act which is outside of the municipality’s jurisdiction is rightfully belongs to and is subject to the administration and control of the Republic
considered as a void ultra vires act, while an act attended only by an irregularity but of the Philippines.54 Hence, without the said grant, the Municipality has no right to
remains within the municipality’s power is considered as an ultra vires act subject claim it as patrimonial property.
to ratification and/or validation. To the former belongs municipal contracts which
(a) are entered into beyond the express, implied or inherent powers of the local Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra
government unit; and (b) do not comply with the substantive requirements of law vires, the officers who authorized the passage of the Subject Resolutions are
e.g., when expenditure of public funds is to be made, there must be an actual personally liable. Case law states that public officials can be held personally
appropriation and certificate of availability of funds; while to the latter belongs accountable for acts claimed to have been performed in connection with official
those which (a) are entered into by the improper department, board, officer of duties where they have acted ultra vires,55 as in this case.
agent; and (b)do not comply with the formal requirements of a written contract e.g.,
the Statute of Frauds.45
WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of
the Court of Appeals in CA-G.R. CV. No. 89732 is hereby AFFIRMED.
Applying these principles to the case at bar, it is clear that the Subject Loans belong
to the first class of ultra vires acts deemed as void.
SO ORDERED.
Records disclose that the said loans were executed by the Municipality for the
purpose of funding the conversion of the Agoo Plaza into a commercial center CIR vs. Estate f Toda
pursuant to the Redevelopment Plan. However, the conversion of the said plaza is
beyond the Municipality’s jurisdiction considering the property’s nature as one for G.R. No. 147188 September 14, 2004
public use and thereby, forming part of the public dominion. Accordingly, it cannot
be the object of appropriation either by the State or by private persons. 46 Nor can it COMMISSIONER OF INTERNAL REVENUE, petitioner,
be the subject of lease or any other contractual undertaking.47 In Villanueva v. vs.
Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators
pronounced that: Lorna Kapunan and Mario Luza Bautista, respondents.

x x x Town plazas are properties of public dominion, to be devoted to public use and DECISION
to be made available to the public in general. They are outside the commerce of man
and cannot be disposed of or even leased by the municipality to private DAVIDE, JR., C.J.:
parties.1âwphi1 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
In this relation, Article 1409(1) of the Civil Code provides that a contract whose deficiency income tax.
purpose is contrary to law, morals, good customs, public order or public policy is
considered void50 and as such, creates no rights or obligations or any juridical The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31
relations.51 Consequently, given the unlawful purpose behind the Subject Loans January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the
which is to fund the commercialization of the Agoo Plaza pursuant to 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
TAXATION CASES |46

Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by
ordered the cancellation and setting aside of the assessment issued by special co-administrators Lorna Kapunan and Mario Luza Bautista,
Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. received a Notice of Assessment12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year
The case at bar stemmed from a Notice of Assessment sent to CIC by the 1989 in the amount of P79,099,999.22, computed as follows:
Commissioner of Internal Revenue for deficiency income tax arising from Income Tax – 1989
an alleged simulated sale of a 16-storey commercial building known as Net Income per return P75,987,725.00
Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati
City. Add: Additional gain on sale of real property taxable under ordinary
corporate income but were substituted with individual capital
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner gains(P200M – 100M)
of 99.991% of its issued and outstanding capital stock, to sell the Cibeles 100,000,000.00
Building and the two parcels of land on which the building stands for an Total Net Taxable Income per investigation P175,987,725.00
amount of not less than P90 million.4 Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
On 30 August 1989, Toda purportedly sold the property for P100 million 1. Per return P26,595,704.00
to Rafael A. Altonaga, who, in turn, sold the same property on the same day 2. Thru Capital Gains Tax made
to Royal Match Inc. (RMI) for P200 million. These two transactions were by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public.5 P 24,999,999.75
Add: 50% Surcharge
For the sale of the property to RMI, Altonaga paid capital gains tax in the 12,499,999.88
amount of P10 million.6 25% Surcharge
6,249,999.94
On 16 April 1990, CIC filed its corporate annual income tax return7 for the Total
year 1989, declaring, among other things, its gain from the sale of real P 43,749,999.57
property in the amount of P75,728.021. After crediting withholding taxes Add: Interest 20% from
of P254,497.00, it paid P26,341,2078 for its net taxable income of 4/16/90-4/30/94 (.808) 35,349,999.65
P75,987,725. TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
==============
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 The Estate thereafter filed a letter of protest.13
Three and a half years later, or on 16 January 1994, Toda died.
In the letter dated 19 October 1995,14 the Commissioner dismissed the
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an protest, stating that a fraudulent scheme was deliberately perpetuated by
assessment notice10 and demand letter to the CIC for deficiency income the CIC wholly owned and controlled by Toda by covering up the
tax for the year 1989 in the amount of P79,099,999.22. 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
The new CIC asked for a reconsideration, asserting that the assessment building thereon to an individual capital gains, thus evading the higher
should be directed against the old CIC, and not against the new CIC, which corporate income tax rate of 35%.
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 On 15 February 1996, the Estate filed a petition for review15 with the CTA
tax liabilities for the fiscal years 1987-1989.11 alleging that the Commissioner erred in holding the Estate liable for
income tax deficiency; that the inference of fraud of the sale of the
TAXATION CASES |47

properties is unreasonable and unsupported; and that the right of the between Toda and Altonaga. She further alleged that the latter was a
Commissioner to assess CIC had already prescribed. representative, dummy, and a close business associate of the former,
having held his office in a property owned by CIC and derived his salary
In his Answer16 and Amended Answer,17 the Commissioner argued that from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
the two transactions actually constituted a single sale of the property by representation services rendered. The CTA denied20 the motion for
CIC to RMI, and that Altonaga was neither the buyer of the property from reconsideration, prompting the Commissioner to file a petition for
CIC nor the seller of the same property to RMI. The additional gain of P100 review21 with the Court of Appeals.
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 In its challenged Decision of 31 January 2001, the Court of Appeals
the rate of only 5% purportedly as capital gains tax of Altonaga, instead of affirmed the decision of the CTA, reasoning that the CTA, being more
at the rate of 35% as corporate income tax of CIC. The income tax return advantageously situated and having the necessary expertise in matters of
filed by CIC for 1989 with intent to evade payment of the tax was thus false taxation, is "better situated to determine the correctness, propriety, and
or fraudulent. Since such falsity or fraud was discovered by the BIR only on legality of the income tax assessments assailed by the Toda Estate."22
8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National Unsatisfied with the decision of the Court of Appeals, the Commissioner
Internal Revenue Code of 1986, which provides that tax may be assessed filed the present petition invoking the following grounds:
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 I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
be disregarded. Toda, being the registered owner of the 99.991% shares of COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE
stock of CIC and the beneficial owner of the remaining 0.009% shares OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
registered in the name of the individual directors of CIC, should be held
liable for the deficiency income tax, especially because the gains realized II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE
from the sale were withdrawn by him as cash advances or paid to him as SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
cash dividends. Since he is already dead, his estate shall answer for his CORPORATION.
liability.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
In its decision18 of 3 January 2000, the CTA held that the Commissioner PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX
failed to prove that CIC committed fraud to deprive the government of the FOR THE YEAR 1989 HAD PRESCRIBED.
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 The Commissioner reiterates her arguments in her previous pleadings and
evasion. There being no proof of fraudulent transaction, the applicable insists that the sale by CIC of the Cibeles property was in connivance with
period for the BIR to assess CIC is that prescribed in Section 203 of the its dummy Rafael Altonaga, who was financially incapable of purchasing it.
NIRC of 1986, which is three years after the last day prescribed by law for She further points out that the documents themselves prove the fact of
the filing of the return. Thus, the government’s right to assess CIC fraud in that (1) the two sales were done simultaneously on the same date,
prescribed on 15 April 1993. The assessment issued on 9 January 1995 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI
was, therefore, no longer valid. The CTA also ruled that the mere was notarized ahead of the alleged sale between CIC and Altonaga, with
ownership by Toda of 99.991% of the capital stock of CIC was not in itself the former registered in the Notarial Register of Jocelyn H. Arreza
sufficient ground for piercing the separate corporate personality of CIC. Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc.
Hence, the CTA declared that the Estate is not liable for deficiency income No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as
tax of P79,099,999.22 and, accordingly, cancelled and set aside the early as 4 May 1989, CIC received P40 million from RMI, and not from
assessment issued by the Commissioner on 9 January 1995. 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
In its motion for reconsideration,19 the Commissioner insisted that the P40 million was withdrawn by Toda through the declaration of cash
sale of the property owned by CIC was the result of the connivance dividends to all its stockholders.
TAXATION CASES |48

The investigation conducted by the BIR disclosed that Altonaga was a close
For its part, respondent Estate asserts that the Commissioner failed to business associate and one of the many trusted corporate executives of
present the income tax return of Altonaga to prove that the latter is Toda. This information was revealed by Mr. Boy Prieto, the assistant
financially incapable of purchasing the Cibeles property. 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
To resolve the grounds raised by the Commissioner, the following and is thus inadmissible in evidence. It was not verified either, since the
questions are pertinent: letter-request for investigation of Altonaga was unserved,28 Altonaga
having left for the United States of America in January 1990. Nevertheless,
1. Is this a case of tax evasion or tax avoidance? 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
2. Has the period for assessment of deficiency income tax for the year 1989 of CIC. That admission is borne by the records. In its Memorandum,
prescribed? and respondent Estate declared:

3. Can respondent Estate be held liable for the deficiency income tax of CIC Petitioner, however, claims there was a "change of structure" of the
for the year 1989, if any? proceeds of sale. Admitted one hundred percent. But isn’t this precisely the
definition of tax planning? Change the structure of the funds and pay a
We shall discuss these questions in seriatim. 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
Is this a case of tax evasion or tax avoidance? 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
Tax avoidance and tax evasion are the two most common ways used by allowed.
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 Tax planning is by definition to reduce, if not eliminate altogether, a tax.
taxpayer in good faith and at arms length. Tax evasion, on the other hand, Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from
is a scheme used outside of those lawful means and when availed of, it 35% to 5%.29 [Underscoring supplied].
usually subjects the taxpayer to further or additional civil or criminal
liabilities.23 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
Tax evasion connotes the integration of three factors: (1) the end to be Altonaga to RMI cannot be considered a legitimate tax planning. Such
achieved, i.e., the payment of less than that known by the taxpayer to be scheme is tainted with fraud.
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 Fraud in its general sense, "is deemed to comprise anything calculated to
"bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of deceive, including all acts, omissions, and concealment involving a breach
action or failure of action which is unlawful.24 of legal or equitable duty, trust or confidence justly reposed, resulting in
the damage to another, or by which an undue and unconscionable
All these factors are present in the instant case. It is significant to note that advantage is taken of another."30
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 Here, it is obvious that the objective of the sale to Altonaga was to reduce
RMI,25 and not from Altonaga. That P40 million was debited by RMI and the amount of tax to be paid especially that the transfer from him to RMI
reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 would then subject the income to only 5% individual capital gains tax, and
July 1989, another P40 million was debited and reflected in RMI’s trial not the 35% corporate income tax. Altonaga’s sole purpose of acquiring
balance as "other inv. – Cibeles Bldg." This would show that the real buyer and transferring title of the subject properties on the same day was to
of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net 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
TAXATION CASES |49

merely a tax ploy, a sham, and without business purpose and economic Thirty-five percent upon the amount by which the taxable net income
substance. Doubtless, the execution of the two sales was calculated to exceeds one hundred thousand pesos.
mislead the BIR with the end in view of reducing the consequent income
tax liability.lavvphi1.net 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)
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax
was prompted more on the mitigation of tax liabilities than for legitimate Reform Act of 1997) is inapplicable. Hence, the assessment for the
business purposes constitutes one of tax evasion.31 deficiency income tax issued by the BIR must be upheld.

Generally, a sale or exchange of assets will have an income tax incidence Has the period of assessment prescribed?
only when it is consummated.32 The incidence of taxation depends upon
the substance of a transaction. The tax consequences arising from gains No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform
from a sale of property are not finally to be determined solely by the Act of 1997) read:
means employed to transfer legal title. Rather, the transaction must be
viewed as a whole, and each step from the commencement of negotiations Sec. 269. Exceptions as to period of limitation of assessment and collection
to the consummation of the sale is relevant. A sale by one person cannot be of taxes.-(a) In the case of a false or fraudulent return with intent to evade
transformed for tax purposes into a sale by another by using the latter as a tax or of failure to file a return, the tax may be assessed, or a proceeding in
conduit through which to pass title. To permit the true nature of the court after the collection of such tax may be begun without assessment, at
transaction to be disguised by mere formalisms, which exist solely to alter any time within ten years after the discovery of the falsity, fraud or
tax liabilities, would seriously impair the effective administration of the tax omission: Provided, That in a fraud assessment which has become final
policies of Congress.33 and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for collection thereof… .
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 Put differently, in cases of (1) fraudulent returns; (2) false returns with
was merely a conduit is to sanction a circumvention of our tax laws. Hence, intent to evade tax; and (3) failure to file a return, the period within which
the sale to Altonaga should be disregarded for income tax purposes.34 The to assess tax is ten years from discovery of the fraud, falsification or
two sale transactions should be treated as a single direct sale by CIC to omission, as the case may be.
RMI.
It is true that in a query dated 24 August 1989, Altonaga, through his
Accordingly, the tax liability of CIC is governed by then Section 24 of the counsel, asked the Opinion of the BIR on the tax consequence of the two
NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), sale transactions.36 Thus, the BIR was amply informed of the transactions
which stated as follows: even prior to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made with the execution
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- of public documents and the declaration of taxes for 1989. However, these
A tax is hereby imposed upon the taxable net income received during each circumstances do not negate the existence of fraud. As earlier discussed
taxable year from all sources by every corporation organized in, or existing those two transactions were tainted with fraud. And even assuming
under the laws of the Philippines, and partnerships, no matter how created arguendo that there was no fraud, we find that the income tax return filed
or organized but not including general professional partnerships, in by CIC for the year 1989 was false. It did not reflect the true or actual
accordance with the following: amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
Twenty-five percent upon the amount by which the taxable net income
does not exceed one hundred thousand pesos; and 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
TAXATION CASES |50

have been discovered only on 8 March 1991.37 The assessment for the free from any and all income tax liabilities of Cibeles for the fiscal years
1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, 1987, 1988 and 1989.39 [Underscoring Supplied].
the issuance of the correct assessment for deficiency income tax was well
within the prescriptive period. 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,
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles 1988, and 1989," he thereby voluntarily held himself personally liable
Insurance Corporation? therefor. Respondent estate cannot, therefore, deny liability for CIC’s
deficiency income tax for the year 1989 by invoking the separate corporate
A corporation has a juridical personality distinct and separate from the personality of CIC, since its obligation arose from Toda’s contractual
persons owning or composing it. Thus, the owners or stockholders of a undertaking, as contained in the Deed of Sale of Shares of Stock.
corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain instances in which WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED.
personal liability may arise. It has been held in a number of cases that The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No.
personal liability of a corporate director, trustee, or officer along, albeit not 57799 is REVERSED and SET ASIDE, and another one is hereby rendered
necessarily, with the corporation may validly attach when: 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,
1. He assents to the (a) patently unlawful act of the corporation, (b) bad plus legal interest from 1 May 1994 until the amount is fully paid.
faith or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders, or other persons; Costs against respondent.

2. He consents to the issuance of watered down stocks or, having SO ORDERED.


knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto; G.R. No. 196596, November 09, 2016
3. He agrees to hold himself personally and solidarily liable with the
corporation; or COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
UNIVERSITY, INC., Respondent.
4. He is made, by specific provision of law, to personally answer for his
corporate action.38 G.R. No. 198841

It is worth noting that when the late Toda sold his shares of stock to Le DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL
Hun T. Choa, he knowingly and voluntarily held himself personally liable REVENUE,Respondent.
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 G.R. No. 198941
provides:
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
g. Except for transactions occurring in the ordinary course of business, UNIVERSITY, INC., Respondent.
Cibeles has no liabilities or obligations, contingent or otherwise, for taxes,
sums of money or insurance claims other than those reported in its DECISION
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 BRION, J.:
been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles
Before the Court are consolidated petitions for review on certiorari:1
TAXATION CASES |51

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
(Commissioner) to assail the December 10, 2010 decision and March 29, The dispositive portion of the decision reads:
2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. chanRoblesvirtualLawlibrary
622;2 WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the assessment on the loan transactions of [DLSU] in the amount of P1,1681,774.00 is
June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
No. 671;3 and VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001,
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 2002 and 2003 in the total amount of P18,421,363.53...xxx.
decision and October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
(CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En BancCase total amount due computed from September 30, 2004 until full payment thereof
No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the
and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also compromise penalties imposed by [the Commissioner] were excluded, there. being
challenge CTA Case No. 7303.chanroblesvirtuallawlibrary no compromise agreement between the parties.
The Factual Antecedents
SO ORDERED.9ChanRoblesVirtualawlibrary
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Both the Commissioner and DLSU moved for the reconsideration of the January 5,
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's 2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
books of accounts and other accounting records for all internal revenue taxes for the motion for reconsideration while it held in abeyance the resolution on DLSU's
period Fiscal Year Ending 2003 and Unverified Prior Years.5 motion for reconsideration.11

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6 On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
Subsequently on August 18, 2004, the BIR through a Formal Letter of educational or commercial purposes removed these items from the exemption
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental coverage under the Constitution.12
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST) On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, documentary evidence to prove that its rental income was used actually, directly
inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and and exclusively for educational purposes.13The Commissioner did not promptly object
2003.7 to the formal offer of supplemental evidence despite notice.14

