Contents \\

1. McCulloch v. Maryland, 17 U.S. 316 (1819)......................................................Error! Bookmark not defined.

2. COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX APPEALS,
G.R. No. L-28896 February 17, 1988............................................................................................................... 16
3. RUFINO R. TAN vs. RAMON R. DEL ROSARIO, JR., as SEC. OF FINANCE & JOSE U. ONG, as CIR,
G.R. No. 109289 October 3, 1994.................................................................................................................... 18
4. REPUBLIC OF THE PHILIPPINES vs. MAMBULAO LUMBER COMPANY, ET AL., G.R. No. L-17725,
February 28, 1962............................................................................................................................................ 22
5. ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, G.R. No. L-
67649, June 28, 1988....................................................................................................................................... 24
6. IN THE MATTER OF THE TESTATE ESTATE OF PATRICIO PONFERRADA, deceased. JOAQUIN
CORDERO, administrator-appellee, vs. JOSE GONDA as Representative of the Commissioner of
Internal Revenue, claimant-appellant. G.R. No. L-22369, October 15, 1966...............................................27
7. NATIONAL POWER CORPORATION vs. PROV. OF QUEZON and MUN. OF PAGBILAO, G.R. No.
171586, July 15, 2009...................................................................................................................................... 31
8. NAPOCOR vs. PROV OF QUEZON and MUN OF PAGBILAO, G.R. No. 171586, January 25, 2010...........36
9. COMM OF INTERNAL REVENUE vs. CA, CITYTRUST BANKING CORP. and CTA, G.R. No. 106611,
July 21, 1994.................................................................................................................................................... 44
10. COMMISSIONER OF INTERNAL REVENUE  vs. ROYAL INTEROCEAN LINES and THE COURT OF
TAX APPEALS, G.R. No. L-26806 July 30, 1970............................................................................................ 50
11. TRIDHARMA MARKETING CORPORATION, Petitioner, - versus - COURT OF TAX APPEALS,
SECOND DIVISION, AND THE COMMISSIONER OF INTERNAL REVENUE, Respondents. G.R. No.
215950 Present: SERENO, C.J., ~ LEONARDO-DE CASTRO, BERSAMIN, PERLAS-BERNABE, and
CAGUIOA,JJ Promulgated: JUN 2 o 2016..................................................................................................... 55
12. JOSE B. L. REYES and EDMUNDO A. REYES vs. PEDRO ALMANZOR, VICENTE ABAD SANTOS,
JOSE ROÑO, in their capacities as appointed and Acting Members of the CENTRAL BOARD OF
ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES,
in their capacities as appointed and Acting Members of the BOARD OF ASSESSMENT APPEALS of
Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila, respondents. G.R. Nos. L-
49839-46             April 26, 1991....................................................................................................................... 55

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William Johnson, Jr.
Henry Brockholst Livingston
Thomas Todd
Gabriel Duvall
Joseph Story

In this unanimous decision, Marshall observed that the Second Bank was no different from the First Bank of the
United States, of which the constitutionality had not been challenged. Echoing the decision in Martin v. Hunter's
Lessee, he also noted that the people rather than the states were responsible for ratifying the U.S. Constitution and
thus taking away a measure of sovereignty from the states. He did not find it necessary to establish a textual basis
in the Constitution that specifically addressed banks.

The most notable section of Marshall's opinion concerned the Necessary and Proper Clause. He rejected the
state's argument that this clause was confined to authorizing only laws that were absolutely essential to carrying
out its enumerated powers. Marshall felt that a broader interpretation was warranted, since the clause was not
placed among the limitations on Congressional authority and thus should be viewed as an expansion on its
authority. As a result, he redefined the meaning of "necessary" as something closer to "appropriate and legitimate,"
covering all methods for furthering the objectives covered by the enumerated powers. Moreover, Marshall struck
down the tax as applied to the Second Bank as unconstitutional.

Case Commentary

Later commentators have continued to challenge the logic in Marshall's opinion, some of them suggesting that it
infringes on the Tenth Amendment. However, it remains valid to the current day, and his view that the federal
government derives sovereignty from the people rather than the states has been widely accepted. The decision
has been influential in nations that have similar legal systems, such as Australia.

