AIME N. SORIANO v. SECRETARY OF FINANCE, GR No.

184450, 2017-01-24
Facts:
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.) 2293. On 21 May 2008,
former President Gloria M. Arroyo certified the passage of the bill as urgent through a letter addressed to then Senate
President Manuel Villar. On the same day, the bill was passed on second reading IN the Senate and, on 27 May 2008, on
third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House of Representatives for the latter's
concurrence.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as
Amended, Otherwise Known as the National Internal Revenue Code of 1997," was approved and signed into law by
President Arroyo
The following are the salient features of the new law:It increased the basic personal exemption from P20,000 for a single
individual, P25,000 for the head of the family, and P32,000 for a married individual to P50,000 for each individual.It
increased the additional exemption for each dependent not exceeding four from P8,000 to P25,000.It raised the
Optional Standard Deduction (OSD) for individual taxpayers from 10% of gross income to 40% of the gross receipts or
gross sales.It introduced the OSD to corporate taxpayers at no more than 40% of their gross income.It granted MWEs
exemption from payment of income tax on their minimum wage, holiday pay, overtime pay, night shift differential pay
and hazard pay.[1]
Accordingly, R.A. 9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of the
15-day period, the law took effect.
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the prorated application of the
personal and additional exemptions for taxable year 2008 to begin only effective 6 July 2008 for being contrary to
Section 4 of Republic Act No. 9504.[2]Petitioners argue that the prorated application of the personal and additional
exemptions under RR 10-2008 is not "the legislative intendment in this jurisdiction."[3] They stress that Congress has
always maintained a policy of "full taxable year treatment"[4] as regards the application of tax exemption laws. They
allege further that R.A. 9504 did not provide for a prorated application of the new set of personal and additional
exemptions.[5]
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable year treatment of the income
tax benefits of the new law. He relies on what he says is clear legislative intent In his "Explanatory Note of Senate Bill No.
103," he stresses "the very spirit of enacting the subject tax exemption law
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504 provide for the application
of the tax exemption for the full calendar year 2008. It also espouses the interpretation that R.A. 9504 provides for the
unqualified tax exemption of the income of MWEs regardless of the other benefits they receive.[14] In conclusion, it
says that RR 10-2008, which is only an implementing rule, amends the original intent of R.A. 9504, which is the
substantive law, and is thus null and void.
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the Philippines, Inc., and Ernesto Ebro
allege that R.A. 9504 unconditionally grants MWEs exemption from income tax on their taxable income, as wel1 as
increased personal and additional exemptions for other individual taxpayers, for the whole year 2008. They note that
the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides that those MWEs who received
"other benefits" in excess of P30,000 are not exempt from income taxation. Petitioners believe this RR is a "patent
nullity"[15] and therefore voi
The Office of the Solicitor General (OSG) filed a Consolidated Comment[16] and took the position that the application of
R.A. 9504 was intended to be prospective, and not retroactive. This was supposedly the general rule under the rules of
statutory construction: law will only be applied retroactively if it clearly provides for retroactivity, which is not provided
in this instance

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The OSG further argues that the legislative intent of non-retroactivity was effectively confirmed by the "Conforme" of
Senator Escudero, Chairperson of the Senate Committee on Ways and Means, on the draft revenue regulation that
became RR 10-2008.
Issues:
First, whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the entire
taxable year 2008 or prorated, considering that R.A. 9504 took effect only on 6 July 2008.Second, whether an MWE is
exempt for the entire taxable year 2008 or from 6 July 2008 only.Third, whether Sections 1 and 3 of RR 10-2008 are
consistent with the law in providing that an MWE who receives other benefits in excess of the statutory limit of
P30,000[19] is no longer entitled to the exemption provided by R.A. 9504.
Ruling:
the policy of full taxable year treatment is established, not by the amendments introduced by R.A. 9504, but by the
provisions of the 1997 Tax Code, which adopted the policy from as early as 1969.
Principles:
This Court ruled in the affirmative, considering that the increased exemptions were already available on or before 15
April 1992, the date for the filing of individual income tax returns. Further, the law itself provided that the new set of
personal and additional exemptions would be immediately available upon its effectivity. While R.A. 7167 had not yet
become effective during calendar year 1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the new law provided for
adjustments "to the poverty threshold level" prevailing at the time of the enactment of the law
T]he Court is of the considered view that Rep. Act 7167 should cover or extend to compensation income earned or
received during calendar year 1991
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to afford immediate tax relief
to individual taxpayers, particularly low-income compensation earners. Indeed, if R.A. 9504 was to take effect beginning
taxable year 2009 or half of the year 2008 only, then the intent of Congress to address the increase in the cost of living
in 2008 would have been negated.
The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be computed on the basis of the
calendar year.[30] The taxpayer is required to fi1e an income tax return on the 15th of April of each year covering
income of the preceding taxable year.[31] The tax due thereon shall be paid at the time the return is filed
In the present case, the increased exemptions were already available much earlier than the required time of filing of the
return on 15 April 2009. R.A. 9504 came into law on 6 July 2008, more than nine months before the deadline for the
filing of the income tax return for taxable year 2008. Hence, individual taxpayers were entitled to claim the increased
amounts for the entire year 2008. This was true despite the fact that incomes were already earned or received prior to
the law's effectivity on 6 July 2008.
We find the facts of this case to be substantially identical to those of Umali.First, both cases involve an amendment to
the prevailing tax code. The present petitions call for the interpretation of the effective date of the increase in personal
and additional exemptions. Otherwise stated, the present case deals with an amendment (R.A. 9504) to the prevailing
tax code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali involved an amendment to the then prevailing
tax code - it interpreted the effective date of R.A. 7167, an amendment to the 1977 NIRC, which also increased personal
and additional exemptions.Second, the amending law in both cases reflects an intent to make the new set of personal
and additional exemptions immediately available after the effectivity of the law. As already pointed out, in Umali, R.A.
7167 involved social legislation intended to adjust personal and additional exemptions. The adjustment was made in
keeping with the poverty threshold level prevailing at the time.Third, both cases involve social legislation intended to
cure a social evil - R.A. 7167 was meant to adjust personal and additional exemptions in relation to the poverty
threshold level, while R.A. 9504 was geared towards addressing the impact of the global increase in the price of

2
goods.Fourth, in both cases, it was clear that the intent of the legislature was to hasten the enactment of the law to
make its beneficial relief immediately available.

R. Nos. 213446 and 213658 are petitions for Certiorari, Prohibition and/or Mandamus under Rule 65 of the Rules of
Court, with Application for Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction, uniformly
seeking to: (a) issue a Temporary Restraining Order to enjoin the implementation of Revenue Memorandum Order
(RMO) No. 23- 2014 dated June 20, 2014 issued by the Commissioner of Internal Revenue (CIR); and (b) declare null, void
and unconstitutional paragraphs A, B, C, and D of Section III, and Sections IV, VI and VII of RMO No. 23-2014. The
petition in G.R. No. 213446 also prays for the issuance of a Writ of Mandamus to compel respondents to upgrade the
P30,000.00 non-taxable ceiling of the 13th month pay and other benefits for the concerned officials and employees of
the government.

The Antecedents

On June 20, 2014, respondent CIR issued the assailed RMO No. 23-2014, in furtherance of Revenue Memorandum
Circular (RMC) No. 23-2012 dated February 14, 2012 on the "Reiteration of the Responsibilities of the Officials and
Employees of Government Offices for the Withholding of Applicable Taxes on Certain Income Payments and the
Imposition of Penalties for Non-Compliance Thereof," in order to clarify and consolidate the responsibilities of the public
sector to withhold taxes on its transactions as a customer (on its purchases of goods and services) and as an employer
(on compensation paid to its officials and employees) under the National Internal Revenue Code (NIRC or Tax Code) of
1997, as amended, and other special laws.

The Petitions

G.R. No. 213446

On August 6, 2014, petitioners Confederation for Unity, Recognition and Advancement of Government Employees
(COURAGE), et al., organizations/unions of government employees from the Sandiganbayan, Senate of the Philippines,
Court of Appeals, Department of Agrarian Reform, Department of Social Welfare and Development, Department of

3
Trade and Industry, Metro Manila Development Authority, National Housing Authority and local government of Quezon
City, filed a Petition for Prohibition and Mandamus,1 imputing grave abuse of discretion on the part of respondent CIR in
issuing RMO No. 23-2014. According to petitioners, RMO No. 23-2014 classified as taxable compensation, the following
allowances, bonuses, compensation for services granted to government employees, which they alleged to be considered
by law as non-taxable fringe and de minimis benefits, to wit:

I. Legislative Fringe Benefits

a. Anniversary Bonus
b. Additional Food Subsidy
c. 13th Month Pay
d. Food Subsidy
e. Cash Gift
f. Cost of Living Assistance
g. Efficiency Incentive Bonus
h. Financial Relief Assistance
i. Grocery Allowance
j. Hospitalization
k. Inflationary Assistance Allowance
l. Longevity Service Pay
m. Medical Allowance
n. Mid-Year Eco. Assistance
o. Productivity Incentive Benefit
p. Transition Allowance
q. Uniform Allowance

II. Judiciary Benefits

a. Additional Compensation Income

b. Extraordinary & Miscellaneous Expenses
c. Monthly Special Allowance
d. Additional Cost of Living Allowance (from Judiciary Development Fund)
e. Productivity Incentive Benefit
f. Grocery Allowance
g. Clothing Allowance
h. Emergency Economic Assistance
i. Year-End Bonus (13th Month Pay)
j. Cash Gift
k. Loyalty Cash Award (Milestone Bonus)
l. Christmas Allowance m. Anniversary Bonus2

Petitioners further assert that the imposition of withholding tax on these allowances, bonuses and benefits, which have
been allotted by the Government to its employees free of tax for a long time, violates the prohibition on non-diminution
of benefits under Article 100 of the Labor Code;3 and infringes upon the fiscal autonomy of the Legislature, Judiciary,
Constitutional Commissions and Office of the Ombudsman granted by the Constitution.4

Petitioners also claim that RMO No. 23-2014 (1) constitutes a usurpation of legislative power and diminishes the
delegated power of local government units inasmuch as it defines new offenses and prescribes penalty therefor,
particularly upon local government officials;5 and (2) violates the equal protection clause of the Constitution as it
discriminates against government officials and employees by imposing fringe benefit tax upon their allowances and

4
benefits, as opposed to the allowances and benefits of employees of the private sector, the fringe benefit tax of which is
borne and paid by their employers.6

Further, the petition also prays for the issuance of a writ of mandamus ordering respondent CIR to perform its duty
under Section 32(B)(7)(e)(iv) of the NIRC of 1997, as amended, to upgrade the ceiling of the 13th month pay and other
benefits for the concerned officials and employees of the government, including petitioners.7

G.R. No. 213658

On August 19, 2014, petitioners Armando A. Yanga, President of the Regional Trial Court (RTC) Judges Association of
Manila, and Ma. Cristina Carmela I. Japzon, President of the Philippine Association of Court Employees – Manila Chapter,
filed a Petition for Certiorari and Prohibition8 as duly authorized representatives of said associations, seeking to nullify
RMO No. 23-2014 on the following grounds: (1) respondent CIR is bereft of any authority to issue the assailed RMO. The
NIRC of 1997, as amended, expressly vests to the Secretary of Finance the authority to promulgate all needful rules and
regulations for the effective enforcement of tax provisions;9 and (2) respondent CIR committed grave abuse of discretion
amounting to lack or excess of jurisdiction in the issuance of RMO No. 23-2014 when it subjected to withholding tax
benefits and allowances of court employees which are tax-exempt such as: (a) Special Allowance for Judiciary (SAJ)
under Republic Act (RA) No. 9227 and additional cost of living allowance (AdCOLA) granted under Presidential Decree
(PD) No. 1949 which are considered as non-taxable fringe benefits under Section 33(A) of the NIRC of 1997, as amended;
(b) cash gift, loyalty awards, uniform and clothing allowance and additional compensation (ADCOM) granted to court
employees which are considered de minimis under Section 33(C)(4) of the same Code; (c) allowances and benefits
granted by the Judiciary which are not taxable pursuant to Section 32(7)(E) of the NIRC of 1997, as amended; and (d)
expenses for the Judiciary provided under Commission on Audit (COA) Circular 2012-001.10

Petitioners further assert that RMO No. 23-2014 violates their right to due process of law because while it is ostensibly
denominated as a mere revenue issuance, it is an illegal and unwarranted legislative action which sharply increased the
tax burden of officials and employees of the Judiciary without the benefit of being heard.11

On October 21, 2014, the Court resolved to consolidate the foregoing cases.12

Respondents, through the Office of the Solicitor General (OSG), filed their Consolidated Comment13 on December 23,
2014. They argue that the petitions are barred by the doctrine of hierarchy of courts and petitioners failed to present
any special and important reasons or exceptional and compelling circumstance to justify direct recourse to this Court.14