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
DLSU filed on August 3, 2005 a petition for review with the CTA Division.8 reduced the amount of DLSU's tax deficiencies. The dispositive portion of
the amended decision reads:
DLSU, a non-stock, non-profit educational institution, principally anchored its chanRoblesvirtualLawlibrary
petition on Article XIV, Section 4 (3) of the Constitution, which reads: WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
chanRoblesvirtualLawlibrary GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total
(3) All revenues and assets of non-stock, non-profit educational institutions used adjusted amount of P5,506,456.71...xxx.
actually, directly, and exclusively for educational purposes shall be exempt
from taxes and duties. xxx. In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency
interest on the...basic deficiency taxes...until full payment thereof pursuant to
Section 249(B) of the [National Internal Revenue Code]...xxx.
TAXATION CASES |52

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on made by a DST imprinting machine, which is allowed under Section 200 (D) of the
the deficiency taxes, surcharge and deficiency interest which have accrued...from National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
September 30, 2004 until fully paid.15ChanRoblesVirtualawlibrary (RR) No. 15-2001.25cralawred
Consequently, the Commissioner supplemented its petition with the CTA En
Banc and argued that the CTA Division erred in admitting DLSU's additional Admissibility of DLSU's supplemental evidence
evidence.16
The CTA En Banc held that the supplemental pieces of documentary evidence were
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed admissible even if DLSU formally offered them only when it moved for
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on reconsideration of the CTA Division's original decision. Notably, the law creating the
the following grounds: (1) the entire assessment should have been cancelled CTA provides that proceedings before it shall not be governed strictly by the
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA technical rules of evidence.26
Division should still have cancelled the entire assessment because DLSU submitted
evidence similar to those submitted by Ateneo De Manila University (Ateneo) in The Commissioner moved but failed to obtain a reconsideration of the CTA En
a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA Banc's December 10, 2010 decision.27 Thus, she came to this court for relief through
Division erred in finding that a portion of DLSU's rental income was not proved to a petition for review on certiorari (G.R. No. 196596).
have been used actually, directly and exclusively for educational
purposes.18chanroblesvirtuallawlibrary CTA En Banc Case No. 671
The CTA En Banc Rulings
The CTA En Banc partially granted DLSU's petition for review and further reduced
CTA En Banc Case No. 622 its tax liabilities to P2,554,825.47 inclusive of surcharge.28

The CTA En Banc dismissed the Commissioner's petition for review and sustained On the validity of the Letter of Authority
the findings of the CTA Division.19
The issue of the LOA's validity was raised during trial;29 hence, the issue was
Tax on rental income deemed properly submitted for decision and reviewable on appeal.

Relying on the findings of the court-commissioned Independent Certified Public Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove period and that the practice of issuing a LOA covering audit of unverified prior
that a portion of the assessed rental income was used actually, directly and years is prohibited.30 The prohibition is consistent with Revenue Memorandum
exclusively for educational purposes; hence, exempt from tax.20 The CTA En Order (RMO) No. 43-90, which provides that if the audit includes more than one
Banc was satisfied with DLSU's supporting evidence confirming that part of its taxable period, the other periods or years shall be specifically indicated in the LOA. 31
rental income had indeed been used to pay the loan it obtained to build the
university's Physical Education - Sports Complex.21 In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its DST for taxable years 2001 and 2002 are void, but the assessment for taxable
income that was not shown by supporting documents to have been actually, directly year 2003 is valid.32
and exclusively used for educational purposes, must be subjected to income tax and
VAT.22 On the applicability of the Ateneo case

DST on loan and mortgage transactions The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence,
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST and defenses.33
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on the documents On the CTA Division's appreciation of the evidence
TAXATION CASES |53

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of


The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It evidence. The belated submission of supplemental evidence reopened the case for
held that while DLSU successfully proved that a portion of its rental income was trial, and worse, DLSU offered the supplemental evidence only after it received the
transmitted and used to pay the loan obtained to fund the construction of the Sports unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
Complex, the rental income from other sources were not shown to have been supplemental documentary evidence was unnecessary since its rental income was
actually, directly and exclusively used for educational purposes.34 taxable regardless of its disposition.45

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the G.R. No. 198841
Commissioner (G.R. No. 198941) came to this Court for
relief.chanroblesvirtuallawlibrary DLSU argues as that:
The Consolidated Petitions
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
G.R. No. 196596 of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void.46
The Commissioner submits the following arguments:
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
First, DLSU's rental income is taxable regardless of how such income is derived, used Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed
or disposed of.35 DLSU's operations of canteens and bookstores within its campus DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and
even though exclusively serving the university community do not negate income tax 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for
liability.36 taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
chanRoblesvirtualLawlibrary
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
be harmonized with Section 30 (H) of the Tax Code, which states among others, that prohibited.ChanRoblesVirtualawlibrary
the income of whatever kind and character of [a non-stock and non-profit it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since
educational institution] from any of [its] properties, real or personal, or from any of the LOA issued to DLSU follows this format, then any assessment arising from it
(its] activities conducted for profit regardless of the disposition made of such income, must be entirely voided.48
shall be subject to tax imposed by this Code.37
Second, DLSU invokes the principle of uniformity in taxation, which mandates that
The Commissioner argues that the CTA En Banc misread and misapplied the case for similarly situated parties, the same set of evidence should be appreciated and
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that weighed in the same manner.49 The CTA En Banc erred when it did not similarly
revenues however generated are covered by the constitutional exemption, provided appreciate DLSU's evidence as it did to the pieces of evidence submitted by Ateneo,
that, the revenues will be used for educational purposes or will be held in reserve also a non-stock, non-profit educational institution.50
for such purposes.39
G.R. No. 198941
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU
is exempt only from property tax but not from income tax on the rentals earned The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
from property.40 Thus, DLSU's income from the leases of its real properties is not are exactly the same as those she raised in her: (1) petition docketed as G.R. No.
exempt from taxation even if the income would be used for educational purposes. 41 196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51chanroblesvirtuallawlibrary
Second, the Commissioner insists that DLSU did not prove the fact of DST Counter-arguments
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
Machine, which is available only to certain classes of taxpayers under RR No. 9- DLSU's Comment on G.R. No. 196596
2000.43
First, DLSU questions the defective verification attached to the petition. 52
TAXATION CASES |54

institutions to share with the State the responsibility of educating the youth."60
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used Third, DLSU highlights that both the CTA En Banc and Division found that the bank
actually, directly and exclusively for educational purposes are exempt from taxes that handled DLSU's loan and mortgage transactions had remitted to the BIR the
and duties.53 DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owmg to the exemption
On this point, DLSU explains that: (1) the tax exemption of non�stock, non-profit granted under the Constitution.62
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code - with formal offer of supplemental evidence. Because of the Commissioner's failure to
the addition of non-stock, non-profit educational institutions to the list of tax- timely object, she became bound by the results of the submission of such
exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973 supplemental evidence.63
Constitution was still in place.
The CIR's Comment on G.R. No. 198841
DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special The Commissioner submits that DLSU is estopped from questioning the LOA's
tax treatment on income of private educational institutions only emanates from validity because it failed to raise this issue in both the administrative and judicial
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption proceedings.64 That it was asked on cross�examination during the trial does not
from tax of all the assets and revenues of non-stock, non-profit educational make it an issue that the CTA could resolve.65 The Commissioner also maintains that
institutions used actually, directly and exclusively for educational purposes, was DLSU's rental income is not tax-exempt because an educational institution is only
expressly and categorically enshrined.55 exempt from property tax but not from tax on the income earned from the
property.66
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and DLSU's Comment on G.R. No. 198941
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income
of whatever kind and character of a non�stock and non-profit educational DLSU puts forward the same counter-arguments discussed above.67
institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be In addition, DLSU prays that the Court award attorney's fees in its favor because it
declared without force and effect in view of the constitutionally granted tax was constrained to unnecessarily retain the services of counsel in this separate
exemption on "all revenues and assets of non-stock, non-profit educational petition.68chanroblesvirtuallawlibrary
institutions used actually, directly, and exclusively for educational purposes."57 Issues

DLSU further submits that it complies with the requirements enunciated in Although the parties raised a number of issues, the Court shall decide only the
the YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3) pivotal issues, which we summarize as follows:
of the Constitution, the taxpayer must prove that: (1) it falls under the classification
non-stock, non-profit educational institution; and (2) the income it seeks to be I. Whether DLSU's income and revenues proved to have been used actually,
exempted from taxation is used actually, directly and exclusively for educational directly and exclusively for educational purposes are exempt from duties
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is and taxes;chanrobleslaw
undisputedly a non-stock, non-profit educational institution. It had also submitted II. Whether the entire assessment should be voided because of the defective
evidence to prove that it actually, directly and exclusively used its income for LOA;chanrobleslaw
educational purposes.59 III. Whether the CTA correctly admitted DLSU's supplemental pieces of
evidence; and
DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted "to incentivize private educational
TAXATION CASES |55

IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may First, the constitutional provision refers to two kinds of educational institutions: (1)
be disturbed by the Court. non-stock, non-profit educational institutions and (2) proprietary educational
Our Ruling institutions.69