Opinions
Syllabus
 
Case

U.S. Supreme Court

McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 316 (1819)
McCulloch v. Maryland
17 U.S. (4 Wheat.) 316

ERROR TO THE COURT OF APPEALS OF THE STATE OF MARYLAND

Syllabus

Congress has power to incorporate a bank

The Act of the 10th of April, 1816, ch. 44, to "incorporate the subscribers to the Bank of the United States" is a law
made in pursuance of the Constitution.
The Government of the Union, though limited in its powers, is supreme within its sphere of action, and its laws,
when made in pursuance of the Constitution, form the supreme law of the land.

There is nothing in the Constitution of the United States similar to the Articles of Confederation, which exclude
incidental or implied powers.

If the end be legitimate, and within the scope of the Constitution, all the means which are appropriate, which are
plainly adapted to that end, and which are not prohibited, may constitutionally be employed to carry it into effect.

The power of establishing a corporation is not a distinct sovereign power or end of Government, but only the
means of carrying into effect other powers which are sovereign. Whenever it becomes an appropriate means of

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exercising any of the powers given by the Constitution to the Government of the Union, it may be exercised by that
Government.

If a certain means to carry into effect of any of the powers expressly given by the Constitution to the Government of
the Union be an appropriate measure, not prohibited by the Constitution, the degree of its necessity is a question
of legislative discretion, not of judicial cognizance.

The Bank of the United States has, constitutionally, a right to establish its branches or offices of discount and
deposit within any state.

The State within which such branch may be established cannot, without violating the Constitution, tax that branch.

The State governments have no right to tax any of the constitutional means employed by the Government of the
Union to execute its constitutional powers.

The States have no power, by taxation or otherwise, to retard, impede, burthen, or in any manner control the
operations of the constitutional laws enacted by Congress to carry into effect the powers vested in the national
Government.

This principle does not extend to a tax paid by the real property of the Bank of the United States in common with
the other real property in a particular state, nor to a tax imposed on the proprietary interest which the citizens of
that State may hold in this institution, in common with other property of the same description throughout the State.

This was an action of debt, brought by the defendant in error, John James, who sued as well for himself as for the
State of Maryland, in the County Court of Baltimore County, in the said State, against the plaintiff in error,
McCulloch, to recover certain penalties, under the act of the Legislature of Maryland hereafter mentioned.
Judgment being rendered against the plaintiff in error, upon the following statement of facts agreed and submitted
to the court by the parties, was affirmed by the Court of Appeals of the State of Maryland, the highest court of law
of said State, and the cause was brought by writ of error to this Court.

It is admitted by the parties in this cause, by their counsel, that there was passed, on the 10th day of April, 1816,
by the Congress of the United States, an act entitled, "an act to incorporate the subscribers to the Bank of the
United States;" and that there was passed on the 11th day of February, 1818, by the General Assembly of
Maryland, an act, entitled, "an act to impose a tax on all banks, or branches thereof, in the State of Maryland,  not
chartered by the legislature," which said acts are made part of this Statement, and it is agreed, may be read from
the statute books in which they are respectively printed. It is further admitted that the President, directors and
company of the Bank of the United States, incorporated by the act of Congress aforesaid, did organize themselves,
and go into full operation, in the City of Philadelphia, in the State of Pennsylvania, in pursuance of the said act, and
that they did on the ___ day of _____ 1817, establish a branch of the said bank, or an office of discount and
deposit, in the City of Baltimore, in the State of Maryland, which has, from that time until the first day of May 1818,
ever since transacted and carried on business as a bank, or office of discount and deposit, and as a branch of the
said Bank of the United States, by issuing bank notes and discounting promissory notes, and performing other
operations usual and customary for banks to do and perform, under the authority and by the direction of the said
President, directors and company of the Bank of the United States, established at Philadelphia as aforesaid. It is
further admitted that the said President, directors and company of the said bank had no authority to establish the
said branch, or office of discount and deposit, at the City of Baltimore, from the State of Maryland, otherwise than
the said State having adopted the Constitution of the United States and composing one of the States of the Union.
It is further admitted that James William McCulloch, the defendant below, being the cashier of the said branch, or
office of discount and deposit did, on the several days set forth in the declaration in this cause, issue the said
respective bank notes therein described, from the said branch or office, to a certain George Williams, in the City of
Baltimore, in part payment of a promissory note of the said Williams, discounted by the said branch or office, which
said respective bank notes were not, nor was either of them, so issued on stamped paper in the manner prescribed
by the act of assembly aforesaid. It is further admitted that the said President, directors and company of the Bank
of the United States, and the said branch, or office of discount and deposit have not, nor has either of them, paid in
advance, or otherwise, the sum of $15,000, to the Treasurer of the Western Shore, for the use of the State of
Maryland, before the issuing of the said notes, or any of them, nor since those periods. And it is further admitted