Maintaining that RMO No. 23-2014 was validly issued in accordance with the power of the CIR to make rulings and
opinion in connection with the implementation of internal revenue laws, respondents aver that unlike Revenue
Regulations (RRs), RMOs do not require the approval or signature of the Secretary of Finance, as these merely provide
directives or instructions in the implementation of stated policies, goals, objectives, plans and programs of the
Bureau.15 According to them, RMO No. 23-2014 is in fact a mere reiteration of the Tax Code and previous RMOs, and can
be traced back to RR No. 01-87 dated April 2, 1987 implementing Executive Order No. 651 which was promulgated by
then Secretary of Finance Jaime V. Ongpin upon recommendation of then CIR Bienvenido A. Tan, Jr. Thus, the CIR never
usurped the power and authority of the legislature in the issuance of the assailed RMO.16 Also, contrary to petitioners'
assertion, the due process requirements of hearing and publication are not applicable to RMO No. 23-2014.17

Respondents further argue that petitioners' claim that RMO No. 23-2014 is unconstitutional has no leg to stand on. They
explain that the constitutional guarantee of fiscal autonomy to Judiciary and Constitutional Commissions does not
include exemption from payment of taxes, which is the lifeblood of the nation.18 They also aver that RMO No. 23-2014
never intended to diminish the powers of local government units. It merely reiterates the obligation of the government
as an employer to withhold taxes, which has long been provided by the Tax Code.19

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Moreover, respondents assert that the allowances and benefits enumerated in Section III A, B, C, and D, are not fringe
benefits which are exempt from taxation under Section 33 of the Tax Code, nor de minimis benefits excluded from
employees' taxable basic salary. They explain that the SAJ under RA No. 9227 and AdCOLA under PD No. 1949 are
additional allowances which form part of the employee's basic salary; thus, subject to withholding taxes.20

Respondents also claim that RMO No. 23-2014 does not violate petitioners' right to equal protection of laws as it covers
all employees and officials of the government. It does not create a new category of taxable income nor make taxable
those which are not taxable but merely reflect those incomes which are deemed taxable under existing laws.21

Lastly, respondents aver that mandamus will not lie to compel respondents to increase the ceiling for tax exemptions
because the Tax Code does not impose a mandatory duty on the part of respondents to do the same.22

The Petitions-in-Intervention

Meanwhile, on September 11, 2014, the National Federation of Employees Associations of the Department of
Agriculture (NAFEDA) et al., duly registered union/association of employees of the Department of Agriculture, National
Agricultural and Fisheries Council, Commission on Elections, Mines and Geosciences Bureau, and Philippine Fisheries
Development Authority, claiming similar interest as petitioners in G.R. No. 213446, filed a Petition-in-
Intervention23 seeking the nullification of items III, VI and VII of RMO No. 23-2014 based on the following grounds: (1)
that respondent CIR acted with grave abuse of discretion and usurped the power of the Legislature in issuing RMO No.
23-2014 which imposes additional taxes on government employees and prescribes penalties for government official's
failure to withhold and remit the same;24 (2) that RMO No. 23-2014 violates the equal protection clause because the
Commission on Human Rights (CHR) was not included among the constitutional commissions covered by the issuance
and the ADCOM of employees of the Judiciary was subjected to withholding tax but those received by employees of the
Legislative and Executive branches are not;25 and (3) that respondent CIR failed to upgrade the tax exemption ceiling for
benefits under Section 32(B)(7) of the NIRC of 1997, as amended.26

In its Comment,27 respondents, through the OSG, sought the denial of the Petition-in-Intervention for failure of the
intervenors to seek prior leave of Court and to demonstrate that the existing consolidated petitions are not sufficient to
protect their interest as parties affected by the assailed RMO.28 They further contend that, contrary to the intervenors'
position, the CHR is not exempt from the applicability of RMO No. 23-2014.29 They explain that the enumeration of
government offices and constitutional bodies covered by RMO No. 23-2014 is not exclusive; Section III thereof in fact
states that RMO No. 23-2014 covers all employees of the public sector.30 They also allege that the ADCOM referred to in
Section III(B) of the assailed RMO is unique to the Judiciary; employees and officials in the executive and legislative do
not receive this specific type of ADCOM enjoyed by the employees and officials of the Judicial branch.31

On October 10, 2014, a Motion for Intervention with attached Complaint in Intervention32 was filed, in G.R. No. 213658,
by the Members of the Association of Regional Trial Court Judges in Iloilo City. Claiming that they are similarly situated
with petitioners, said intervenors pray that the Court declare null and void RMO No. 23-2014 and direct the Bureau of
Internal Revenue (BIR) to refund the amount illegally exacted from the salaries/compensations of the judges by virtue of
the implementation of RMO No. 23-2014.33The intervenors claim that RMO No. 23-2014 violates their right to due
process as it takes away a portion of their salaries and compensation without giving them the opportunity to be
heard.34 They also aver that the implementation of RMO No. 23-2014 resulted in the diminution of their
salaries/compensation in violation of Sections 3 and 10, Article VIII of the Constitution.35

In their Comment36 to the Motion, respondents adopted the arguments in their Consolidated Comment and further
stated that: (1) RMO No. 23-2014 does not diminish the salaries and compensation of members of the judiciary as it has
been judicially settled that the imposition of taxes on salaries and compensation of judges and justices is not equivalent
to diminution of the same;37 (2) the allowances and benefits enumerated under Section III(B) of RMO No. 23-2014 are
not fringe benefits exempt from taxation;38 (3) the AdCOLA and SAJ are not fringe benefits as these are considered part

6
of the basic salary of government employees subject to income tax;39 and (4) there is no valid ground for the refund of
the taxes withheld pursuant to RMO No. 23-2014.40

In sum, petitioners and intervenors (collectively referred to as petitioners) argue that:

1. RMO No. 23-2014 is ultra vires insofar as:

a. Sections III and IV of RMO No. 23-2014, for subjecting to withholding taxes non-taxable allowances,
bonuses and benefits received by government employees;

b. Sections VI and VII, for defining new offenses and prescribing penalties therefor, particularly upon
government officials;

2. RMO No. 23-2014 violates the equal protection clause as it discriminates against government employees;

3. RMO No. 23-2014 violates fiscal autonomy enjoyed by government agencies;

4. The implementation of RMO No. 23-2014 results in diminution of benefits of government employees, a violation
of Article 100 of the Labor Code; and

5. Respondents may be compelled through a writ of mandamus to increase the tax-exempt ceiling for 13th month
pay and other benefits.

On the other hand, respondents counter that:

1. The instant consolidated petitions are barred by the doctrine of hierarchy of courts;

2. The CIR did not abuse its discretion in the issuance of RMO No. 23-2014 because:

a. It was issued pursuant to the CIR's power to interpret the NIRC of 1997, as amended, and other tax laws,
under Section 4 of the NIRC of 1997, as amended;

b. RMO No. 23-2014 does not discriminate against government employees. It does not create a new
category of taxable income nor make taxable those which are exempt;

c. RMO No. 23-2014 does not result in diminution of benefits;

d. The allowances, bonuses or benefits listed under Section III of the assailed RMO are not fringe benefits;

e. The fiscal autonomy granted by the Constitution does not include tax exemption; and

3. Mandamus does not lie against respondents because the NIRC of 1997, as amended, does not impose a
mandatory duty upon them to increase the tax-exempt ceiling for 13th month pay and other benefits.

Incidentally, in a related case docketed as A.M. No. 16-12-04-SC, the Court, on July 11, 2017, issued a Resolution
directing the Fiscal Management and Budget Office of the Court to maintain the status quo by the non-withholding of
taxes from the benefits authorized to be granted to judiciary officials and personnel, namely, the Mid-year Economic
Assistance, the Year-end Economic Assistance, the Yuletide Assistance, the Special Welfare Assistance (SWA) and the
Additional SWA, until such time that a decision is rendered in the instant consolidated cases.

The Court's Ruling

7
I.

Procedural

Non-exhaustion of administrative remedies.

It is an unquestioned rule in this jurisdiction that certiorari under Rule 65 will only lie if there is no appeal, or any other
plain, speedy and adequate remedy in the ordinary course of law against the assailed issuance of the CIR.41 The plain,
speedy and adequate remedy expressly provided by law is an appeal of the assailed RMO with the Secretary of Finance
under Section 4 of the NIRC of 1997, as amended, to wit:

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to interpret the
provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed
in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals.42

The CIR's exercise of its power to interpret tax laws comes in the form of revenue issuances, which include RMOs that
provide "directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows,
methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of
the Bureau in all areas of operations, except auditing."43 These revenue issuances are subject to the review of the
Secretary of Finance. In relation thereto, Department of Finance Department Order No. 007-0244 issued by the Secretary
of Finance laid down the procedure and requirements for filing an appeal from the adverse ruling of the CIR to the said
office. A taxpayer is granted a period of thirty (30) days from receipt of the adverse ruling of the CIR to file with the
Office of the Secretary of Finance a request for review in writing and under oath.45

In Asia International Auctioneers, Inc. v. Parayno, Jr.,46 the Court dismissed the petition seeking the nullification of RMC
No. 31-2003 for failing to exhaust administrative remedies. The Court held:

x x x It is settled that the premature invocation of the court's intervention is fatal to one's cause of action. If a remedy
within the administrative machinery can still be resorted to by giving the administrative officer every opportunity to
decide on a matter that comes within his jurisdiction, then such remedy must first be exhausted before the court's
power of judicial review can be sought. The party with an administrative remedy must not only initiate the prescribed
administrative procedure to obtain relief but also pursue it to its appropriate conclusion before seeking judicial
intervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court.47

The doctrine of exhaustion of administrative remedies is not without practical and legal reasons. For one thing,
availment of administrative remedy entails lesser expenses and provides for a speedier disposition of controversies. It is
no less true to state that courts of justice for reasons of comity and convenience will shy away from a dispute until the
system of administrative redress has been completed and complied with so as to give the administrative agency
concerned every opportunity to correct its error and to dispose of the case.48 While there are recognized exceptions to
this salutary rule, petitioners have failed to prove the presence of any of those in the instant case.

Violation of the rule on hierarchy of courts.

Moreover, petitioners violated the rule on hierarchy of courts as the petitions should have been initially filed with the
CTA, having the exclusive appellate jurisdiction to determine the constitutionality or validity of revenue issuances.
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In The Philippine American Life and General Insurance Co. v. Secretary of Finance,49 the Court held that rulings of the
Secretary of Finance in its exercise of its power of review under Section 4 of the NIRC of 1997, as amended, are
appealable to the CTA.50 The Court explained that while there is no law which explicitly provides where rulings of the
Secretary of Finance under the adverted to NIRC provision are appealable, Section 7(a)51 of RA No. 1125, the law
creating the CTA, is nonetheless sufficient, albeit impliedly, to include appeals from the Secretary's review under Section
4 of the NIRC of 1997, as amended.

Moreover, echoing its pronouncements in City of Manila v. Grecia-Cuerdo,52 that the CTA has the power of certiorari
within its appellate jurisdiction, the Court declared that "it is now within the power of the CTA, through its power
of certiorari, to rule on the validity of a particular administrative rule or regulation so long as it is within its appellate
jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax treatment of a certain transaction,
but also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is
based."53

Subsequently, in Banco de Oro v. Republic,54 the Court, sitting En Banc, further held that the CTA has exclusive appellate
jurisdiction to review, on certiorari, the constitutionality or validity of revenue issuances, even without a prior issuance
of an assessment. The Court En Banc reasoned:

We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The Court of Tax Appeals has
exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other
administrative issuances of the Commissioner of Internal Revenue.

Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:

ARTICLE [VIII]
JUDICIAL DEPARTMENT

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be established by
law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. (Emphasis supplied)

Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v. Hon. Grecia-
Cuerdo, the Court of Tax Appeals' jurisdiction over petitions for certiorari assailing interlocutory orders issued by the
Regional Trial Court in a local tax case. Thus:

[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution
provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law and that judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes
that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the
tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs
of certiorari in these cases. (Emphasis in the original)

9
This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is inherent in the exercise
of its appellate jurisdiction:

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively, to make
all orders that will preserve the subject of the action, and to give effect to the final determination of the appeal. It
carries with it the power to protect that jurisdiction and to make the decisions of the court thereunder effective. The
court, in aid of its appellate jurisdiction, has authority to control all auxiliary and incidental matters necessary to the
efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the
performance of any act which might interfere with the proper exercise of its rightful jurisdiction in cases pending before
it.

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should have powers
which are necessary to enable it to act effectively within such jurisdiction. These should be regarded as powers which
are inherent in its jurisdiction and the court must possess them in order to enforce its rules of practice and to suppress
any abuses of its process and to defeat any attempted thwarting of such process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall possess all the
inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of jurisdiction, in
addition to those expressly conferred on them. These inherent powers are such powers as are necessary for the ordinary
and efficient exercise of jurisdiction; or are essential to the existence, dignity and functions of the courts, as well as to
the due administration of justice; or are directly appropriate, convenient and suitable to the execution of their granted
powers; and include the power to maintain the court's jurisdiction and render it effective in behalf of the litigants.

Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to effectuate its
jurisdiction, a grant of jurisdiction, in the absence of prohibitive legislation, implies the necessary and usual incidental
powers essential to effectuate it, and, subject to existing laws and constitutional provisions, every regularly constituted
court has power to do all things that are reasonably necessary for the administration of justice within the scope of its
jurisdiction and for the enforcement of its judgments and mandates." Hence, demands, matters or questions ancillary or
incidental to, or growing out of, the main action, and coming within the above principles, may be taken cognizance of by
the court and determined, since such jurisdiction is in aid of its authority over the principal matter, even though the
court may thus be called on to consider and decide matters which, as original causes of action, would not be within its
cognizance. (Citations omitted)

Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or regulation in the
first instance. This is contemplated in the Constitution when it speaks of appellate review of final judgments of inferior
courts in cases where such constitutionality is in issue.

On June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another superior administrative agency
as was its predecessor — the former Board of Tax Appeals — but as a part of the judicial system with exclusive
jurisdiction to act on appeals from:

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;

(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money

10
 charges; seizure, detention or release of property affected fines, forfeitures or other penalties imposed in relation
thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of
Customs; and

(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and taxation of real
property or other matters arising under the Assessment Law, including rules and regulations relative thereto.

Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving assessments that
were previously cognizable by the Regional Trial Courts (then courts of first instance).

In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals and elevated its
rank to the level of a collegiate court with special jurisdiction. Section 1 specifically provides that the Court of Tax
Appeals is of the same level as the Court of Appeals and possesses "all the inherent powers of a Court of Justice."

Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-related issues:

Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a
denial;

3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by
them in the exercise of their original or appellate jurisdiction;

4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of
Customs;

5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases

11
 involving the assessment and taxation of real property originally decided by the provincial or city board of
assessment appeals;

6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the
Tariff and Customs Code;

7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article,
and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping
and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or
not to impose said duties.

The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or
regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund. It
is only in the lawful exercise of its power to pass upon all matters brought before it, as sanctioned by Section 7 of
Republic Act No. 1125, as amended.

This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging
the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders, revenue
memorandum circulars, rulings).

Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the decisions of
quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner of Customs, Secretary of Finance, Central
Board of Assessment Appeals, Secretary of Trade and Industry) on tax-related problems must be brought exclusively to
the Court of Tax Appeals.

In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to
resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of the said quasi-judicial agencies
should, thus, be filed before the Court of Tax Appeals.

Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 provides an exception to the original
jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or validity of tax laws or
regulations. Except for local tax cases, actions directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance may be filed directly before the Court of Tax Appeals.

Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars, or rulings),
these are issued by the Commissioner under its power to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws. Tax rulings, on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request clarification on certain provisions of the National Internal Revenue
Code, other tax laws, or their implementing regulations. Hence, the determination of the validity of these issuances
clearly falls within the exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic Act
No. 1125, as amended, subject to prior review by the Secretary of Finance, as required under Republic Act No. 8424. 55

A direct invocation of this Court's jurisdiction should only be allowed when there are special, important and compelling
reasons clearly and specifically spelled out in the petition.56

12
Nevertheless, despite the procedural infirmities of the petitions that warrant their outright dismissal, the Court deems it
prudent, if not crucial, to take cognizance of, and accordingly act on, the petitions as they assail the validity of the
actions of the CIR that affect thousands of employees in the different government agencies and instrumentalities. The
Court, following recent jurisprudence, avails itself of its judicial prerogative in order not to delay the disposition of the
case at hand and to promote the vital interest of justice. As the Court held in Bloomberry Resorts and Hotels, Inc. v.
Bureau of Internal Revenue:57

From the foregoing jurisprudential pronouncements, it would appear that in questioning the validity of the subject
revenue memorandum circular, petitioner should not have resorted directly before this Court considering that it appears
to have failed to comply with the doctrine of exhaustion of administrative remedies and the rule on hierarchy of courts,
a clear indication that the case was not yet ripe for judicial remedy. Notably, however, in addition to the justifiable
grounds relied upon by petitioner for its immediate recourse (i.e., pure question of law, patently illegal act by the BIR,
national interest, and prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not
to further delay the disposition of the issues at hand, and also to promote the vital interest of substantial justice. To add,
in recent years, this Court has consistently acted on direct actions assailing the validity of various revenue regulations,
revenue memorandum circulars, and the likes, issued by the CIR. The position we now take is more in accord with
latest jurisprudence. x x x 58

II.

Substantive

The petitions assert that the CIR's issuance of RMO No. 23-2014, particularly Sections III, IV, VI and VII thereof, is tainted
with grave abuse of discretion. "By grave abuse of discretion is meant, such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction."59 It is an evasion of a positive duty or a virtual refusal to perform a duty
enjoined by law or to act in contemplation of law as when the judgment rendered is not based on law and evidence but
on caprice, whim and despotism.60

As earlier stated, Section 4 of the NIRC of 1997, as amended, grants the CIR the power to issue rulings or opinions
interpreting the provisions of the NIRC or other tax laws. However, the CIR cannot, in the exercise of such power, issue
administrative rulings or circulars inconsistent with the law sought to be applied. Indeed, administrative issuances must
not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. 61 The courts
will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the
law they seek to apply and implement.62 Thus, in Philippine Bank of Communications v. Commissioner of Internal
Revenue,63the Court upheld the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue
because it was contrary to the express provision of Section 230 of the NIRC of 1977.

Also, in Banco de Oro v. Republic,64 the Court nullified BIR Ruling Nos. 370-2011 and DA 378-2011 because they
completely disregarded the 20 or more-lender rule added by Congress in the NIRC of 1997, as amended, and created a
distinction for government debt instruments as against those issued by private corporations when there was none in the
law.65

Conversely, if the assailed administrative rule conforms with the law sought to be implemented, the validity of said
issuance must be upheld. Thus, in The Philippine American Life and General Insurance Co. v. Secretary of Finance,66 the
Court declared valid Section 7 (c.2.2) of RR No. 06-08 and RMC No. 25-11, because they merely echoed Section 100 of
the NIRC that the amount by which the fair market value of the property exceeded the value of the consideration shall
be deemed a gift; thus, subject to donor's tax.67

In this case, the Court finds the petitions partly meritorious only insofar as Section VI of the assailed RMO is concerned.
On the other hand, the Court upholds the validity of Sections III, IV and VII thereof as these are in fealty to the provisions
of the NIRC of 1997, as amended, and its implementing rules.
13
 Sections III and IV of RMO No. 23-2014 are valid.

Compensation income is the income of the individual taxpayer arising from services rendered pursuant to an employer-
employee relationship.68 Under the NIRC of 1997, as amended, every form of compensation for services, whether paid in
cash or in kind, is generally subject to income tax and consequently to withholding tax.69 The name designated to the
compensation income received by an employee is immaterial.70 Thus, salaries, wages, emoluments and honoraria,
allowances, commissions, fees, (including director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe benefits tax under Section 33 of the
Tax Code), pensions, retirement pay, and other income of a similar nature, constitute compensation income71that are
taxable and subject to withholding.

The withholding tax system was devised for three primary reasons, namely: (1) to provide the taxpayer a convenient
manner to meet his probable income tax liability; (2) to ensure the collection of income tax which can otherwise be lost
or substantially reduced through failure to file the corresponding returns; and (3) to improve the government's cash
flow.72 This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and remedies.73

Section 79(A) of the NIRC of 1997, as amended, states:

SEC. 79. Income Tax Collected at Source. –

(A) Requirement of Withholding - Except in the case of a minimum wage earner as defined in Section 22(HH) of this
Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.74

In relation to the foregoing, Section 2.78 of RR No. 2-98,75 as amended, issued by the Secretary of Finance to implement
the withholding tax system under the NIRC of 1997, as amended, provides:

SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on compensation income is a method of
collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens
or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as
the withholding agent.76

Section 2.78.3 of RR No. 2-98 further states that the term employee "covers all employees, including officers and
employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or
any agency or instrumentality"; while an employer, as Section 2.78.4 of the same regulation provides, "embraces not
only an individual and an organization engaged in trade or business, but also includes an organization exempt from
income tax, such as charitable and religious organizations, clubs, social organizations and societies, as well as the
Government of the Philippines, including its agencies, instrumentalities, and political subdivisions."

The law is therefore clear that withholding tax on compensation applies to the Government of the Philippines, including
its agencies, instrumentalities, and political subdivisions. The Government, as an employer, is constituted as the
withholding agent, mandated to deduct, withhold and remit the corresponding tax on compensation income paid to all
its employees.

However, not all income payments to employees are subject to withholding tax. The following allowances, bonuses or
benefits, excluded by the NIRC of 1997, as amended, from the employee's compensation income, are exempt from
withholding tax on compensation:

14
1. Retirement benefits received under RA No. 7641 and those received by officials and employees of private firms,
whether individual or corporate, under a reasonable private benefit plan maintained by the employer subject to
the requirements provided by the Code [Section 32(B)(6)(a) of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(a) of RR No. 2-98];

2. Any amount received by an official or employee or by his heirs from the employer due to death, sickness or
other physical disability or for any cause beyond the control of the said official or employee, such as
retrenchment, redundancy, or cessation of business [Section 32(B)(6)(b) of the NIRC of 1997, as amended and
Section 2.78.1(B)(1)(b) of RR No. 2-98];

3. Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or non-
resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions private or public [Section 32(B)(6)(c) of the NIRC of 1997, as
amended and Section 2.78.1(B)(1)(c) of RR No. 2-98];

4. Payments of benefits due or to become due to any person residing in the Philippines under the law of the United
States administered by the United States Veterans Administration [Section 32(B)(6)(d) of the NIRC of 1997, as
amended and Section 2.78.1(B)(1)(d) of RR No. 2-98];

5. Payments of benefits made under the Social Security System Act of 1954 as amended [Section 32(B)(6)(e) of the
NIRC of 1997, as amended and Section 2.78.1(B)(1)(e) of RR No. 2-98];

6. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government
officials and employees [Section 32(B)(6)(f) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(f) of RR
No.2- 98];

7. Thirteenth (13th) month pay and other benefits received by officials and employees of public and private
entities not exceeding P82,000.00 [Section 32(B)(7)(e) of the NIRC of 1997, as amended, and Section
2.78.1(8)(11) of RR No. 2-98, as amended by RR No. 03-15];

8. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees [Section 32(B)(7)(f) of
the NIRC of 1997, as amended and Section 2.78.1(8)(12) of RR No. 2-98];

9. Remuneration paid for agricultural labor [Section 2.78.1 (B)(2) of RR No. 2-98];

10. Remuneration for domestic services [Section 28, RA No. 10361 and Section 2.78.1 (B)(3) of RR No. 2-98];

11. Remuneration for casual labor not in the course of an employer's trade or business [Section 2.78.1(8)(4) of RR
No. 2-98];

12. Remuneration not more than the statutory minimum wage and the holiday pay, overtime pay, night shift
differential pay and hazard pay received by Minimum Wage Earners [Section 24(A)(2) of the NIRC of 1997, as
amended];

13. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international
organization [Section 2.78.1(8)(5) of RR No. 2-98];

14. Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final
judgment or compromise agreement arising out of or related to an employer-employee relationship [Section
32(B)(4) of the NIRC of 1997, as amended and Section 2.78.1 (B)(6) of RR No. 2-98];

15. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether
in a single sum or otherwise, provided however, that interest payments agreed under the policy for the amounts
15
 which are held by the insured under such an agreement shall be included in the gross income [Section 32(B)(1)
of the NIRC of 1997, as amended and Section 2.78.1 (B)(7) of RR No. 2-98];

16. The amount received by the insured, as a return of premium or premiums paid by him under life insurance,
endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract [Section 32(8)(2) of the NIRC of 1997, as amended and Section
2.78.1(B)(8) of RR No. 2-98];

17. Amounts received through Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or
agreement on account of such injuries or sickness [Section 32(8)(4) of the NIRC of 1997, as amended and Section
2.78.1(8)(9) of RR No. 2-98];

18. Income of any kind to the extent required by any treaty obligation binding upon the Government of the
Philippines [Section 32(8)(5) of the NIRC of 1997, as amended and Section 2.78.1(B)(10) of RR No. 2-98];

19. Fringe and De minimis Benefits. [Section 33(C) of the NIRC of 1997, as amended); and

20. Other income received by employees which are exempt under special laws (RATA granted to public officers and
employees under the General Appropriations Act and Personnel Economic Relief Allowance granted to
government personnel).

Petitioners assert that RMO No. 23-2014 went beyond the provisions of the NIRC of 1997, as amended, insofar as
Sections III and IV thereof impose new or additional taxes to allowances, benefits or bonuses granted to government
employees. A closer look at the assailed Sections, however, reveals otherwise.

For reference, Sections III and IV of RMO No. 23-2014 read, as follows:

III. OBLIGATION TO WITHHOLD ON COMPENSATION PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES

As an employer, government offices including government-owned or controlled corporations (such as but not limited to
the Bangko Sentral ng Pilipinas, Metropolitan Waterworks and Sewerage System, Philippine Deposit Insurance
Corporation, Government Service Insurance System, Social Security System), as well as provincial, city and municipal
governments are constituted as withholding agents for purposes of the creditable tax required to be withheld from
compensation paid for services of its employees.

Under Section 32(A) of the NIRC of 1997, as amended, compensation for services, in whatever form paid and no matter
how called, form part of gross income. Compensation income includes, among others, salaries, fees, wages, emoluments
and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including
director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and
fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the NIRC; taxable pensions
and retirement pay; and other income of a similar nature.