As we explain in full below, we rule that: Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70
I. The income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively for Third, while DLSU's claim for tax exemption arises from and is based on the
educational purposes are exempt from duties and taxes. Constitution, the Constitution, in the same provision, also imposes certain
II. The LOA issued to DLSU is not entirely void. The assessment for taxable conditions to avail of the exemption. We discuss below the import of the
year 2003 is valid. constitutional text vis-a-vis the Commissioner's counter-arguments.
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence;
and Fourth, there is a marked distinction between the treatment of non�stock, non-
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown profit educational institutions and proprietary educational institutions. The tax
to have manifestly overlooked certain relevant facts not disputed by the exemption granted to non-stock, non-profit educational institutions is conditioned
parties and which, if properly considered, would justify a different only on the actual, direct and exclusive use of their revenues and assets for
conclusion. educational purposes. While tax exemptions may also be granted to proprietary
educational institutions, these exemptions may be subject to limitations imposed by
The parties failed to convince the Court that the CTA overlooked or failed Congress.
to consider relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used As we explain below, the marked distinction between a non-stock, non-profit and a
actually, directly and exclusively for educational purposes; and proprietary educational institution is crucial in determining the nature and extent of
b. DLSU proved the payment of the DST through its bank's on-line the tax exemption granted to non-stock, non-profit educational institutions.
imprinting machine.
I. The revenues and assets of non-stock, non-profit educational institutions The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
proved to have been used actually, directly, and exclusively for educational 30 (H) of the Tax Code. The relevant text reads:
purposes are exempt from duties and taxes. chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which respect to income received by them as such:
reads: xxxx
chanRoblesvirtualLawlibrary
(H) A non-stock and non-profit educational institution
(3) All revenues and assets of non-stock, non-profit educational xxxx
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or Notwithstanding the provisions in the preceding paragraphs, the income of
cessation of the corporate existence of such institutions, their assets shall be whatever kind and character of the foregoing organizations from any of their
disposed of in the manner provided by law. Proprietary educational properties, real or personal, or from any of their activities conducted for
institutions, including those cooperatively owned, may likewise be entitled profit regardless of the disposition made of such income shall be subject to tax
to such exemptions subject to the limitations provided by law including imposed under this Code. [underscoring and emphasis
restrictions on dividends and provisions for reinvestment [underscoring and supplied]ChanRoblesVirtualawlibrary
emphasis supplied] The Commissioner posits that the 1997 Tax Code qualified the tax exemption
granted to non-stock, non-profit educational institutions such that the revenues and
Before fully discussing the merits of the case, we observe that: income they derived from their assets, or from any of their activities conducted for
profit, are taxable even if these revenues and income are used for educational
TAXATION CASES |56

purposes. seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.77
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions? We now adopt YMCA as precedent and hold that:

We answer in the negative. 1. The last paragraph of Section 30 of the Tax Code is without force and effect
with respect to non-stock, non-profit educational institutions, provided,
While the present petition appears to be a case of first impression,71 the Court in that the non-stock, non-profit educational institutions prove that its assets
the YMCA case had in fact already analyzed and explained the meaning of Article and revenues are used actually, directly and exclusively for educational
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal purposes.
pronouncements that are relevant to the present case. 2. The tax-exemption constitutionally-granted to non-stock, non� profit
educational institutions, is not subject to limitations imposed by law.
The issue in YMCA was whether the income derived from rentals of real property The tax exemption granted by the Constitution to non-stock, non-profit
owned by the YMCA, established as a "welfare, educational and charitable non-profit educational institutions is conditioned only on the actual, direct and exclusive
corporation," was subject to income tax under the Tax Code and the Constitution.72 use of their assets, revenues and income78for educational purposes.
The Court denied YMCA's claim for exemption on the ground that as a charitable We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is charitable institutions, churches, parsonages or convents, mosques, and non-profit
not tax-exempt per se; "what is exempted is not the institution itself...those cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
exempted from real estate taxes are lands, buildings and improvements actually, improvements, actually, directly, and exclusively used for religious, charitable, or
directly and exclusively used for religious, charitable or educational purposes."74 educational purposes...," Article XIV, Section 4 (3) categorically states that
"[a]ll revenues and assets... used actually, directly, and exclusively for educational
The Court held that the exemption claimed by the YMCA is expressly disallowed by purposes shall be exempt from taxes and duties."
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties, real The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
or personal, are subject to the same tax imposed by the Tax Code, regardless of how Constitution is not without significance.
that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property.75 We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission79 to provide broader tax
In short, the YMCA is exempt only from property tax but not from income tax. privilege to non-stock, non-profit educational institutions as recognition of their
role in assisting the State provide a public good. The tax exemption was seen as
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA beneficial to students who may otherwise be charged unreasonable tuition fees if
invoked the tax privilege granted under Article XIV, Section 4 (3) of the Constitution. not for the tax exemption extended to all revenues and assets of non-stock, non-
profit educational institutions.80
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws Further, a plain reading of the Constitution would show that Article XIV, Section 4
granting tax exemptions, refers to the school system (synonymous with formal (3) does not require that the revenues and income must have also been sourced
education); it includes a college or an educational establishment; it refers to the from educational activities or activities related to the purposes of an educational
hierarchically structured and chronologically graded learnings organized and institution. The phrase all revenues is unqualified by any reference to the source of
provided by the formal school system.76 revenues. Thus, so long as the revenues and income are used actually, directly and
exclusively for educational purposes, then said revenues and income shall be
The Court then significantly laid down the requisites for availing the tax exemption exempt from taxes and duties.81
under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the
classification non-stock, non-profit educational institution; and (2) the income it
TAXATION CASES |57

We find it helpful to discuss at this point the taxation of revenues versus the taxation
of assets. However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
Revenues consist of the amounts earned by a person or entity from the conduct of shall be exempt from taxes and duties. The tax exemption no longer hinges on the
business operations.82 It may refer to the sale of goods, rendition of services, or the use of the asset from which the revenues were earned, but on the actual, direct and
return of an investment. Revenue is a component of the tax base in income exclusive use of the revenues for educational purposes.
tax,83 VAT,84 and local business tax (LBT).85
Parenthetically, income and revenues of non-stock, non-profit educational
Assets, on the other hand, are the tangible and intangible properties owned by a institution not used actually, directly and exclusively for educational purposes are
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in not exempt from duties and taxes. To avail of the exemption, the taxpayer
the stocks of a corporation, inventory of goods, or any property from which the must factually prove that it used actually, directly and exclusively for educational
person or entity may derive income or use to generate the same. In Philippine purposes the revenues or income sought to be exempted.
taxation, the fair market value of real property is a component of the tax base in real
property tax (RPT).87 Also, the landed cost of imported goods is a component of the The crucial point of inquiry then is on the use of the assets or on the use of the
tax base in VAT on importation88 and tariff duties.89 revenues. These are two things that must be viewed and treated separately. But so
long as the assets or revenues are used actually, directly and exclusively for
Thus, when a non-stock, non-profit educational institution proves that it uses educational purposes, they are exempt from duties and taxes.
its revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows The tax exemption granted by the Constitution to non-stock, non-profit
that it uses its assets in the form of real property for educational purposes, it shall educational institutions, unlike the exemption that may be availed of by
be exempted from RPT. proprietary educational institutions, is not subject to limitations imposed by
law.
To be clear, proving the actual use of the taxable item will result in an exemption,
but the specific tax from which the entity shall be exempted from shall depend on That the Constitution treats non-stock, non-profit educational institutions
whether the item is an item of revenue or asset. differently from proprietary educational institutions cannot be doubted. As
discussed, the privilege granted to the former is conditioned only on the actual,
To illustrate, if a university leases a portion of its school building to a bookstore or direct and exclusive use of their revenues and assets for educational purposes. In
cafeteria, the leased portion is not actually, directly and exclusively used for clear contrast, the tax privilege granted to the latter may be subject to limitations
educational purposes, even if the bookstore or canteen caters only to university imposed by law.
students, faculty and staff.
We spell out below the difference in treatment if only to highlight the privileged
The leased portion of the building may be subject to real property tax, as held status of non-stock, non-profit educational institutions compared with their
in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of proprietary counterparts.
exemption from taxation is the use of the property for purposes mentioned in the
Constitution. We also held that the exemption extends to facilities which are While a non-stock, non-profit educational institution is classified as a tax-exempt
incidental to and reasonably necessary for the accomplishment of the main entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
purposes. proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations).
In concrete terms, the lease of a portion of a school building for commercial
purposes, removes such asset from the property tax exemption granted under the To be specific, Section 30 provides that exempt organizations like non-stock, non-
Constitution.91 There is no exemption because the asset is not used actually, directly profit educational institutions shall not be taxed on income received by them as
and exclusively for educational purposes. The commercial use of the property is also such.
not incidental to and reasonably necessary for the accomplishment of the main
purpose of a university, which is to educate its students. Section 27 (B), on the other hand, states that [p]roprietary educational
TAXATION CASES |58