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that the Treasurer of the Western Shore of Maryland, under the direction of the Governor and Council of the said
State, was ready, and offered to deliver to the said President, directors and company of the said bank, and to the
said branch, or office of discount and deposit, stamped paper of the kind and denomination required and described
in the said act of assembly.

The question submitted to the Court for their decision in this case is as to the validity of the said act of the General
Assembly of Maryland on the ground of its being repugnant to the Constitution of the United States and the act of
Congress aforesaid, or to one of them. Upon the foregoing statement of facts and the pleadings in this cause (all
errors in which are hereby agreed to be mutually released), if the Court should be of opinion that the plaintiffs are
entitled to recover, then judgment, it is agreed, shall be entered for the plaintiffs for $2,500 and costs of suit. But if
the Court should be of opinion that the plaintiffs are not entitled to recover upon the statement and pleadings
aforesaid, then judgment of non pros shall be entered, with costs to the defendant.

It is agreed that either party may appeal from the decision of the County Court to the Court of Appeals, and from
the decision of the Court of Appeals to the Supreme Court of the United States, according to the modes and
usages of law, and have the same benefit of this statement of facts in the same manner as could be had if a jury
had been sworn and impanneled in this cause and a special verdict had been found, or these facts had appeared
and been stated in an exception taken to the opinion of the Court, and the Court's direction to the jury thereon.

Copy of the act of the Legislature of the State of Maryland, referred to in the preceding Statement.

"An act to impose a tax on all banks or branches thereof, in the State of Maryland not chartered by the legislature"

"Be it enacted by the General Assembly of Maryland that if any bank has established or shall, without authority
from the State first had and obtained establish any branch, office of discount and deposit, or office of pay and
receipt in any part of this State, it shall not be lawful for the said branch, office of discount and deposit, or office of
pay and receipt to issue notes, in any manner, of any other denomination than five, ten, twenty, fifty, one hundred,
five hundred and one thousand dollars, and no note shall be issued except upon stamped paper of the following
denominations; that is to say, every five dollar note shall be upon a stamp of ten cents; every ten dollar note, upon
a stamp of twenty cents; every twenty dollar note, upon a stamp of thirty cents; every fifty dollar note, upon a stamp
of fifty cents; every one hundred dollar note, upon a stamp of one dollar; every five hundred dollar note, upon a
stamp of ten dollars; and every thousand dollar note, upon a stamp of twenty dollars; which paper shall be
furnished by the Treasurer of the Western Shore, under the direction of the Governor and Council, to be paid for
upon delivery; provided always that any institution of the above description may relieve itself from the operation of
the provisions aforesaid by paying annually, in advance, to the Treasurer of the Western Shore, for the use of
State, the sum of $15,000."

"And be it enacted that the President, cashier, each of the directors and officers of every institution established or
to be established as aforesaid, offending against the provisions aforesaid shall forfeit a sum of $500 for each and
every offence, and every person having any agency in circulating any note aforesaid, not stamped as aforesaid
directed, shall forfeit a sum not exceeding $100, every penalty aforesaid to be recovered by indictment or action of
debt in the county court of the county where the offence shall be committed, one-half to the informer and the other
half to the use of the State."