The foregoing also includes allowances, bonuses, and other benefits of similar nature received by officials and
employees of the Government of the Republic of the Philippines or any of its branches, agencies and instrumentalities,
its political subdivisions, including government-owned and/or controlled corporations (herein referred to as officials and
employees in the public sector) which are composed of (but are not limited to) the following:

A. Allowances, bonuses, honoraria or benefits received by employees and officials in the Legislative Branch,
such as anniversary bonus, Special Technical Assistance Allowance, Efficiency Incentive Benefits,
Additional Food Subsidy, Eight[h] (8th) Salary Range Level Allowance, Hospitalization Benefits, Medical

16
 Allowance, Clothing Allowance, Longevity Pay, Food Subsidy, Transition Allowance, Cost of Living
Allowance, Inflationary Adjustment Assistance, Mid-Year Economic Assistance, Financial Relief
Assistance, Grocery Allowance, Thirteenth (13th Month Pay, Cash Gift and Productivity Incentive Benefit
and other allowances, bonuses and benefits given by the Philippine Senate and House of
Representatives to their officials and employees, subject to the exemptions enumerated herein.

B. Allowances, bonuses, honoraria or benefits received by employees and officials in the Judicial Branch,
such as the Additional Compensation (ADCOM), Extraordinary and Miscellaneous Expenses (EME),
Monthly Special Allowance from the Special Allowance for the Judiciary, Additional Cost of Living
Allowance from the Judiciary Development Fund, Productivity Incentive Benefit, Grocery Allowance,
Clothing Allowance, Emergency Economic Allowance, Year-End Bonus, Cash Gift, Loyalty Cash Award
(Milestone Bonus), SC Christmas Allowance, anniversary bonuses and other allowances, bonuses and
benefits given by the Supreme Court of the Philippines and all other courts and offices under the Judicial
Branch to their officials and employees, subject to the exemptions enumerated herein.

C. Compensation for services in whatever form paid, including, but not limited to allowances, bonuses,
honoraria or benefits received by employees and officials in the Constitutional bodies (Commission on
Election, Commission on Audit, Civil Service Commission) and the Office of the Ombudsman, subject to
the exemptions enumerated herein.

D. Allowances, bonuses, honoraria or benefits received by employees and officials in the Executive Branch,
such as the Productivity Enhancement Incentive (PEI), Performance-Based Bonus, anniversary bonus and
other allowances, bonuses and benefits given by the departments, agencies and other offices under the
Executive Branch to their officials and employees, subject to the exemptions enumerated herein.

Any amount paid either as advances or reimbursements for expenses incurred or reasonably expected to be incurred by
the official and employee in the performance of his/her duties are not compensation subject to withholding, if the
following conditions are satisfied:

1. The employee was duly authorized to incur such expenses on behalf of the government; and

2. Compliance with pertinent laws and regulations on accounting and liquidation of advances and
reimbursements, including, but not limited to withholding tax rules. The expenses should be duly
receipted for and in the name of the government office concerned.

Other than those pertaining to intelligence funds duly appropriated and liquidated, any amount not in compliance with
the foregoing requirements shall be considered as part of the gross taxable compensation income of the taxpayer.
Intelligence funds not duly appropriated and not properly liquidated shall form part of the compensation of the
government officials/personnel concerned, unless returned.

IV. NON-TAXABLE COMPENSATION INCOME – Subject to existing laws and issuances, the following income received by
the officials and employees in the public sector are not subject to income tax and withholding tax on compensation:

A.
A. Thirteenth (13th Month Pay and Other Benefits not exceeding Thirty Thousand Pesos (P30,000.00) paid
or accrued during the year. Any amount exceeding Thirty Thousand Pesos (P30,000.00) are taxable
compensation. This includes:

1. Benefits received by officials and employees of the national and local government pursuant to
Republic Act no. 6686 ("An Act Authorizing Annual Christmas Bonus to National and Local
Government Officials and Employees Starting CY 1998");

17
 2. Benefits received by employees pursuant to Presidential Decree No. 851 ("Requiring All
Employers to Pay Their Employees a 13th Month Pay"), as amended by Memorandum Order No.
28, dated August 13, 1986;

3. Benefits received by officials and employees not covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 19, 1986;

4. Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gift in cash
or in kind and other benefits of similar nature actually received by officials and employees of
government offices, including the additional compensation allowance (ACA) granted and paid to
all officials and employees of the National Government Agencies (NGAs) including state
universities and colleges (SUCs), government-owned and/or controlled corporations (GOCCs),
government financial institutions (GFIs) and Local Government Units (LGUs).

B. Facilities and privileges of relatively small value or "De Minimis Benefits" as defined in existing issuances
and conforming to the ceilings prescribed therein;

C. Fringe benefits which are subject to the fringe benefits tax under Section 33 of the NIRC, as amended;

D. Representation and Transportation Allowance (RATA) granted to public officers and employees under
the General Appropriations Act;

E. Personnel Economic Relief Allowance (PERA) granted to government personnel;

F. The monetized value of leave credits paid to government officials and employees;

G. Mandatory/compulsory GSIS, Medicare and Pag-Ibig Contributions, provided that, voluntary

contributions to these institutions in excess of the amount considered mandatory/compulsory are not
excludible from the gross income of the taxpayer and hence, not exempt from Income Tax and
Withholding Tax;

H. Union dues of individual employees;

I. Compensation income of employees in the public sector with compensation income of not more than
the Statutory Minimum Wage (SMW) in the non-agricultural sector applicable to the place where he/she
is assigned;

J. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by Minimum Wage
Earners (MWEs);

K. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity/benefits received
by government officials and employees under pertinent retirement laws;

L. All other benefits given which are not included in the above enumeration but are exempted from
income tax as well as withholding tax on compensation under existing laws, as confirmed by BIR.77

Clearly, Sections III and IV of the assailed RMO do not charge any new or additional tax. On the contrary, they merely
mirror the relevant provisions of the NIRC of 1997, as amended, and its implementing rules on the withholding tax on
compensation income as discussed above. The assailed Sections simply reinforce the rule that every form of
compensation for personal services received by all employees arising from employer-employee relationship is deemed
subject to income tax and, consequently, to withholding tax,78 unless specifically exempted or excluded by the Tax Code;

18
and the duty of the Government, as an employer, to withhold and remit the correct amount of withholding taxes due
thereon.

While Section III enumerates certain allowances which may be subject to withholding tax, it does not exclude the
possibility that these allowances may fall under the exemptions identified under Section IV – thus, the phrase, "subject
to the exemptions enumerated herein." In other words, Sections III and IV articulate in a general and broad language the
provisions of the NIRC of 1997, as amended, on the forms of compensation income deemed subject to withholding tax
and the allowances, bonuses and benefits exempted therefrom. Thus, Sections III and IV cannot be said to have been
issued by the CIR with grave abuse of discretion as these are fully in accordance with the provisions of the NIRC of 1997,
as amended, and its implementing rules.

Furthermore, the Court finds untenable petitioners' contention that the assailed provisions of RMO No. 23-2014
contravene the equal protection clause, fiscal autonomy, and the rule on non-diminution of benefits.

The constitutional guarantee of equal protection is not violated by an executive issuance which was issued to simply
reinforce existing taxes applicable to both the private and public sector. As discussed, the withholding tax system
embraces not only private individuals, organizations and corporations, but also covers organizations exempt from
income tax, including the Government of the Philippines, its agencies, instrumentalities, and political subdivisions. While
the assailed RMO is a directive to the Government, as a reminder of its obligation as a withholding agent, it did not, in
any manner or form, alter or amend the provisions of the Tax Code, for or against the Government or its employees.

Moreover, the fiscal autonomy enjoyed by the Judiciary, Ombudsman, and Constitutional Commissions, as envisioned in
the Constitution, does not grant immunity or exemption from the common burden of paying taxes imposed by law. To
borrow former Chief Justice Corona's words in his Separate Opinion in Francisco, Jr. v. House of Representatives,79 "fiscal
autonomy entails freedom from outside control and limitations, other than those provided by law. It is the freedom to
allocate and utilize funds granted by law, in accordance with law and pursuant to the wisdom and dispatch its needs
may require from time to time."80

It bears to emphasize the Court's ruling in Nitafan v. Commissioner of Internal Revenue81 that the imposition of taxes on
salaries of Judges does not result in diminution of benefits. This applies to all government employees because the intent
of the framers of the Organic Law and of the people adopting it is "that all citizens should bear their aliquot part of the
cost of maintaining the government and should share the burden of general income taxation equitably."82

Determination of existence of fringe benefits is a question of fact.

Petitioners, nonetheless, insist that the allowances, bonuses and benefits enumerated in Section III of the assailed RMO
are, in fact, fringe and de minimis benefits exempt from withholding tax on compensation. The Court cannot, however,
rule on this issue as it is essentially a question of fact that cannot be determined in this petition questioning the
constitutionality of the RMO.

To be sure, settled is the rule that exemptions from tax are construed strictissimi juris against the taxpayer and liberally
in favor of the taxing authority.83 One who claims tax exemption must point to a specific provision of law conferring, in
clear and plain terms, exemption from the common burden84 and prove, through substantial evidence, that it is, in fact,
covered by the exemption so claimed.85 The determination, therefore, of the merits of petitioners' claim for tax
exemption would necessarily require the resolution of both legal and factual issues, which this Court, not being a trier of
facts, has no jurisdiction to do; more so, in a petition filed at first instance.

Among the factual issues that need to be resolved, at the first instance, is the nature of the fringe benefits granted to
employees. The NIRC of 1997, as amended, does not impose income tax, and consequently a withholding tax, on
payments to employees which are either (a) required by the nature of, or necessary to, the business of the employer; or
19
(b) for the convenience or advantage of the employer.86 This, however, requires proper documentation. Without any
documentary proof that the payment ultimately redounded to the benefit of the employer, the same shall be
considered as a taxable benefit to the employee, and hence subject to withholding taxes.87

Another factual issue that needs to be confirmed is the recipient of the alleged fringe benefit. Fringe benefits furnished
or granted, in cash or in kind, by an employer to its managerial or supervisory employees, are not considered part of
compensation income; thus, exempt from withholding tax on compensation.88 Instead, these fringe benefits are subject
to a fringe benefit tax equivalent to 32% of the grossed-up monetary value of the benefit, which the employer is legally
required to pay.89 On the other hand, fringe benefits given to rank and file employees, while exempt from fringe benefit
tax,90form part of compensation income taxable under the regular income tax rates provided in Section 24(A)(2) of the
NIRC, of 1997, as amended;91 and consequently, subject to withholding tax on compensation.

Furthermore, fringe benefits of relatively small value furnished by the employer to his employees (both
managerial/supervisory and rank and file) as a means of promoting health, goodwill, contentment, or efficiency,
otherwise known as de minimis benefits, that are exempt from both income tax on compensation and fringe benefit tax;
hence, not subject to withholding tax,92 are limited and exclusive only to those enumerated under RR No. 3-98, as
amended.93 All other benefits given by the employer which are not included in the said list, although of relatively small
value, shall not be considered as de minimis benefits; hence, shall be subject to income tax as well as withholding tax on
compensation income, for rank and file employees, or fringe benefits tax for managerial and supervisory employees, as
the case may be.94

Based on the foregoing, it is clear that to completely determine the merits of petitioners' claimed exemption from
withholding tax on compensation, under Section 33 of the NIRC of 1997, there is a need to confirm several factual
issues. As such, petitioners cannot but first resort to the proper courts and administrative agencies which are better
equipped for said task.

All told, the Court finds Sections III and IV of the assailed RMO valid. The NIRC of 1997, as amended, is clear that all
forms of compensation income received by the employee from his employer are presumed taxable and subject to
withholding taxes. The Government of the Philippines, its agencies, instrumentalities, and political subdivisions, as an
employer, is required by law to withhold and remit to the BIR the appropriate taxes due thereon. Any claims of
exemption from withholding taxes by an employee, as in the case of petitioners, must be brought and resolved in the
appropriate administrative and judicial proceeding, with the employee having the burden to prove the factual and legal
bases thereof.

Section VII of RMO No. 23-2014 is valid; Section VI contravenes, in part, the provisions of the NIRC of 1997, as amended,
and its implementing rules.

Petitioners claim that RMO No. 23-2014 is ultra vires insofar as Sections VI and VII thereof define new offenses and
prescribe penalties therefor, particularly upon government officials.

The NIRC of 1997, as amended, clearly provides the offenses and penalties relevant to the obligation of the withholding
agent to deduct, withhold and remit the correct amount of withholding taxes on compensation income, to wit:

TITLE X
Statutory Offenses and Penalties

CHAPTER I
Additions to the Tax

SEC. 247. General Provisions. –

20
(a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes, fees and charges imposed
in this Code. The amount so added to the tax shall be collected at the same time, in the same manner and as part of the
tax.

(b) If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a
government owned or -controlled corporation, the employee thereof responsible for the withholding and remittance of
the tax shall be personally liable for the additions to the tax prescribed herein.