institutions...which are nonprofit shall pay a tax of ten percent (10%) on their
taxable income...Provided, that if the gross income from unrelated trade, business or Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
other activity exceeds fifty percent (50%) of the total gross income derived by such DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency
educational institutions...[the regular corporate income tax of 30%] shall be for taxable year 2003?
imposed on the entire taxable income...92
We answer in the negative.
By the Tax Code's clear terms, a proprietary educational institution is entitled only
to the reduced rate of 10% corporate income tax. The reduced rate is applicable The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which
only if: (1) the proprietary educational institution is non� profit and (2) its gross reads:
income from unrelated trade, business or activity does not exceed 50% of its total chanRoblesvirtualLawlibrary
gross income.
3. A Letter of Authority [LOA] should cover a taxable period not exceeding
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do one taxable year. The practice of issuing [LOAs] covering audit of
not apply to non-stock, non-profit educational institutions. unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and specifically indicated in the [LOA].98
effect for being contrary to the Constitution insofar as it subjects to tax the income What this provision clearly prohibits is the practice of issuing LOAs covering audit
and revenues of non-stock, non-profit educational institutions used actually, directly of unverified prior years. RMO 43-90 does not say that a LOA which contains
and exclusively for educational purpose. We make this declaration in the exercise of unverified prior years is void. It merely prescribes that if the audit includes more
and consistent with our duty93 to uphold the primacy of the Constitution.94 than one taxable period, the other periods or years must be specified. The provision
read as a whole requires that if a taxpayer is audited for more than one taxable year,
Finally, we stress that our holding here pertains only to non-stock, non-profit the BIR must specify each taxable year or taxable period on separate LOAs.
educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code. Read in this light, the requirement to specify the taxable period covered by the LOA
is simply to inform the taxpayer of the extent of the audit and the scope of the
For all these reasons, we hold that the income and revenues of DLSU proven to have revenue officer's authority. Without this rule, a revenue officer can unduly burden
been used actually, directly and exclusively for educational purposes are exempt the taxpayer by demanding random accounting records from random unverified
from duties and taxes. years, which may include documents from as far back as ten years in cases
of fraud audit.99
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid. In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because it
DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year includes unverified prior years. This does not mean, however, that the entire LOA is
2003 and insists that the entire LOA should be voided for being contrary to RMO No. void.
43-90, which provides that if tax audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA. As the CTA correctly held, the assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it was being
A LOA is the authority given to the appropriate revenue officer to examine the books audited for taxable year 2003. Corollarily, the assessments for taxable years 2001
of account and other accounting records of the taxpayer in order to determine the and 2002 are void for having been unspecified on separate LOAs as required under
taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the RMO No. 43-90.
correct amount oftax,96 in accordance with Section 5 of the Tax Code, which gives
the CIR the power to obtain information, to summon/examine, and take testimony Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's
of persons. The LOA commences the audit process97 and informs the taxpayer that it validity at the CTA Division, and thus, should not have been entertained on appeal, is
is under audit for possible deficiency tax assessment. not accurate.
TAXATION CASES |59

on the materiality or sufficiency of the supplemental evidence admitted, she was


On the contrary, the CTA En Banc found that the issue of the LOA's validity came up bound by the outcome of the CTA Division's assessment of the evidence.108
during the trial.100 DLSU then raised the issue in its memorandum and motion for
partial reconsideration with the CTA Division. DLSU raised it again on appeal to the Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the Division's admission of the formal offer of supplemental evidence, without prompt
LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of objection from the Commissioner, was thus justified.
the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice.102 Notably, this Court had in the past admitted and considered evidence attached to the
taxpayers' motion for reconsideration.
III. The CTA correctly admitted the supplemental evidence formally offered by
DLSU. In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant
attached to its motion for reconsideration with the CTA its Final Adjustment Return.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental The Commissioner, as in the present case, did not oppose the taxpayer's motion for
pieces of documentary evidence. reconsideration and the admission of the Final Adjustment Return.110 We thus
admitted and gave weight to the Final Adjustment Return although it was only
To recall, DLSU formally offered its supplemental evidence upon filing its motion for submitted upon motion for reconsideration.
reconsideration with the CTA Division.103 The CTA Division admitted the
supplemental evidence, which proved that a portion of DLSU's rental income was We held that while it is true that strict procedural rules generally frown upon the
used actually, directly and exclusively for educational purposes. Consequently, the submission of documents after the trial, the law creating the CTA specifically
CTA Division reduced DLSU's tax liabilities. provides that proceedings before it shall not be governed strictly by the technical
rules of evidence111 and that the paramount consideration remains the
We uphold the CTA Division's admission of the supplemental evidence on distinct ascertainment of truth. We ruled that procedural rules should not bar courts from
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object considering undisputed facts to arrive at a just determination of a controversy.112
to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly
by the technical rules of evidence. We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
First, the failure to object to the offered evidence renders it admissible, and the Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
court cannot, on its own, disregard such evidence.104 supplemental supporting document only upon filing their motions for
reconsideration.
The Court has held that if a party desires the court to reject the evidence offered, it
must so state in the form of a timely objection and it cannot raise the objection to Although the cited cases involved claims for tax refunds, we also dispense with the
the evidence for the first time on appeal.105 strict application of the technical rules of evidence in the present tax
assessmentcase. If anything, the liberal application of the rules assumes greater force
Because of a party's failure to timely object, the evidence offered becomes part of and significance in the case of a taxpayer who claims a constitutionally granted tax
the evidence in the case. As a consequence, all the parties are considered bound by exemption. While the taxpayers in the cited cases claimed refund of excess tax
any outcome arising from the offer of evidence properly presented.106 payments based on the Tax Code,115 DLSU is claiming tax exemption based on the
Constitution. If liberality is afforded to taxpayers who paid more than they should
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal have under a statute, then with more reason that we should allow a taxpayer to
offer of evidence despite notice.107 The Commissioner objected to the admission of prove its exemption from tax based on the Constitution.
the supplemental evidence only when the case was on appeal to the CTA En Banc. By
the time the Commissioner raised her objection, it was too late; the formal offer, Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not
admission and evaluation of the supplemental evidence were all fait accompli. only because the Commissioner failed to promptly object, but more so because the
strict application of the technical tules of evidence may defeat the intent of the
We clarify that while the Commissioner's failure to promptly object had no bearing Constitution.
TAXATION CASES |60

CTA "cannot ascertain whether rental income from the [other] concessionaires was
IV. The CTA's appreciation of evidence is generally binding on the Court unless indeed used for educational purposes."121
compelling reasons justify otherwise.
To stress, the CTA's factual findings were based on and supported by the report of
It is doctrinal that the Court will not lightly set aside the conclusions reached by the the Independent CPA who reviewed, audited and examined the voluminous
CTA which, by the very nature of its function of being dedicated exclusively to the documents submitted by DLSU.
resolution of tax problems, has developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.116 We thus accord Under the CTA Revised Rules, an Independent CPA's functions include: (a)
the findings of fact by the CTA with the highest respect. These findings of facts can examination and verification of receipts, invoices, vouchers and other long accounts;
only be disturbed on appeal if they are not supported by substantial evidence or (b) reproduction of, and comparison of such reproduction with, and certification
there is a showing of gross error or abuse on the part of the CTA. In the absence of that the same are faithful copies of original documents, and pre-marking of
any clear and convincing proof to the contrary, this Court must presume that the documentary exhibits consisting of voluminous documents; (c) preparation of
CTA rendered a decision which is valid in every respect.117 schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the
We sustain the factual findings of the CTA. amount(s) of taxes paid; (d) making findings as to compliance with
substantiation requirements under pertinent tax laws, regulations and
The parties failed to raise credible basis for us to disturb the CTA's findings that jurisprudence; (e) submission of a formal report with certification of authenticity
DLSU had used actually, directly and exclusively for educational purposes and veracity of findings and conclusions in the performance of the audit; (f)
a portion of its assessed income and that it had remitted the DST payments though testifying on such formal report; and (g) performing such other functions as the CTA
an online imprinting machine. may direct.122

a. DLSU used actually, directly, and exclusively for educational purposes Based on the Independent CPA's report and on its own appreciation of the evidence,
a portion of its assessed income. the CTA held that only the portion of the rental income pertaining to
To see how the CTA arrived at its factual findings, we review the process the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-
undertaken, from which it deduced that DLSU successfully proved that it used CPA Account was considered as used actually, directly and exclusively for
actually, directly and exclusively for educational purposes a portion of its rental educational purposes. Consequently, the unaccounted and unsubstantiated
income. disbursements must be subjected to income tax and VAT.123