"And be it enacted that this act shall be in full force and effect from and after the first day of May next. "

MARSHALL, Chief Justice, delivered the opinion of the Court.

In the case now to be determined, the defendant, a sovereign State, denies the obligation of a law enacted by the
legislature of the Union, and the plaintiff, on his part, contests the validity of an act which has been passed by the
legislature of that State. The Constitution of our country, in its most interesting and vital parts, is to be considered,
the conflicting powers of the Government of the Union and of its members, as marked in that Constitution, are to
be discussed, and an opinion given which may essentially influence the great operations of the Government. No
tribunal can approach such a question without a deep sense of its importance, and of the awful responsibility
involved in its decision. But it must be decided peacefully, or remain a source of hostile legislation, perhaps, of

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hostility of a still more serious nature; and if it is to be so decided, by this tribunal alone can the decision be made.
On the Supreme Court of the United States has the Constitution of our country devolved this important duty.

The first question made in the cause is -- has Congress power to incorporate a bank?

It has been truly said that this can scarcely be considered as an open question entirely unprejudiced by the former
proceedings of the Nation respecting it. The principle now contested was introduced at a very early period of our
history, has been recognised by many successive legislatures, and has been acted upon by the Judicial
Department, in cases of peculiar delicacy, as a law of undoubted obligation.

It will not be denied that a bold and daring usurpation might be resisted after an acquiescence still longer and more
complete than this. But it is conceived that a doubtful question, one on which human reason may pause and the
human judgment be suspended, in the decision of which the great principles of liberty are not concerned, but the
respective powers of those who are equally the representatives of the people, are to be adjusted, if not put at rest
by the practice of the Government, ought to receive a considerable impression from that practice. An exposition of
the Constitution, deliberately established by legislative acts, on the faith of which an immense property has been
advanced, ought not to be lightly disregarded.

The power now contested was exercised by the first Congress elected under the present Constitution.

The bill for incorporating the Bank of the United States did not steal upon an unsuspecting legislature and pass
unobserved. Its principle was completely understood, and was opposed with equal zeal and ability. After being
resisted first in the fair and open field of debate, and afterwards in the executive cabinet, with as much persevering
talent as any measure has ever experienced, and being supported by arguments which convinced minds as pure
and as intelligent as this country can boast, it became a law. The original act was permitted to expire, but a short
experience of the embarrassments to which the refusal to revive it exposed the Government convinced those who
were most prejudiced against the measure of its necessity, and induced the passage of the present law. It would
require no ordinary share of intrepidity to assert that a measure adopted under these circumstances was a bold
and plain usurpation to which the Constitution gave no countenance. These observations belong to the cause; but
they are not made under the impression that, were the question entirely new, the law would be found irreconcilable
with the Constitution.

In discussing this question, the counsel for the State of Maryland have deemed it of some importance, in the
construction of the Constitution, to consider that instrument not as emanating from the people, but as the act of
sovereign and independent States. The powers of the General Government, it has been said, are delegated by the
States, who alone are truly sovereign, and must be exercised in subordination to the States, who alone possess
supreme dominion.

It would be difficult to sustain this proposition. The convention which framed the Constitution was indeed elected by
the State legislatures. But the instrument, when it came from their hands, was a mere proposal, without obligation
or pretensions to it. It was reported to the then existing Congress of the United States with a request that it might
"be submitted to a convention of delegates, chosen in each State by the people thereof, under the
recommendation of its legislature, for their assent and ratification."

This mode of proceeding was adopted, and by the convention, by Congress, and by the State legislatures, the
instrument was submitted to the people. They acted upon it in the only manner in which they can act safely,
effectively and wisely, on such a subject -- by assembling in convention. It is true, they assembled in their several
States -- and where else should they have assembled? No political dreamer was ever wild enough to think of
breaking down the lines which separate the States, and of compounding the American people into one common
mass. Of consequence, when they act, they act in their States. But the measures they adopt do not, on that
account, cease to be the measures of the people themselves, or become the measures of the State governments.