(c) The term "person", as used in this Chapter, includes an officer or employee of a corporation who as such officer,
employee or member is under a duty to perform the act in respect of which the violation occurs.

SEC. 248. Civil Penalties. — x x x95

SEC. 249. Interest. – x x x96

xxxx

SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. – Any person required to withhold, account for, and
remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and remit such tax, or aids
or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for
under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted.97

SEC. 252. Failure of a Withholding Agent to Refund Excess Withholding Tax. – Any employer/withholding agent who fails
or refuses to refund excess withholding tax shall, in addition to the penalties provided in this Title, be liable to a penalty
equal to the total amount of refunds which was not refunded to the employee resulting from any excess of the amount
withheld over the tax actually due on their return.

CHAPTER II
Crimes, Other Offenses and Forfeitures

xxxx

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund
Excess Taxes Withheld on Compensation. – Any person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return, keep any record, or supply correct and accurate information,
who willfully fails to pay such tax, make such return, keep such record, or supply such correct and accurate information,
or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by
law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished
by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (l) year but not
more than ten (10) years.

CHAPTER III
Penalties Imposed on Public Officers

xxxx

SEC. 272. Violation of Withholding Tax Provision. – Every officer or employee of the Government of the Republic of the
Philippines or any of its agencies and instrumentalities, its political subdivisions, as well as government-owned or -
controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who, under the provisions of this Code or rules
and regulations promulgated thereunder, is charged with the duty to deduct and withhold any internal revenue tax and
21
to remit the same in accordance with the provisions of this Code and other laws is guilty of any offense hereinbelow
specified shall, upon conviction for each act or omission be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six (6) months and
one day (1) but not more than two (2) years, or both:

(a) Failing or causing the failure to deduct and withhold any internal revenue tax under any of the withholding tax laws
and implementing rules and regulations;

(b) Failing or causing the failure to remit taxes deducted and withheld within the time prescribed by law, and
implementing rules and regulations; and

(c) Failing or causing the failure to file return or statement within the time prescribed, o rendering or furnishing a false
or fraudulent return or statement required under the withholding tax laws and rules and regulations.98

Based on the foregoing, and similar to Sections III and IV of the assailed RMO, the Court finds that Section VII thereof
was issued in accordance with the provisions of the NIRC of 1997, as amended, and RR No. 2-98. For easy reference,
Section VII of RMO No. 23-2014 states:

VII. PENALTY PROVISION

In case of non-compliance with their obligation as withholding agents, the abovementioned persons shall be liable for
the following sanctions:

A. Failure to Collect and Remit Taxes (Section 251, NIRC) "Any person required to withhold, account for,
and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and
remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in
addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal
to the total amount of the tax not withheld, or not accounted for and remitted."

B. Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and Remit Tax and
Refund Excess Taxes Withheld on Compensation (Section 255, NIRC) "Any person required under this
Code or by rules and regulations promulgated thereunder to pay any tax make a return, keep any
record, or supply correct the accurate information, who willfully fails to pay such tax, make such return,
keep such record, or supply correct and accurate information, or withhold or remit taxes withheld, or
refund excess taxes withheld on compensation, at the time or times required by law or rules and
regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished
by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1)
year but not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in fact filed a return
or statement, or actually files a return or statement and subsequently withdraws the same return or
statement after securing the official receiving seal or stamp of receipt of internal revenue office wherein
the same was actually filed shall, upon conviction therefor, be punished by a fine of not less than Ten
thousand pesos (P10,000) but not more than Twenty thousand pesos (P20,000) and suffer imprisonment
of not less than one (1) year but not more than three (3) years."

C. Violation of Withholding Tax Provisions (Section 272, NIRC)

"Every officer or employee of the Government of the Republic of the Philippines or any of its agencies and
instrumentalities, its political subdivisions, as well as government-owned or controlled corporations, including the
Bangko Sentral ng Pilipinas (BSP), who is charged with the duty to deduct and withhold any internal revenue tax and to
22
remit the same is guilty of any offense herein below specified shall, upon conviction for each act or omission be
punished by a fine of not less than Five thousand pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or
suffer imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or both:

1. Failing or causing the failure to deduct and withhold any internal revenue tax under any of the
withholding tax laws and implementing rules and regulations; or

2. Failing or causing the failure to remit taxes deducted and withheld within the time prescribed by
law, and implementing rules and regulations; or

3. Failing or causing the failure to file return or statement within the time prescribed, or rendering
or furnishing a false or fraudulent return or statement required under the withholding tax laws
and rules and regulations."

All revenue officials and employees concerned shall take measures to ensure the full enforcement of the provisions of
this Order and in case of any violation thereof, shall commence the appropriate legal action against the erring
withholding agent.

Verily, tested against the provisions of the NIRC of 1997, as amended, Section VII of RMO No. 23-2014 does not define a
crime and prescribe a penalty therefor. Section VII simply mirrors the relevant provisions of the NIRC of 1997, as
amended, on the penalties for the failure of the withholding agent to withhold and remit the correct amount of taxes, as
implemented by RR No. 2-98.

However, with respect to Section VI of the assailed RMO, the Court finds that the CIR overstepped the boundaries of its
authority to interpret existing provisions of the NIRC of 1997, as amended.

Section VI of RMO No. 23-2014 reads:

VI. PERSONS RESPONSIBLE FOR WITHHOLDING

The following officials are duty bound to deduct, withhold and remit taxes:

a) For Office of the Provincial Government-province- the Chief Accountant, Provincial Treasurer and the Governor;

b) For Office of the City Government-cities- the Chief Accountant, City Treasurer and the City Mayor;

c) For Office of the Municipal Government-municipalities- the Chief Accountant, Municipal Treasurer and the Mayor;

d) Office of the Barangay-Barangay Treasurer and Barangay Captain

e) For NGAs, GOCCs and other Government Offices, the Chief Accountant and the Head of Office or the Official holding
the highest position (such as the President, Chief Executive Officer, Governor, General Manager).

23
To recall, the Government of the Philippines, or any political subdivision or agency thereof, or any GOCC, as an
employer, is constituted by law as the withholding agent, mandated to deduct, withhold and remit the correct amount
of taxes on the compensation income received by its employees. In relation thereto, Section 82 of the NIRC of 1997, as
amended, states that the return of the amount deducted and withheld upon any wage paid to government employees
shall be made by the officer or employee having control of the payments or by any officer or employee duly designated
for such purpose.99 Consequently, RR No. 2-98 identifies the Provincial Treasurer in provinces, the City Treasurer in cities,
the Municipal Treasurer in municipalities, Barangay Treasurer in barangays, Treasurers of government-owned or -
controlled corporations (GOCCs), and the Chief Accountant or any person holding similar position and performing similar
function in national government offices, as persons required to deduct and withhold the appropriate taxes on the
income payments made by the government.100

However, nowhere in the NIRC of 1997, as amended, or in RR No. 2-98, as amended, would one find the Provincial
Governor, Mayor, Barangay Captain and the Head of Government Office or the "Official holding the highest position
(such as the President, Chief Executive Officer, Governor, General Manager)" in an Agency or GOCC as one of the
officials required to deduct, withhold and remit the correct amount of withholding taxes. The CIR, in imposing upon
these officials the obligation not found in law nor in the implementing rules, did not merely issue an interpretative rule
designed to provide guidelines to the law which it is in charge of enforcing; but instead, supplanted details thereon — a
power duly vested by law only to respondent Secretary of Finance under Section 244 of the NIRC of 1997, as amended.

Moreover, respondents' allusion to previous issuances of the Secretary of Finance designating the Governor in
provinces, the City Mayor in cities, the Municipal Mayor in municipalities, the Barangay Captain in barangays, and the
Head of Office (official holding the highest position) in departments, bureaus, agencies, instrumentalities, government-
owned or -controlled corporations, and other government offices, as officers required to deduct and withhold,101 is
bereft of legal basis. Since the 1977 NIRC and Executive Order No. 651, which allegedly breathed life to these issuances,
have already been repealed with the enactment of the NIRC of 1997, as amended, and RR No. 2-98, these previous
issuances of the Secretary of Finance have ceased to have the force and effect of law.

Accordingly, the Court finds that the CIR gravely abused its discretion in issuing Section VI of RMO No. 23-2014 insofar as
it includes the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of Office in agencies, GOCCs, and
other government offices, as persons required to withhold and remit withholding taxes, as they are not among those
officials designated by the 1997 NIRC, as amended, and its implementing rules.

Petition for Mandamus is moot and academic.

As regards the prayer for the issuance of a writ of mandamus to compel respondents to increase the P30,000.00 non-
taxable income ceiling, the same has already been rendered moot and academic due to the enactment of RA No.
10653.102

The Court takes judicial notice of RA No. 10653, which was signed into law on February 12, 2015, which increased the
income tax exemption for 13th month pay and other benefits, under Section 32(B)(7)(e) of the NIRC of 1997, as
amended, from P30,000.00 to P82,000.00.103 Said law also states that every three (3) years after the effectivity of said
Act, the President of the Philippines shall adjust the amount stated therein to its present value using the Consumer Price
Index, as published by the National Statistics Office.104

Recently, RA No. 10963,105 otherwise known as the "Tax Reform for Acceleration and Inclusion (TRAIN)" Act, further
increased the income tax exemption for 13th month pay and other benefits to P90,000.00.106

A case is considered moot and academic if it ceases to present a justiciable controversy by virtue of supervening events,
so that an adjudication of the case or a declaration on the issue would be of no practical value or use. Courts generally
decline jurisdiction over such case or dismiss it on the ground of mootness.107
24
With the enactment of RA Nos. 10653 and 10963, which not only increased the tax exemption ceiling for 13th month pay
and other benefits, as petitioners prayed, but also conferred upon the President the power to adjust said amount, a
supervening event has transpired that rendered the resolution of the issue on whether mandamus lies against
respondents, of no practical value. Accordingly, the petition for mandamus should be dismissed for being moot and
academic.

As a final point, the Court cannot turn a blind eye to the adverse effects of this Decision on ordinary government
employees, including petitioners herein, who relied in good faith on the belief that the appropriate taxes on all the
income they receive from their respective employers are withheld and paid. Nor does the Court ignore the situation of
the relevant officers of the different departments of government that had believed, in good faith, that there was no
need to withhold the taxes due on the compensation received by said ordinary government employees. Thus, as a
measure of equity and compassionate social justice, the Court deems it proper to clarify and declare, pro hac vice, that
its ruling on the validity of Sections III and IV of the assailed RMO is to be given only prospective effect.108

WHEREFORE, premises considered, the Petitions and Petitions-in Interventions are PARTIALLY GRANTED. Section VI of
Revenue Memorandum Order No. 23-2014 is DECLARED null and void insofar as it names the Governor, City Mayor,
Municipal Mayor, Barangay Captain, and Heads of Office in government agencies, government-owned or -controlled
corporations, and other government offices, as persons required to withhold and remit withholding taxes.

Sections III, IV and VII of RMO No. 23-2014 are DECLARED valid inasmuch as they merely mirror the provisions of the
National Internal Revenue Code of 1997, as amended. However, the Court cannot rule on petitioners' claims of
exemption from withholding tax on compensation income because these involve issues that are essentially factual or
evidentiary in nature, which must be raised in the appropriate administrative and/or judicial proceeding.

The Court's Decision upholding the validity of Sections III and IV of the assailed RMO is to be applied only prospectively.

Finally, the Petition for Mandamus in G.R. No. 213446 is hereby DENIED on the ground of mootness.

SO ORDERED.

25
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-9692 January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.

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

MONTEMAYOR, J.:

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

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

According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called,
"Joint Emergency Operation", was to economize in overhead expenses; that by means of said joint operation, both
companies had been able to save the salaries of one manager, one assistant manager, fifteen inspectors, special agents,
and one set of office of clerical force, the savings in one year amounting to about P200,000 or about P100,000 for each
company. At the end of each calendar year, all gross receipts and expenses of both companies were determined and the
26
net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then
prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and
liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon
separately".

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

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

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

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

The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et
al., vs. Collector of Internal Revenue et al.,* G.R. No. L-9996, promulgated on October 15, 1957. Considering the views
and rulings embodied in our decision in that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to
extensively discuss the point. Briefly, the facts in that case are as follows: The three Evangelista sisters borrowed from
their father about P59,000 and adding thereto their own personal funds, bought real properties, such as a lot with
improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters with
27
improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000
in the same year. The relatively large amounts invested may be explained by the fact that purchases were made during
the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters appointed their brother to manage
their properties, with full power to lease, to collect and receive rents, on default of such payment, to bring suits against
the defaulting tenants, to sign all letters and contracts, etc. The properties therein involved were rented to various
tenants, and the sisters, through their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in
1946, and P12,615 in 1948.