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
submission of the supplemental evidence, which consisted of statement of receipts, taxable years 2001 and 2002 due to the defective LOA.124
statement of disbursement and fund balance and statement of fund changes.118
The Court finds that the above fact-finding process undertaken by the CTA shows
These documents showed that DLSU borrowed P93.86 Million,119
which was used to that it based its ruling on the evidence on record, which we reiterate, were
build the university's Sports Complex. Based on these pieces of evidence, the CTA examined and verified by the Independent CPA. Thus, we see no persuasive reason
found that DLSU's rental income from its concessionaires were indeed transmitted to deviate from these factual findings.
and used for the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct and exclusive However, while we generally respect the factual findings of the CTA, it does not
use for educational purposes. mean that we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU's unsubstantiated rental income (i.e.,
The CTA also found that DLSU's rental income from other concessionaires, which income not proved to have been actually, directly and exclusively used for
were allegedly deposited to a fund (CF-CPA Account),120 intended for the university's educational purposes).
capital projects, was not proved to have been used actually, directly and
exclusively for educational purposes. The CTA observed that "[DLSU]...failed to To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in
fully account for and substantiate all the disbursements from the [fund]." Thus, the taxable year 2003.125 DLSU earned this income from leasing a portion of its
TAXATION CASES |61

premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., from the abovementioned concessionaries. The difference (P6,602,655.00)
5) Capri International, and 6) MTO Bookstore.126 was the portion claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
To prove that its rental income was used for educational purposes, DLSU identified disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at
the transactions where the rental income was expended, viz.: the supposed unsubstantiated portion of the rental income
1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports (P4,841,066.65).132
Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128 3. The substantiated portion of CF-CPA disbursements
(P1,761,308.37)133 was derived by multiplying the rental income claimed
DLSU also submitted documents to the Independent CPA to prove that the to have been added to the CF-CPA Account (P6,602,655.00) by 26.68% or
P6,602,655.00 transferred to the CF-CPA Account was used actually, directly and the ratio of substantiated disbursements to total
exclusively for educational purposes. According to the Independent CPA' findings, disbursements (P23,463,543.02).
DLSU was able to substantiate disbursements from the CF-CPA Account amounting 4. The 26.68% ratio134 was the result of dividing the substantiated
to P6,259,078.30. disbursements from the CF-CPA Account as found by the Independent CPA
(P6,259,078.30) by the total disbursements (P23,463,543.02) from the
Contradicting the findings of the Independent CPA, the CTA concluded that out of same account.
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus, We find that this system of calculation is incorrect and does not truly give effect to
subject to income tax and VAT.129 the constitutional grant of tax exemption to non-stock, non�profit educational
institutions. The CTA's reasoning is flawed because it required DLSU to substantiate
The CTA then concluded that the ratio of substantiated disbursements to the total an amount that is greater than the rental income deposited in the CF-CPA Account in
disbursements from the CF-CPA Account for taxable year 2003 is only 2003.
26.68%.130The CTA held as follows:
chanRoblesvirtualLawlibrary To reiterate, to be exempt from tax, DLSU has the burden of proving that the
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., proceeds of its rental income (which amounted to a total of P10.61 million) 135 were
Capri International and MTO Bookstore, which were transmitted to the CF-CPA used for educational purposes. This amount was divided into two parts: (a) the
Account, petitioner again failed to fully account for and substantiate all the P4.01 million, which was used to pay the loan obtained for the construction of the
disbursements from the CF-CPA Account; thus failing to prove that the rental Sports Complex; and (b) the P6.60 million,136 which was transferred to the CF-CPA
income derived therein were actually, directly and exclusively used for educational account.
purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to P- For year 2003, the total disbursement from the CF-CPA account amounted to P23.46
6,259,078.30 only. Hence, this portion of the rental income, being the substantiated million.137 These figures, read in light of the constitutional exemption, raises the
disbursements of the CF-CPA Account, was considered by the Special First Division question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
as used actually, directly and exclusively for educational purposes. Since for fiscal million is tax-exempt so that it is required to prove that all these
year 2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"), disbursements had been made for educational purposes?
and the total disbursements per subsidiary ledger amounts to P23,463,543.02
(Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is We answer in the negative.
26.68% (P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68% The records show that DLSU never claimed that the total CF-CPA disbursements of
with the total rent income added to and used in the CF-CPA Account in the amount P23.46 million had been for educational purposes and should thus be tax-exempt;
of P6,602,655.00 ts P1,761,588.35.131 (emphasis DLSU only claimed P10.61 million for tax�exemption and should thus be required
supplied)ChanRoblesVirtualawlibrary to prove that this amount had been used as claimed.
For better understanding, we summarize the CTA's computation as follows:
Of this amount, P4.01 had been proven to have been used for educational purposes,
1. The CTA subtracted the rent income used in the construction of the Sports as confirmed by the Independent CPA. The amount in issue is therefore the balance
Complex (P4,007,724.00) from the rental income (P10,610,379.00) earned of P6.60 million which was transferred to the CF-CPA which in turn made
TAXATION CASES |62

disbursements of P23.46 million for various general purposes, among them the
P6.60 million transferred by DLSU. � CTA Decision138 Revised

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements Rental income 10,610,379.00 10,610,379.00
for educational purposes in year 2003 in the amount P6.26 million. Based on these
given figures, the CTA concluded that the expenses for educational purposes that Less: Rent income used in construction
4,007,724.00 4,007,724.00
had been coursed through the CF-CPA should be prorated so that only the portion of the Sports Complex
that P6.26 million bears to the total CF�-CPA disbursements should be credited to
DLSU for tax exemption. � � �

This approach, in our view, is flawed given the constitutional requirement that Rental income deposited to the CF-CPA
6,602,655.00 6,602.655.00
revenues actually and directly used for educational purposes should be tax-exempt. Account
As already mentioned above, DLSU is not claiming that the whole P23.46 million CF-
CPA disbursement had been used for educational purposes; it only claims that P6.60 � � �
million transferred to CF-CPA had been used for educational purposes. This was
what DLSU needed to prove to have actually and directly used for educational Less: Substantiated portion of CF-CPA
purposes. 1,761,588.35 6,259,078.30
disbursements

That this fund had been first deposited into a separate fund (the CF�-CPA � � �
established to fund capital projects) lends peculiarity to the facts of this case, but
does not detract from the fact that the deposited funds were DLSU revenue funds Tax base for deficiency income tax
that had been confirmed and proven to have been actually and directly used for 4,841,066.65 343,576.70
and VAT
educational purposes via the CF-CPA. That the CF-CPA might have had other sources
of funding is irrelevant because the assessment in the present case pertains only to On DLSU's argument that the CTA should have appreciated its evidence in the same
the rental income which DLSU indisputably earned as revenue in 2003. That the way as it did with the evidence submitted by Ateneo in another separate case, the
proven CF-CPA funds used for educational purposes should not be prorated as part CTA explained that the issue in the Ateneo case was not the same as the issue in the
of its total CF-�CPA disbursements for purposes of crediting to DLSU is also logical present case.
because no claim whatsoever had been made that the totality of the CF-CPA
disbursements had been for educational purposes. No prorating is necessary; to The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
state the obvious, exemption is based on actual and direct use and this DLSU has income taxes and VAT under certain BIR and Department of Finance
indisputably proven. issuances139that required the educational institution to own and operate the
canteens, or other commercial enterprises within its campus, as condition for tax
Based on these considerations, DLSU should therefore be liable only for the exemption. The CTA held that the Constitution does not require the educational
difference between what it claimed and what it has proven. In more concrete terms, institution to own or operate these commercial establishments to avail of the
DLSU only had to prove that its rental income for taxable year 2003 exemption.140
(P10,610,379.00) was used for educational purposes. Hence, while the total
disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only Given the lack of complete identity of the issues involved, the CTA held that it had to
had to substantiate its P10.6 million rental income, part of which was the evaluate the separate sets of evidence differently. The CTA likewise stressed that
P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on
million was substantiated to have been used for educational purposes. its decision on two different cases with two different issues."141

To summarize, we thus revise the tax base for deficiency income tax and VAT for DLSU disagrees with the CTA and argues that the entire assessment must be
taxable year 2003 as follows: cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
chanRoblesvirtualLawlibrary We reject DLSU's argument for being non sequitur. Its reliance on the concept of
TAXATION CASES |63

uniformity of taxation is also incorrect. Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and
uniformity of taxation means that all taxable articles or kinds of property of the
First, even granting that Ateneo and DLSU submitted similar evidence, same class shall be taxed at the same rate.147 A tax is uniform when it operates with
the sufficiency and materiality of the evidence supporting their respective claims the same force and effect in every place where the subject of it is found.148 The
for tax exemption would necessarily differ because their attendant issues and facts concept requires that all subjects of taxation similarly situated should be treated
differ. alike and placed in equal footing.149

To state the obvious, the amount of income received by DLSU and by Ateneo during In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
the taxable years they were assessed varied. The amount of tax assessment them alike because their income proved to have been used actually, directly and
also varied. The amount of income proven to have been used for educational exclusively for educational purposes were exempted from taxes. The CTA equally
purposes also varied because the amount substantiated varied.142 Thus, the amount applied the requirements in the YMCA case to test if they indeed used their revenues
of tax assessment cancelled by the CTA varied. for educational purposes.