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

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

From the standpoint of the income tax law, this procedure and practice of determining the net income of each company
was arbitrary and unwarranted, disregarding as it did the real facts in the case. There can be no question that the
receipts and gross expenses of two, distinct and separate companies operating different lines and in some cases,
different territories, and different equipment and personnel at least in value and in the amount of salaries, can at the
end of each year be equal or even approach equality. Those familiar with the operation of the business of land
transportation can readily see that there are many factors that enter into said operation. Much depends upon the
number of lines operated and the length of each line, including the number of trips made each day. Some lines are
profitable, others break above even, while still others are operated at a loss, at least for a time, depending, of course,
upon the volume of traffic, both passenger and freight. In some lines, the operator may enjoy a more or less exclusive
exclusive operation, while in others, the competition is intense, sometimes even what they call "cutthroat competition".
Sometimes, the operator is involved in litigation, not only as the result of money claims based on physical injuries ar
deaths occassioned by accidents or collisions, but litigations before the Public Service Commission, initiated by the
operator itself to acquire new lines or additional service and equipment on the lines already existing, or litigations forced
28
upon said operator by its competitors. Said litigation causes expense to the operator. At other times, operator is
denounced by competitors before the Public Service Commission for violation of its franchise or franchises, for making
unauthorized trips, for temporary abandonement of said lines or of scheduled trips, etc. In view of this, and considering
that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different provinces or
territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to
say that the end of each year, the gross receipts and income in the gross expenses of two companies are exactly the
same for purposes of the payment of income tax. What was actually done in this case was that, although no legal
personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation
joint venture, or joint management operated the business affairs of the two companies as though they constituted a
single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.

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

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

The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors
committed by its agents and tax collectors in making tax assessments, specially when due to a misinterpretation or
application of the tax laws, more so when done in good faith; that the tax laws provide for a prescriptive period within
which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the
Government, and that if the Collector of Internal Revenue is not allowed to amend his assessment before the Court of
Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of
his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which
the law does not encourage; that since the Collector of Internal Revenue, in modifying his assessment, may not only
increase the same, but may also reduce it, if he finds that he has committed an error against the taxpayer, and may even
make refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the
Court of Tax Appeals partakes of a trial de novoand the Tax Court is authorized to receive evidence, summon witnesses,
and give both parties, the Government and the taxpayer, opportunity to present and argue their sides, so that the true
29
and correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or
reduction of the assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that
pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed
assessment, as he has done in the present case.

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

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

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

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

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

TakE NOTE OF EVANGELISTA CASE

30
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA
B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney
Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding
that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of the
deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for the years
1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958,
subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No.
2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for reconsideration of
said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five
children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed administrator of the
estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted
the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the
project of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of
said minors. On November 14, 1949, the Court appointed him guardian of the persons and property of
the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-
half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total
31
assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death of
the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00
(t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the administrator
thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of
the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the properties remained under the management of Lorenzo
T. Oña who used said properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in
1956 as can be gleaned from the following year-end balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from installment sales
of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p.
32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T.
Oña where the corresponding shares of the petitioners in the net income for the year are also known.
Every year, petitioners returned for income tax purposes their shares in the net income derived from
said properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-
26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40,
98, 100). The income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out,
invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
32
 pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested
against the assessment and asked for reconsideration of the ruling of respondent that they have formed
an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit
17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the
questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years. (See Exh. 17,
page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF
THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

33
 THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE
INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE

COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME
TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax
Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased Julia
Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed an
unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2)
Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted to them upon the
security of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the
total income thereof should be considered as that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should not the various amounts already paid by
them for the same years 1955 and 1956 as individual income taxes on their respective shares of the profits accruing
from the properties they owned in common be deducted from the deficiency corporate taxes, herein involved, assessed
against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early as
May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since those
dates admittedly under the administration or management of the head of the family, the widower and father Lorenzo T.
Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having
formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier assessment had
already been made. Such being the case, and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the
project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used
said properties in business by leasing or selling them and investing the income derived therefrom and the proceed from
the sales thereof in real properties and securities," as a result of which said properties and investments steadily
increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these
became possible because, admittedly, petitioners never actually received any share of the income or profits from
Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the common fund for their
34
ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the profits of their
common business as reported by the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the
purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of
the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in
undertaking several transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners
rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the
partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status
as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of anyone chosen by them and engage in business
on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent
and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants
therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found already
in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to argue
therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided, there
can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited properties
is automatically converted into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple.
From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and
the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition,
he allows his share to be held in common with his co-heirs under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of
gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived," and, for that matter, on any other provision of said
code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships
under the Civil Code from that of unregistered partnerships which are considered as "corporations" under Sections 24
and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this
point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
35
 among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships therein referred
to. In fact, as above stated, "duly registered general co-partnerships" — which are possessed of the
aforementioned personality — have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

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

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

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

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-24020-
21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in
question, of their inherited properties from those acquired by them subsequently, We consider as justified the following
ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by petitioners.
In other words, the taxable income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not include the income
derived from the inherited properties. It is admitted that the inherited properties and the income
derived therefrom were used in the business of buying and selling other real properties and corporate

36
 securities. Accordingly, the partnership income must include not only the income derived from the
purchase and sale of other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the
moment their respective known shares are used as part of the common assets of the heirs to be used in making profits,
it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently, the
court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be taxed as
such, it might be recalled that the petitioners in their individual income tax returns
reported their shares of the profits of the unregistered partnership. We think it only fair
and equitable that the various amounts paid by the individual petitioners as income tax
on their respective shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the unregistered
partnership. (page 7, Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits. This is
not correct; rather, it should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income tax assessed against the
partnership. Consequently, each of the petitioners in his individual capacity overpaid his income tax for
the years in question, but the income tax due from the partnership has been correctly assessed. Since
the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for
the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual
income tax cannot be credited as part payment of the taxes herein in question. It is argued that to sanction the view of
the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do not agree. As We see it, the case of petitioners as regards the
point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the
corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case of herein petitioners has
already lapsed, it would not seem right to virtually disregard prescription merely upon the ground that the reason for
the delay is precisely because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not
exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs against
petitioners.

37
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had
acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on
March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were co-
owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a
mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit
of P134,336, in addition to the tax on capital gains already paid by them.

38
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture
within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co.,
102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit
among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as
partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged
in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which
was in the nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any property from which the
returns are derived". There must be an unmistakable intention to form a partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small
amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won
the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

39
 Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to
the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-
indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or
expand the inherited properties; they merely continued dedicating the property to the use to which it
had been put by their forebears; they individually reported in their tax returns their corresponding
shares in the income and expenses of the 'hacienda', and they continued for many years the status of
co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to
continue the existing contractual relations with the Central Azucarera de Bais for milling purposes.
Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the
income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961,
cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-
heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was
held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a
lot and building, entrusted the administration of the building to an administrator and divided equally the net income,
and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four
pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in
these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might
have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

40
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the
issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968
toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid
by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed
and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and
1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties
way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual income tax; and that the availment of
tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities
but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to
pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due
course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by
respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by
petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this
case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax
under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
41
 A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN

UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD
BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with full power to
lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years
and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of
income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

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

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

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

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

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
42
 petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:

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

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

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

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

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

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

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner
and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners
purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

43
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when
they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three
(3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the management of
one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case
at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp.
635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital, and
no community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
44
 In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole
property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole
property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in
the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid
obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual
taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30,
1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate
income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

THIRD DIVISION

[G.R. No. 112675. January 25, 1999]

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.;
DEVELOPMENT INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES;
EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY &
SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS INSURANCE CO., INC.; GOVERNMENT SERVICE
INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.; MERCANTILE
45
 INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION;
NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT
INSURANCE CORPORATION; PEOPLES TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT
INSURANCE COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-
EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE
BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC.all
assessed as POOL OF MACHINERY INSURERS, petitioners, vs. COURT OF APPEALS, COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION
PANGANIBAN, J.:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a pool in order to
facilitate the handling of business contracted with a nonresident foreign reinsurance company. May the clearing house
or insurance pool so formed be deemed a partnership or an association that is taxable as a corporation under the
National Internal Revenue Code (NIRC)? Should the pools remittances to the member companies and to the said foreign
firm be taxable as dividends? Under the facts of this case, has the governments right to assess and collect said tax
prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11,
1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which dismissed petitioners appeal of the October 19, 1992
Decision[3] of the Court of Tax Appeals[4] (CTA) which had previously sustained petitioners liability for deficiency income
tax, interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioners.[5]

The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon
issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the
petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return of
Organization Exempt from Income Tax for the year ending in 1975, on the basis of which it was assessed by the
Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in
46
the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These
assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed as
Pool of Machinery Insurers, to pay deficiency income tax, interest, and with[h]olding tax, itemized as follows:

Net income per information

return P3,737,370.00

===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========

Dividend paid to Munich

Reinsurance Company P3,728,412.00
===========

35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========

Dividend paid to Pool Members P 655,636.00

===========

10% withholding tax at

source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that
the latters collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because the taxpayer cannot
be located at the address given in the information return filed. Hence, this Petition for Review before us.[9]

47
The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative functions, and which
did not insure or assume any risk in its own name, was a partnership or association subject to tax as a corporation;

2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums,
pertaining to their individual and separate contracts of reinsurance, were dividends subject to tax; and

3.Whether or not the respondent Commissioners right to assess the Clearing House had already prescribed.[10]

The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a
corporation, and that the governments right to assess and collect the taxes had not prescribed.

First Issue:
Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were
written by them individually and separately, and that their liability was limited to the extent of their allocated share in
the original risks thus reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited to its
principal function of allocating and distributing the risk(s) arising from the original insurance among the signatories to
the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of
incidental functions, such as records, maintenance, collection and custody of funds, etc.[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same
risk or solidary liability;[14] (2) there was no common fund;[15] (3) the executive board of the pool did not exercise control
and management of its funds, unlike the board of directors of a corporation;[16] and (4) the pool or clearing house was
not and could not possibly have engaged in the business of reinsurance from which it could have derived income for
itself.[17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with
the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently
wrong,[18] particularly in this case where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the
Court of Appeals.[19] Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such
as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration
of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of its authority.[20]

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:

48
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every corporation organized in, or existing under the laws
of the Philippines, no matter how created or organized, but not including duly registered general co-partnership
(compaias colectivas), general professional partnerships, private educational institutions, and building and loan
associations xxx.

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them
such as unregistered partnerships and associations. Parenthetically, the NLRCs inclusion of such entities in the tax on
corporations was made even clearer by the Tax Reform Act of 1997,[21] which amended the Tax Code. Pertinent
provisions of the new law read as follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed
upon the taxable income derived during each taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.

SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not
include general professional partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract without the Government. General
professional partnerships are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual
members.[23] The Court of Appeals astutely applied Evangelista:[24]

xxx Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation
for purposes of the tax in sec. 24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme
Court said:

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

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.[25] Its requisites are: (1) mutual contribution to a common stock, and (2) a joint interest in the
profits.[26] In other words, a partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves.[27] Meanwhile, an association implies
associates who enter into a joint enterprise x x x for the transaction of business.[28]
In the case before us, the ceding companies entered into a Pool Agreement[29] or an association[30] that would
handle all the insurance businesses covered under their quota-share reinsurance treaty[31] and surplus reinsurance

49
treaty[32]with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and
credit of the pool.[33] This common fund pays for the administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The ceding companies share in the
business ceded to the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement.[36] Profit motive or business is, therefore, the primordial reason for the pools formation. As
aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of
the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the transaction of the business. x x x If together they have
conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that profit actually
resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts obtaining therein are not on
all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took
up only two isolated transactions.[39] The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.

Second Issue:
Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the
hands of the same taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add that even if such
remittances were treated as dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed
only once. That is, xxx taxing the same person twice by the same jurisdiction for the same thing.[46] In the instant case,
the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven
and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or
right.[47] Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the subject information
return for the year ending 1975 was filed.

50
 Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance by any company that has already paid the
tax xxx. This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct
from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their
own.
On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based
solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest
from a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance Treaty and Articles 3[51] and 10[52] of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption
must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to
be mistaken.[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in
effect.[54] Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial
notice that it took effect only later, on December 14, 1984.[55]

Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had prescribed. They claim
that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27,
1981. Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already
lapsed, and that the internal revenue commissioner was already barred by prescription from making an assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled
under then Section 333 of the NIRC,[57] because the taxpayer cannot be located at the address given in the information
return filed and for which reason there was delay in sending the assessment.[58] Indeed, whether the governments right
to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court
must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pools information return filed in 1980 indicated therein its present
address. The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

51
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner,

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

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under the laws
of Japan and duly licensed to engage in business under Philippine laws with branch office at the 4th Floor, FEEMI
Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax Appeals 1dated
February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 representing alleged
overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).

The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the
first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720
and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending
September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding 10%
final dividend tax thereon. 2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final
dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final withholding tax of 10%. A schedule of dividends
declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate dividend tax
and the 15% branch profit remittance tax paid thereon, is shown below:

1981 FIRST QUARTER THIRD TOTAL OF FIRST

(three months QUARTER and THIRD
ended 3.31.81) (three months quarters

52
 (In Pesos) ended 9.30.81)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld

Cash Dividend net of 10% 764,748.00 764,748.00 1,529,496.00

Dividend Tax Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax Withheld

Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60

Petitioner

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first quarter of
1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880.
Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the third
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under Central Bank
Confirmation Receipt No. 7905930. 4

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on cash
dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P229,424.40 on April 20
and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a
ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are
effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the
15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
office to its head office which are effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For example, if a resident
foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends thus earned are not
considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum
Circular No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of
the Tax Code, as amended . . . 6

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on September
24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance
53
erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4,
1981 to ... head office in Tokyo. 7

On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the
same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it
subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b)
of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 %
tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax
totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded. 8

Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal
Revenue in its assailed judgment of February 12, 1986. 9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly remitted to and received
by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine
Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni Corporation of
Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting
documents submitted to it.

Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in
the identity concept or principal-agent relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. 10

Hence, the instant petition for review.

It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is
likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 which states:

54
 Dividends received by a domestic or resident foreign corporation liable to tax under this Code — (1)
Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as
provided in Sections 53 and 54 of this Code ....

Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign corporation
and not engaged in trade or business in the Philippines, is subject to tax on income earned from Philippine sources at
the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which reads:

(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign corporation not engaged
in trade or 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 within the Philippines as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded
between the Philippines and Japan. 11 Thus:

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the
other Contracting State may be taxed in that other Contracting State.

(2) However, such dividends may also be taxed in the Contracting State of which the company paying
the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the
beneficial owner of the dividends the tax so charged shall not exceed;

(a) . . .

(b) 25 per cent of the gross amount of the dividends in all other cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore the
determination of whether it is a resident or a non-resident foreign corporation under Philippine laws.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines.
Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that
it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the
Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. A
single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed
through its local branch is of no moment for after all, the head office and the office branch constitute but one corporate
entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is
the foreign corporation, not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation. 12
55
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in
Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other logical
conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of nominee) was
made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of
the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only
to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines
and avail itself of the lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit
remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly
erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate
imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a
different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the
15 % branch profit remittance tax is imposed is the profit actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty as if
this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state concerned should
not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our laws exceeds the same. In
other words, by reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision
of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section provides:

(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that
the country in which the non-resident foreign corporation is domiciled shall allow a credit against the
tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular tax (35 %) on corporations and
the tax (15 %) on dividends as provided in this Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on
the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the
dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign
corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a
domestic corporation.

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:

Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

56
 Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder
from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross
amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under the
impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the Judiciary
Reorganization Act of 1980. He alleges that the instant petition for review was not perfected in accordance with Batas
Pambansa Blg. 129 which provides that "the period of appeal from final orders, resolutions, awards, judgments, or
decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final order, resolution, award,
judgment or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been created by
virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts specifically mentioned in
Section 2 of BP Blg. 129 as falling within its scope.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of the Court
of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall
become final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on April
15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for reconsideration
which respondent court subsequently denied on November 17, 1986, and notice of which was received by petitioner on
November 26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a notice of appeal with
the Court of Tax Appeals and a petition for review with the Supreme Court. 14 From the foregoing, it is evident that the
instant appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to
appeal having begun to run again from notice of the denial of petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the
denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby
REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the
amount of P144,452.40 representing overpayment of taxes on dividends received. No costs.

So ordered.

57
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19
November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746.
This Court resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis-à-vis
Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its
articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by
the facilities, personnel, funds, or other requirements that are available;

58
 (d) To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to
₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the
CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income
of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in
1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as
non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits
and assets. St. Luke's had total revenues of ₱1,730,367,965 or approximately ₱1.73 billion from patient services in
1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients was
₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of ₱334,642,615. 8 St.
Luke's also claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B)
applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-
profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate
of 10% on their taxable income. The BIR prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its
income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake
such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited
to "cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a party
fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009
which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998
deficiency VAT assessment issued by respondent against petitioner in the amount of ₱110,000.00 is hereby CANCELLED
59
and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded
withholding tax for the taxable year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of
₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of
1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's
to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA
cancelled the remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section
27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the
NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-
paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution
does not lose its charitable character and its consequent exemption from taxation merely because recipients of its
benefits who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable
purposes of the institution x x x." 19 The generation of income from paying patients does not per se destroy the
charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC
(Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997
substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax
exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible
organization must be run to at least insure its existence, by operating within the limits of its own resources, especially its
regular income. In other words, it should always strive, whenever possible, to have a surplus." 23

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

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

The Ruling of the Court

60
St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual
issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of
Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion." 27

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

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section
248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the
NIRC. 31 As explained by the CTA En Banc, the amount of ₱6,275,370.38 in the dispositive portion of the CTA First
Division Decision includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency
interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of
1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-
profit hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals previously
enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection
(A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of which is not substantially related
to the exercise or performance by such educational institution or hospital of its primary purpose or function. A
'proprietary educational institution' is any private school maintained and administered by private individuals or groups
with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and
an organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting
from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of
introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant
provisions of Section 30 state:
61
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect
to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific person;

xxxx

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

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does
not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on
one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be
proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals or groups" with a government
permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37this
Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and
members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. 38 The club was non-profit because of its purpose and there was no evidence that
it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in
Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of
an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41A non-profit
club for the benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph
of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of
62
charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated
by its relief from doing public works which would have been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption
are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can
create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed
without the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption are
strictly construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary for the
existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of
the property. The Constitution provides that "[c]haritable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." 48 The test of
exemption is not strictly a requirement on the intrinsic nature or character of the institution. The test requires that the
institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of
the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect
of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not
devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend
the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person.

63
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable
as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was
organized." 50 However, under Lung Center, any profit by a charitable institution must not only be plowed back
"whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended
to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that
these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset
shall belong to or inure to the benefit of any member, organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does
not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by
providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for
profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic
organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution
"from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to
tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately ₱1.73 billion from paying patients is not an institution "operated exclusively" for
charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared ₱1,730,367,965 as
"Revenues from Services to Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after
expenses was allocated to free or charitable services" in 1998. 53

64
 REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use"
or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and
the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit
over and above the cost" of services. 55 The ₱1.73 billion total revenues from paying patients is not even incidental to St.
Luke's charity expenditure of ₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in 1998. However, if a
part of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the
charitable object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for
charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies
that income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity
conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the
Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es una actividad esencial
dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx
65
R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero considerando que el hospital
tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición social económica, lo que se paga
por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras
o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of
good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a
provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing
in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore
be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should
not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all
its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's,
as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely
charitable and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest." 62

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

66
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of
Court.

SO ORDERED.

67
SECOND DIVISION

November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

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

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011
resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 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 (CTA Division) Case No. 7303. G.R.
No. 196596 stemmed from CTA En Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R.
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No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No.
7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing
its revenue officers to examine the latter's books of accounts and other accounting records for all internal revenue taxes
for the period Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency
taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAI) on business income; and (3) documentary stamp tax (DSI) on loans and lease contracts. The BIR
demanded the payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002
and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a
petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3)of the
Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the decision
reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions of [DLSU] in
the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT
and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount
of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from
September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue Code].
Further, the compromise penalties imposed by [the Commissioner] were excluded, there being no compromise
agreement between the parties.

SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision. 10 On April 6, 2010, the
CTA Division denied the Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's
motion for reconsideration.11

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-educational or commercial purposes removed these items from the exemption coverage
under the Constitution.12

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On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that
its rental income was used actually, directly and exclusively for educational purposes.13 The Commissioner did not
promptly object to the formal offer of supplemental evidence despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax
deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY 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
adjusted amount of ₱5,506,456.71 ... 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.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge and
deficiency interest which have accrued ... from September 30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred
in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En
Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire assessment should have been cancelled
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still have cancelled
the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA Division erred
in finding that a portion of DLSU's rental income was not proved to have been used actually, directly and exclusively for
educational purposes.18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the
CTA En Banc found that DLSU was able to prove that a portion of the assessed rental income was used actually, directly
and exclusively for educational purposes; hence, exempt from tax.20 The CTA En Banc was satisfied with DLSU's
supporting evidence confirming that part of its rental income had indeed been used to pay the loan it obtained to build
the university's Physical Education – Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by
supporting documents to have been actually, directly and exclusively used for educational purposes, must be subjected
to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST 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

70
on the documents made by a DST imprinting machine, which is allowed under Section 200 (D) of the National Internal
Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU formally
offered them only when it moved for reconsideration of the CTA Division's original decision. Notably, the law creating
the CTA provides that proceedings before it shall not be governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010
decision.27 Thus, she came to this court for relief through a petition for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;29 hence, the issue was deemed properly submitted for decision
and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of
issuing a LOA covering audit of unverified prior years is prohibited.30 The prohibition is consistent with Revenue
Memorandum Order (RMO) No. 43-90, which provides that if the audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA.31

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 DST for taxable years 2001 and 2002 are void, but the assessment for
taxable year 2003 is valid.32

On the applicability of the Ateneo case

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, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while DLSU successfully
proved that a portion of its rental income was transmitted and used to pay the loan obtained to fund the construction of
the Sports Complex, the rental income from other sources were not shown to have been actually, directly and
exclusively used for educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941) came
to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

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The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.35 DLSU's operations
of canteens and bookstores within its campus even though exclusively serving the university community do not negate
income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of
the Tax Code, which states among others, that the income of whatever kind and character of [a non-stock and non-profit
educational 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, shall be subject to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue
v. YMCA38 to support its conclusion that revenues however generated are covered by the constitutional exemption,
provided that, the revenues will be used for educational purposes or will be held in reserve for such purposes.39

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 from property.40 Thus, DLSU's income from the leases of its real properties is
not exempt from taxation even if the income would be used for educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST 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-
2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated submission of
supplemental evidence reopened the case for trial, and worse, DLSU offered the supplemental evidence only after it
received the unfavorable CTA Division's original decision.44 In any case, DLSU's submission of supplemental documentary
evidence was unnecessary since its rental income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication 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

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the basis of
this defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001,
2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003. According to
DLSU, when RMO No. 43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU follows this
format, then any assessment arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties,
the same set of evidence should be appreciated and weighed in the same manner.49 The CTA En Banc erred when it did
not similarly appreciate DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, non-
profit educational institution.50

G.R. No. 198941

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The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she
raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

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 actually, directly and exclusively for educational purposes are exempt from
taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit 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 1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with the addition of non-stock,
non-profit educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated
when the 1973 Constitution was still in place.

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 tax treatment on income of private educational institutions only
emanates from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of all
the assets and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes, was expressly and categorically enshrined.55

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 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 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 declared without force and effect in view of the constitutionally granted tax exemption on "all
revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to be
granted under Article XIV, Section 4 (3) 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 exempted from taxation is
used actually, directly and exclusively for educational purposes.58 Unlike YMCA, which is not an educational institution,
DLSU is undisputedly a non-stock, non-profit educational institution. It had also submitted evidence to prove that it
actually, directly and exclusively used its income for educational purposes.59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax exemption
was granted "to incentivize private educational institutions to share with the State the responsibility of educating the
youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU' s loan and
mortgage transactions had remitted to the BIR the 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 owing to the exemption granted under the
Constitution.62

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Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental
evidence. Because of the Commissioner's failure to timely object, she became bound by the results of the submission of
such supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this issue
in both the administrative and judicial proceedings.64 That it was asked on cross-examination during the trial does not
make it an issue that the CTA could resolve.65 The Commissioner also maintains that DLSU's rental income is not tax-
exempt because an educational institution is only exempt from property tax but not from tax on the income earned
from the property.66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67 In addition, DLSU prays that the Court award
attorney's fees in its favor because it was constrained to unnecessarily retain the services of counsel in this separate
petition.68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize as
follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered, would justify a different
conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus sustain the
CTA En Banc's findings that:

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 a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for educational
purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including restrictions on dividends and provisions for
reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit educational
institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-profit
educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the same
provision, also imposes certain conditions to avail of the exemption. We discuss below the import of the constitutional
text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational institutions and
proprietary educational institutions. The tax exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational purposes. While tax
exemptions may also be granted to proprietary educational institutions, these exemptions may be subject to limitations
imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational institution is
crucial in determining the nature and extent of the tax exemption granted to non-stock, non-profit educational
institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The relevant
text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

75
xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed under this
Code. [underscoring and 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 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 purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit educational
institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in the YMCA case had in fact already
analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made
doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established as a
"welfare, educational and charitable non-profit corporation," was subject to income tax under the Tax Code and the
Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article VI,
Section 28 (3) of the Constitution,73 the YMCA is not tax-exempt per se; " what is exempted is not the institution itself...
those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by 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 or personal, are subject to the same tax imposed by the Tax Code, regardless of how 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

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted under
Article XIV, Section 4 (3) of the Constitution.

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 granting tax exemptions, refers to the school system (synonymous with
formal education); it includes a college or an educational establishment; it refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system.76

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The Court then significantly laid down the requisites for availing the tax exemption 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 seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes.77

We now adopt YMCA as precedent and hold that:

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, that the non-stock, non-profit educational institutions prove that its assets and
revenues are used actually, directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to

limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
78
their assets, revenues and income for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches,
parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets,
i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without
significance.

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 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 beneficial to
students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues
and income must have also been sourced from educational activities or activities related to the purposes of an
educational institution. The phrase all revenues is unqualified by any reference to the source of 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 exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.82 It may refer to
the sale of goods, rendition of services, or the return of an investment. Revenue is a component of the tax base in
income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It may refer to real
estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from which
the person or entity may derive income or use to generate the same. In Philippine taxation, the fair market value of real

77
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 tax base in VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses 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 that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT.

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 whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not
actually, directly and exclusively used for educational purposes, even if the bookstore or canteen caters only to
university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v.
Aquino.90 We ruled in that case that the test of 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 incidental to and
reasonably necessary for the accomplishment of the main purposes.

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 Constitution.91 There is no exemption because the asset is not used
actually, directly and exclusively for educational purposes. The commercial use of the property is also not incidental to
and reasonably necessary for the accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the
lease of its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on
the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of the revenues for
educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and
exclusively for educational purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and exclusively for educational purposes the revenues or income
sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the 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 educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational
institutions cannot be doubted. As discussed, the privilege granted to the former is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. In clear contrast, the tax privilege
granted to the latter may be subject to limitations imposed by law.

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We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit
educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions
from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered by Section 27 (Rates of
Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions shall not
be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational 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
other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions ... [the
regular corporate income tax of 30%] shall be imposed on the entire taxable income ... "92

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 only if: (1) the proprietary educational institution is nonprofit and (2) its gross
income from unrelated trade, business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit
educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purpose. We make this declaration in the exercise of and consistent
with our duty93 to uphold the primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not cover
the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and insists that the entire LOA
should be voided for being contrary to RMO No. 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.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting
records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities95 and for the purpose of
collecting the correct amount of tax,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 of persons. The LOA commences the audit process 97 and
informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard
the BIR and the CTA's findings of tax deficiency for taxable year 2003?

79
We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing [LO
As] covering audit of 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 specifically indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90
does not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more
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, the BIR must specify each taxable year or taxable period on separate
LOAs.

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 revenue officer's authority. Without this rule, a revenue officer can unduly
burden the taxpayer by demanding random accounting records from random unverified years, which may include
documents from as far back as ten years in cases of fraud audit.99

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 includes unverified prior years. This does not mean, however, that the entire
LOA is void.

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 audited for taxable year 2003. Corollarily, the assessments for taxable
years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA Division, and thus,
should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up 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 CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the LOA.101Besides, the
Commissioner had the opportunity to argue for the validity of the LOA at the CTA En Banc but she chose not to file her
comment and memorandum despite notice.102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA
Division.103 The CTA Division admitted the supplemental evidence, which proved that a portion of DLSU's rental income
was used actually, directly and exclusively for educational purposes. Consequently, the CTA Division reduced DLSU's tax
liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing grounds, to
wit: (1) the Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the CTA is not
governed strictly by the technical rules of evidence.

80
First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such
evidence.104

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 the evidence for the first time on appeal.105 Because of a party's failure to
timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all the parties are
considered bound by any outcome arising from the offer of evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite notice.107 The
Commissioner objected to the admission of 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, admission and evaluation of
the supplemental evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency of
the supplemental evidence admitted, she was bound by the outcome of the CTA Division's assessment of the
evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the formal
offer of supplemental evidence, without prompt objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for
reconsideration.1âwphi1

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 CT A its Final Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for 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 submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of documents after the
trial, the law creating the CTA specifically provides that proceedings before it shall not be governed strictly by the
technical rules of evidence111 and that the paramount consideration remains the ascertainment of truth. We ruled that
procedural rules should not bar courts from considering undisputed facts to arrive at a just determination of a
controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of
Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also
submitted the supplemental supporting document only upon filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical
rules of evidence in the present tax assessment case. If anything, the liberal application of the rules assumes greater
force and significance in the case of a taxpayer who claims a constitutionally granted tax exemption. While the taxpayers
in the cited cases claimed refund of excess tax 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 have under a statute, then with
more reason that we should allow a taxpayer to prove its exemption from tax based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the Commissioner
failed to promptly object, but more so because the strict application of the technical rules of evidence may defeat the
intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
81
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its
function of being dedicated exclusively to the 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 the findings of fact by the CTA
with the highest respect. These findings of facts can only be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly and
exclusively for educational purposes a portion of its assessed income and that it had remitted the DST payments though
an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that DLSU
successfully proved that it used actually, directly and exclusively for educational purposes a portion of its rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the supplemental
evidence, which consisted of statement of receipts, statement of disbursement and fund balance and statement of fund
changes.118

These documents showed that DLSU borrowed ₱93.86 Million,119 which was used to build the university's Sports
Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental income from its concessionaires were
indeed transmitted 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 use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to a fund (CF-
CPA Account),120 intended for the university's capital projects, was not proved to have been used actually, directly and
exclusively for educational purposes. The CTA observed that "[DLSU] ... failed to fully account for and substantiate all
the disbursements from the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other]
concessionaires was indeed used for educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who reviewed,
audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts,
invoices, vouchers and other long accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre-marking of documentary exhibits consisting
of voluminous documents; (c) preparation of schedules or summaries containing a chronological listing of the numbers,
dates and amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes paid;
(d) making findings as to compliance with substantiation requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification of authenticity and veracity of findings and
conclusions in the performance of the audit; (f) testifying on such formal report; and (g) performing such other functions
as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only
the portion of the rental income pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers, etc.)
82
from the CF-CPA Account was considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002 due to
the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the evidence
on record, which we reiterate, were examined and verified by the Independent CPA. Thus, we see no persuasive reason
to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not 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., income not proved to have been actually, directly and exclusively used for
educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year 2003.125 DLSU earned this
income from leasing a portion of its premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food
Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental
income was expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports Complex; and
2) ₱6,602,655.00 transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00 transferred to the CF-CPA
Account was used actually, directly and exclusively for educational purposes. According to the Independent CPA'
findings, DLSU was able to substantiate disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of the ₱l0,610,379.00 rental
income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA
Account for taxable year 2003 is only 26.68%.130 The CTA held as follows:

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO
Bookstore, which were transmitted to the CF-CPA Account, petitioner again failed to fully account for and substantiate
all the disbursements from the CF-CPA Account; thus failing to prove that the rental income derived therein were
actually, directly and exclusively used for educational 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 ₱6,259,078.30
only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA Account, was
considered by the Special First Division as used actually, directly and exclusively for educational purposes. Since for fiscal
year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per
subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year
2003 is 26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for fiscal year
2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to and used in the CF-CPA Account
in the amount of ₱6,602,655.00 is ₱1,761,588.35.131 (emphasis supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex (₱4,007,724.00) from the rental
income (₱10,610,379.00) earned from the abovementioned concessionaries. The difference (₱6,602,655.00) was the
portion claimed to have been deposited to the CF-CPA Account.
83
2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (₱1,761,308.37) from the
₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the rental income (₱4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was derived by multiplying the rental income
claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as found by
the Independent CPA (₱6,259,078.30) by the total disbursements (₱23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to 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 an amount that is greater than the rental income deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which
amounted to a total of ₱10.61 million)135 were used for educational purposes. This amount was divided into two parts:
(a) the ₱4.0l million, which was used to pay the loan obtained for the construction of the Sports Complex; and (b) the
₱6.60 million,136 which was transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46 million.137 These figures, read in
light of the constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA disbursement
of ₱23.46 million is tax-exempt so that it is required to prove that all these disbursements had been made for
educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million had been for
educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61 million for tax-exemption and should
thus be required to prove that this amount had been used as claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed by the Independent
CPA. The amount in issue is therefore the balance of ₱6.60 million which was transferred to the CF-CPA which in turn
made disbursements of ₱23.46 million for various general purposes, among them the ₱6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in year
2003 in the amount ₱6.26 million. Based on these given figures, the CT A concluded that the expenses for educational
purposes that had been coursed through the CF-CPA should be prorated so that only the portion that ₱6.26 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 revenues actually and directly used for
educational purposes should be tax-exempt. As already mentioned above, DLSU is not claiming that the whole ₱23.46
million CF-CPA disbursement had been used for educational purposes; it only claims that ₱6.60 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 purposes.

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 that had been confirmed and proven to have been actually and directly used for 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 the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA funds
used for educational purposes should not be prorated as part of its total CF-CPA disbursements for purposes of crediting
84
to DLSU is also logical 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 state the obvious, exemption is based on actual and direct
use and this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and
what it has proven. In more concrete terms, DLSU only had to prove that its rental income for taxable year 2003
(₱10,610,379.00) was used for educational purposes. Hence, while the total disbursements from the CF-CPA Account
amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6 million rental income, part of which was the
₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been
used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:

CTA
Decision138 Revised
Rental income 10,610,379.00 10,610,379.00
Less: Rent income used in construction of the Sports 4,007,724.00 4,007,724.00
Complex

Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00

1,761,588.35 6,259,078.30
Less: Substantiated portion of CF-CPA disbursements

Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did with the evidence
submitted by Ateneo in another separate case, the CTA explained that the issue in the Ateneo case was not the same as
the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under certain
BIR and Department of Finance issuances139 that required the educational institution to own and operate the canteens,
or other commercial enterprises within its campus, as condition for tax exemption. The CTA held that the Constitution
does not require the educational institution to own or operate these commercial establishments to avail of the
exemption.140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of
evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom
"cannot be equated on its decision on two different cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar, if
not stronger sets of evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the concept
of uniformity of taxation is also incorrect.

85
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the evidence
supporting their respective claims for tax exemption would necessarily differ because their attendant issues and
facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were
assessed varied. The amount of tax assessment also varied. The amount of income proven to have been used for
educational purposes also varied because the amount substantiated varied.142 Thus, the amount of tax assessment
cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years 2001, 2002 and 2003.
On the other hand, the BIR assessed Ateneo a total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU
was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental 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, the report of the Independent CPA, their income summaries, financial statements, vouchers, etc., the fact
remains that DLSU failed to prove that a portion of its income and revenues had indeed been used for educational
purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in
court. Indeed, the Independent CPA testified that some disbursements had not been proven to have been used actually,
directly and exclusively for educational purposes.144

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 that there was no bad faith on its part.145 To our mind, this admission
is a good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to substantiate a portion of
its claimed exemption.

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 some other
authentic documents on record,146 can no longer be entertained at this 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 duty
to go over these documents to test the truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate.147 A tax is uniform when it operates with the same force and effect in every place where the subject of it
is found.148 The concept requires that all subjects of taxation similarly situated should be treated alike and placed in
equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their
income proved to have been used actually, directly and exclusively for educational purposes were exempted from taxes.
The CTA equally applied the requirements in the YMCA case to test if they indeed used their revenues for educational
purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used
actually, directly and exclusively for educational purposes its income and revenues, the CTA still affirmed the imposition
of taxes. 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 and income.
86
On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation similarly
situated are treated in literally the same way in all and every occasion. The fact that the Ateneo and DLSU are both non-
stock, non-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 litigation, like in any other litigation, depends to a large extent on the
sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted through
its bank's On-Line Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
method of payment because an educational institution is excluded from the class of taxpayers who can use the On-Line
Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant
revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making, signing,
issuing, accepting, or transferring the same.150 The 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 is clear that DST
shall be payable by any party to the document, such that the payment and compliance by one shall mean the full
settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to
DST.151 For the purpose of showing that the DST on the loan agreement has been paid, DLSU presented its agreements
bearing the 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.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST
through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that handled
its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-
Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No. 196596
and AFFIRM the December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in
CTA En Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La Salle University, Inc., which
had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the Commissioner
of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the
Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION that the base for the deficiency
income tax and VAT for taxable year 2003 is ₱343,576.70.

SO ORDERED.
87
COMMISSIONER OF INTERNAL REVENUE, vs. DE LA SALLE UNIVERSITY,INC.

G.R. No. 196596, November 09, 2016

The Commissioner submits the following arguments:

DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. DLSU's operations of
canteens and bookstores within its campus even though exclusively serving the university community do not negate
income tax liability.

Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax Code
“the income of whatever kind and character of [a non-stock and non-profit educational 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, shall be subject to tax imposed by this Code.”

The Commissioner posits that a tax-exempt organization like DLSU is exempt only from property taxbut not from
income tax on the rentals earned from property. Thus, DLSU's income from the leases of its real properties is not
exempt from taxation even if the income would be used for educational purposes.41

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 actually, directly and exclusively for educational purposes are exempt from
taxes and duties.

ISSUE: Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.

RULING: YES.
The requisites for availing the tax exemption 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 seeks to be exempted
from taxation is used actually, directly and exclusively for educational purposes.
A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues
and income must have also been sourced from educational activities or activities related to the purposes of an
educational institution. The phrase all revenues is unqualified by any reference to the source of 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 exempt from taxes and duties.
Thus, when a non-stock, non-profit educational institution proves that it uses 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 that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT.
We further declare that the last paragraph of Section 30 of the Tax Code is without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of
and consistent with our duty to uphold the primacy of the Constitution. We stress that our holding here pertains only to
non-stock, non-profit educational institutions and does not cover the other exempt organizations under Section 30 of
the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.

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