On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a despite proving that it used actually, directly and exclusively for educational
total deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was purposes its income and revenues, the CTA still affirmed the imposition of taxes.
assessed deficiency DST, while Ateneo was not.143 That the DLSU secured a different result happened because it failed to fully prove
that it used actually, directly and exclusively for educational purposes its revenues
Thus, although both Ateneo and DLSU claimed that they used their rental income and income.
actually, directly and exclusively for educational purposes by submitting similar
evidence, e.g., the testimony of their employees on the use of university revenues, On this point, we remind DLSU that the rule on uniformity of taxation does not mean
the report of the Independent CPA, their income summaries, financial statements, that subjects of taxation similarly situated are treated in literally the same way in all
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-
and revenues had indeed been used for educational purposes. profit educational institutions, does not mean that the CTA or this Court would
similarly decide every case for (or against) both universities. Success in tax
The CTA significantly found that some documents that could have fully supported litigation, like in any other litigation, depends to a large extent on the sufficiency of
DLSU's claim were not produced in court. Indeed, the Independent CPA testified that evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully
some disbursements had not been proven to have been used actually, directly and cancelling its tax liabilities.
exclusively for educational purposes.144
b. DLSU proved its payment of the DST
The final nail on the question of evidence is DLSU's own admission that the original
of these documents had not in fact been produced before the CTA although it claimed The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
that there was no bad faith on its part.145 To our mind, this admission is a good transactions were paid and remitted through its bank's On-Line Electronic DST
indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
substantiate a portion of its claimed exemption. method of payment because an educational institution is excluded from the class of
taxpayers who can use the On-Line Electronic DST Imprinting Machine.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence,
that the contents of the missing supporting documents were proven by its recital in We sustain the findings of the CTA. The Commissioner's argument lacks basis in
some other authentic documents on record,146 can no longer be entertained at this both the Tax Code and the relevant revenue regulations.
late stage of the proceeding. The CTA did not rule on this particular claim. The CTA
also made no finding on DLSU's assertion of lack of bad faith. Besides, it is not our DST on documents, loan agreements, and papers shall be levied, collected and paid
duty to go over these documents to test the truthfulness of their contents, this Court for by the person making, signing, issuing, accepting, or transferring the same.150The
not being a trier of facts. Tax Code provides that whenever one party to the document enjoys exemption from
DST, the other party not exempt from DST shall be directly liable for the tax. Thus, it
TAXATION CASES |64

is clear that DST shall be payable by any party to the document, such that the CALLEJO, SR., J.:
payment and compliance by one shall mean the full settlement of the DST due on the
document. This is a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R.
In the present case, DLSU entered into mortgage and loan agreements with banks. SP No. 57014 which affirmed the decision of the Central Board of Assessment
These agreements are subject to DST.151 For the purpose of showing that the DST on Appeals holding that the lot owned by the petitioner and its hospital building
the loan agreement has been paid, DLSU presented its agreements bearing the constructed thereon are subject to assessment for purposes of real property tax.
imprint showing that DST on the document has been paid by the bank, its
counterparty. The imprint should be sufficient proof that DST has been paid. Thus,
DLSU cannot be further assessed for deficiency DST on the said documents. The Antecedents
Finally, it is true that educational institutions are not included in the class of The petitioner Lung Center of the Philippines is a non-stock and non-profit
taxpayers who can pay and remit DST through the On-Line Electronic DST Imprinting entity established on January 16, 1981 by virtue of Presidential Decree No.
Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant 1823.[2] It is the registered owner of a parcel of land, particularly described as Lot
because it was not DLSU who used the On-Line Electronic DST Imprinting No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical
Machine but the bank that handled its mortgage and loan transactions. RR No. 9- Road, Central District, Quezon City. The lot has an area of 121,463 square meters
2000 expressly includes banks in the class of taxpayers that can use the On-Line and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of
Electronic DST Imprinting Machine. 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
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the to private parties, for canteen and small store spaces, and to medical or professional
assessed DST deficiency, except for the unpaid balance of P13,265.48.152 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
WHEREFORE, premises considered, we DENY the petition of the Commissioner of side of the building along Quezon Avenue is vacant and idle, while a big portion on
Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En commercial purposes to a private enterprise known as the Elliptical Orchids
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La and Garden Center.
Salle University, Inc., which had been reduced.
The petitioner accepts paying and non-paying patients. It also renders medical
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and services to out-patients, both paying and non-paying. Aside from its income from
the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and paying patients, the petitioner receives annual subsidies from the government.
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court
On June 7, 1993, both the land and the hospital building of the petitioner were
of Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATIONthat
assessed for real property taxes in the amount of P4,554,860 by the City Assessor of
the base for the deficiency income tax and VAT for taxable year 2003
Quezon City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-
is P343,576.70.
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
SO ORDERED.
Exemption[5] from real property taxes with the City Assessor, predicated on its claim
that it is a charitable institution. The petitioners request was denied, and a petition
LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
City, respondents. 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
DECISION of its hospital operation is to serve charity patients. The petitioner contends that it
TAXATION CASES |65

is a charitable institution and, as such, is exempt from real property taxes. The QC- said property is actually, directly and exclusively used for charitable purposes. The
LBAA rendered judgment dismissing the petition and holding the petitioner liable respondents noted that in a newspaper report, it appears that graft charges were
for real property taxes.[6] filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board and Garden Center, for entering into a lease contract over 7,663.13 square meters of
of Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the the property in 1990 for only P20,000 a month, when the monthly rental should
petitioner was not a charitable institution and that its real properties were not be P357,000 a month as determined by the Commission on Audit; and that instead
actually, directly and exclusively used for charitable purposes; hence, it was not of complying with the directive of the COA for the cancellation of the contract for
entitled to real property tax exemption under the constitution and the law. The being grossly prejudicial to the government, the petitioner renewed the same on
petitioner sought relief from the Court of Appeals, which rendered judgment March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner
affirming the decision of the CBAA.[8] uses the subsidies granted by the government for charity patients and uses the rest
Undaunted, the petitioner filed its petition in this Court contending that: 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
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT 100% of its out-patients and 170 beds in the hospital are reserved for indigent
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT patients. The respondents further assert, thus:
ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY 13. That the claims/allegations of the Petitioner LCP do not speak well of its record
DEVOTED FOR CHARITABLE PURPOSES. of service. That before a patient is admitted for treatment in the Center, first
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX impression is that it is pay-patient and required to pay a certain amount as
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY deposit. That even if a patient is living below the poverty line, he is charged with
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION. 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
The petitioner avers that it is a charitable institution within the context of hospital bills or issue a promissory note guaranteed and indorsed by an influential
Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a agency or person known only to the Center; that even the remains of deceased poor
charitable institution is not altered by the fact that it admits paying patients and patients suffered the same fate.Moreover, before a patient is admitted for treatment
renders medical services to them, leases portions of the land to private parties, and as free or charity patient, one must undergo a series of interviews and must submit
rents out portions of the hospital to private medical practitioners from which it all the requirements needed by the Center, usually accompanied by endorsement by
derives income to be used for operational expenses. The petitioner points out that an influential agency or person known only to the Center. These facts were heard
for the years 1995 to 1999, 100% of its out-patients were charity patients and of the and admitted by the Petitioner LCP during the hearings before the Honorable QC-
hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity BAA and Honorable CBAA. These are the reasons of indigent patients, instead of
patients. It asserts that the fact that it receives subsidies from the government seeking treatment with the Center, they prefer to be treated at the Quezon
attests to its character as a charitable institution. It contends that the exclusivity Institute. Can such practice by the Center be called charitable?[10]
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 The Issues
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends The issues for resolution are the following: (a) whether the petitioner is a
that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it charitable institution within the context of Presidential Decree No. 1823 and the
is not precluded from seeking tax exemption under the 1987 Constitution. 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
In their comment on the petition, the respondents aver that the petitioner is whether the real properties of the petitioner are exempt from real property taxes.
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
TAXATION CASES |66

The Courts Ruling Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by
The petition is partially granted. lung diseases, and to undertake research and training on the cure and prevention of
On the first issue, we hold that the petitioner is a charitable institution within lung diseases, through a Lung Center which will house and nurture the above and
the context of the 1973 and 1987 Constitutions. To determine whether an related activities and provide tertiary-level care for more difficult and problematical
enterprise is a charitable institution/entity or not, the elements which should be cases;
considered include the statute creating the enterprise, its corporate purposes, its
constitution and by-laws, the methods of administration, the nature of the actual Whereas, to achieve this purpose, the Government intends to provide material and
work performed, the character of the services rendered, the indefiniteness of the financial support towards the establishment and maintenance of a Lung Center for
beneficiaries, and the use and occupation of the properties.[11] the welfare and benefit of the Filipino people.[15]

In the legal sense, a charity may be fully defined as a gift, to be applied The purposes for which the petitioner was created are spelled out in its
consistently with existing laws, for the benefit of an indefinite number of persons, Articles of Incorporation, thus:
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 SECOND: That the purposes for which such corporation is formed are as follows:
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 1. To construct, establish, equip, maintain, administer and conduct an integrated
of the poor or sick.[14] The test of a charity and a charitable organization are in law medical institution which shall specialize in the treatment, care, rehabilitation
the same. The test whether an enterprise is charitable or not is whether it exists to and/or relief of lung and allied diseases in line with the concern of the government
carry out a purpose reorganized in law as charitable or whether it is maintained for to assist and provide material and financial support in the establishment and
gain, profit, or private advantage. 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
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation providing them specialized health and medical services and by minimizing the
which, subject to the provisions of the decree, is to be administered by the Office of incidence of lung diseases in the country and elsewhere.
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 2. To promote the noble undertaking of scientific research related to the prevention
people principally to help combat the high incidence of lung and pulmonary of lung or pulmonary ailments and the care of lung patients, including the holding of
diseases in the Philippines. The raison detre for the creation of the petitioner is a series of relevant congresses, conventions, seminars and conferences;
stated in the decree, viz:
3. To stimulate and, whenever possible, underwrite scientific researches on the
Whereas, for decades, respiratory diseases have been a priority concern, having biological, demographic, social, economic, eugenic and physiological aspects of lung
been the leading cause of illness and death in the Philippines, comprising more than or pulmonary diseases and their control; and to collect and publish the findings of
45% of the total annual deaths from all causes, thus, exacting a tremendous toll on such research for public consumption;
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; 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,
Whereas, the more common lung diseases are, to a great extent, preventable, and especially in human lung requirements, general health and physical fitness, and
curable with early and adequate medical care, immunization and through prompt other relevant or related fields;
and intensive prevention and health education programs;
TAXATION CASES |67

5. To encourage the training of physicians, nurses, health officers, social workers 14. To do everything necessary, proper, advisable or convenient for the
and medical and technical personnel in the practical and scientific implementation accomplishment of any of the powers herein set forth and to do every other act and
of services to lung patients; thing incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public
6. To assist universities and research institutions in their studies about lung in general in any and all walks of life including those who are poor and the needy
diseases, to encourage advanced training in matters of the lung and related fields without discrimination.After all, any person, the rich as well as the poor, may fall
and to support educational programs of value to general health; sick or be injured or wounded and become a subject of charity.[17]

7. To encourage the formation of other organizations on the national, provincial As a general principle, a charitable institution does not lose its character as
and/or city and local levels; and to coordinate their various efforts and activities for such and its exemption from taxes simply because it derives income from paying
the purpose of achieving a more effective programmatic approach on the common patients, whether out-patient, or confined in the hospital, or receives subsidies from
problems relative to the objectives enumerated herein; 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
8. To seek and obtain assistance in any form from both international and local Sunday School, etc. v. Board of Review,[19] the State Supreme Court of Illinois held,
foundations and organizations; and to administer grants and funds that may be thus:
given to the organization;

[A]n institution does not lose its charitable character, and consequent exemption
9. To extend, whenever possible and expedient, medical services to the public and, from taxation, by reason of the fact that those recipients of its benefits who are able
in general, to promote and protect the health of the masses of our people, which has to pay are required to do so, where no profit is made by the institution and the
long been recognized as an economic asset and a social blessing; 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
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and ground upon which all exemptions in favor of charitable institutions are based is the
maladies of the people in any and all walks of life, including those who are poor and benefit conferred upon the public by them, and a consequent relief, to some extent,
needy, all without regard to or discrimination, because of race, creed, color or of the burden upon the state to care for and advance the interests of its citizens.[20]
political belief of the persons helped; and to enable them to obtain treatment when
such disorders occur; As aptly stated by the State Supreme Court of South Dakota in Lutheran
Hospital Association of South Dakota v. Baker:[21]
11. To participate, as circumstances may warrant, in any activity designed and
carried on to promote the general health of the community; [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
12. To acquire and/or borrow funds and to own all funds or equipment, educational common observation amongst those who have gone about at all amongst the
materials and supplies by purchase, donation, or otherwise and to dispose of and suffering classes, that the deserving poor can with difficulty be persuaded to enter
distribute the same in such manner, and, on such basis as the Center shall, from time an asylum of any kind confined to the reception of objects of charity; and that their
to time, deem proper and best, under the particular circumstances, to serve its honest pride is much less wounded by being placed in an institution in which paying
general and non-profit purposes and objectives; 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
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose thus received is devoted altogether to the charitable object which the institution is
of properties, whether real or personal, for purposes herein mentioned; and intended to further.[22]
TAXATION CASES |68

The money received by the petitioner becomes a part of the trust fund and other reasonable construction. Such an intention must be expressed in clear and
must be devoted to public trust purposes and cannot be diverted to private profit or unmistakable terms, or must appear by necessary implication from the language
benefit.[23] 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
Under P.D. No. 1823, the petitioner is entitled to receive donations. The against the property owner and in favor of the public. This principle applies with
petitioner does not lose its character as a charitable institution simply because the peculiar force to a claim of exemption from taxation . [28]
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 Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
Lake County:[24] specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:
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 SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock
government. In both Intermountain Health Care and the present case, the crux is the corporation organized primarily to help combat the high incidence of lung and
presence or absence of material reciprocity. It is entirely irrelevant to this analysis pulmonary diseases in the Philippines, all donations, contributions, endowments
that the government, rather than a private benefactor, chose to make up the deficit and equipment and supplies to be imported by authorized entities or persons and
resulting from the exchange between St. Marks Tower and the tenants by making a by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use
contribution to the landlord, just as it would have been irrelevant in Intermountain and benefit of the Lung Center, shall be exempt from income and gift taxes, the same
Health Care if the patients income supplements had come from private individuals further deductible in full for the purpose of determining the maximum deductible
rather than the government. amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
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 The Lung Center of the Philippines shall be exempt from the payment of taxes,
denial of a charitable exemption if the facts otherwise support such an exemption, charges and fees imposed by the Government or any political subdivision or
as they do here.[25] instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]
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 It is plain as day that under the decree, the petitioner does not enjoy any
patients and for the operation of the hospital. It even incurred a net loss in 1991 and property tax exemption privileges for its real properties as well as the building
1992 from its operations. constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2:
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 It is a settled rule of statutory construction that the express mention of one person,
and exclusively used for charitable purposes. thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.
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 The rule of expressio unius est exclusio alterius is formulated in a number of
taxing power. Taxation is the rule and exemption is the exception. The effect of an ways. One variation of the rule is principle that what is expressed puts an end to
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its
payments must be clearly shown and based on language in the law too plain to be terms, is expressly limited to certain matters, it may not, by interpretation or
mistaken.[26] As held in Salvation Army v. Hoehn:[27] construction, be extended to other matters.

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
TAXATION CASES |69

The rule of expressio unius est exclusio alterius and its variations are canons of the same should not only be exclusively used for charitable purposes; it is required
restrictive interpretation. They are based on the rules of logic and the natural that such property be used actually and directly for such purposes.[37]
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 In light of the foregoing substantial changes in the Constitution, the petitioner
not have made specified enumeration in a statute had the intention been not to cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
restrict its meaning and confine its terms to those expressly mentioned.[30] 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]
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 Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents
all, and that unless the privilege is limited to the very terms of the statute the favor appurtenant thereto, and all lands, buildings, and improvements used exclusively
would be intended beyond what was meant.[31] for religious, charitable, or educational purposes shall be exempt from taxation. The
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: 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
(3) Charitable institutions, churches and parsonages or convents appurtenant used for religious or charitable purposes. The Constitution is worded
thereto, mosques, non-profit cemeteries, and all lands, buildings, and differently. The change should not be ignored. It must be duly taken into
improvements, actually,directly and exclusively used for religious, charitable or consideration. Reliance on past decisions would have sufficed were the words
educational purposes shall be exempt from taxation.[32] actually as well as directly not added. There must be proof therefore of
The tax exemption under this constitutional provision covers property taxes the actual and direct use of the lands, buildings, and improvements for religious or
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 charitable purposes to be exempt from taxation.
Constitutional Commission, explained: . . . what is exempted is not the institution Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
itself . . .; those exempted from real estate taxes are lands, buildings and entitled to the exemption, the petitioner is burdened to prove, by clear and
improvements actually, directly and exclusively used for religious, charitable or unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
educational purposes.[34] are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
Consequently, the constitutional provision is implemented by Section 234(b) purposes. Exclusive is defined as possessed and enjoyed to the exclusion of others;
of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) debarred from participation or enjoyment; and exclusively is defined,
as follows: 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
SECTION 234. Exemptions from Real Property Tax. The following are exempted from cannot be substituted for the words used exclusively without doing violence to the
payment of the real property tax: 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
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, income from the real property that is determinative of whether the property is used
mosques, non-profit or religious cemeteries and all lands, buildings, and for tax-exempt purposes.[44]
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35] 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
We note that under the 1935 Constitution, ... all lands, buildings, and portions of the hospital are used for the treatment of patients and the dispensation
improvements used exclusively for charitable purposes shall be exempt from of medical services to them, whether paying or non-paying, other portions thereof
taxation.[36] However, under the 1973 and the present Constitutions, for lands, are being leased to private individuals for their clinics and a canteen. Further, a
buildings, and improvements of the charitable institution to be considered exempt, portion of the land is being leased to a private individual for her business enterprise
TAXATION CASES |70

under the business name Elliptical Orchids and Garden Center. Indeed, the
petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991
and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt from
such taxes.[45] On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to determine,
after due hearing, the precise portions of the land and the area thereof which are
leased to private persons, and to compute the real property taxes due thereon as
provided for by law.
SO ORDERED.