From these conventions the Constitution derives its whole authority. The government proceeds directly from the
people; is "ordained and established" in the name of the people, and is declared to be ordained, "in order to form a
more perfect union, establish justice, insure domestic tranquillity, and secure
the blessings of liberty to themselves and to their posterity."

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The assent of the States in their sovereign capacity is implied in calling a convention, and thus submitting that
instrument to the people. But the people were at perfect liberty to accept or reject it, and their act was final. It
required not the affirmance, and could not be negatived, by the State Governments. The Constitution, when thus
adopted, was of complete obligation, and bound the State sovereignties.

It has been said that the people had already surrendered all their powers to the State sovereignties, and had
nothing more to give. But surely the question whether they may resume and modify the powers granted to
Government does not remain to be settled in this country. Much more might the legitimacy of the General
Government be doubted had it been created by the States. The powers delegated to the State sovereignties were
to be exercised by themselves, not by a distinct and independent sovereignty created by themselves. To the
formation of a league such as was the Confederation, the State sovereignties were certainly competent. But when,
"in order to form a more perfect union," it was deemed necessary to change this alliance into an effective
Government, possessing great and sovereign powers and acting directly on the people, the necessity of referring it
to the people, and of deriving its powers directly from them, was felt and acknowledged by all. The Government of
the Union then (whatever may be the influence of this fact on the case) is, emphatically and truly, a Government of
the people. In form and in substance, it emanates from them. Its powers are granted by them, and are to be
exercised directly on them, and for their benefit.

This Government is acknowledged by all to be one of enumerated powers. The principle that it can exercise only
the powers granted to it would seem too apparent to have required to be enforced by all those arguments which its
enlightened friends, while it was depending before the people, found it necessary to urge; that principle is now
universally admitted. But the question respecting the extent of the powers actually granted is perpetually arising,
and will probably continue to arise so long as our system shall exist. In discussing these questions, the conflicting
powers of the General and State Governments must be brought into view, and the supremacy of their respective
laws, when they are in opposition, must be settled.

If any one proposition could command the universal assent of mankind, we might expect it would be this -- that the
Government of the Union, though limited in its powers, is supreme within its sphere of action. This would seem to
result necessarily from its nature. It is the Government of all; its powers are delegated by all; it represents all, and
acts for all. Though any one State may be willing to control its operations, no State is willing to allow others to
control them. The nation, on those subjects on which it can act, must necessarily bind its component parts. But this
question is not left to mere reason; the people have, in express terms, decided it by saying, "this Constitution, and
the laws of the United States, which shall be made in pursuance thereof," "shall be the supreme law of the land,"
and by requiring that the members of the State legislatures and the officers of the executive and judicial
departments of the States shall take the oath of fidelity to it. The Government of the United States, then, though
limited in its powers, is supreme, and its laws, when made in pursuance of the Constitution, form the supreme law
of the land, "anything in the Constitution or laws of any State to the contrary notwithstanding."

Among the enumerated powers, we do not find that of establishing a bank or creating a corporation. But there is no
phrase in the instrument which, like the Articles of Confederation, excludes incidental or implied powers and which
requires that everything granted shall be expressly and minutely described. Even the 10th Amendment, which was
framed for the purpose of quieting the excessive jealousies which had been excited, omits the word "expressly,"
and declares only that the powers "not delegated to the United States, nor prohibited to the States, are reserved to
the States or to the people," thus leaving the question whether the particular power which may become the subject
of contest has been delegated to the one Government, or prohibited to the other, to depend on a fair construction
of the whole instrument. The men who drew and adopted this amendment had experienced the embarrassments
resulting from the insertion of this word in the Articles of Confederation, and probably omitted it to avoid those
embarrassments. A Constitution, to contain an accurate detail of all the subdivisions of which its great powers will
admit, and of all the means by which they may be carried into execution, would partake of the prolixity of a legal
code, and could scarcely be embraced by the human mind. It would probably never be understood by the public.
Its nature, therefore, requires that only its great outlines should be marked, its important objects designated, and
the minor ingredients which compose those objects be deduced from the nature of the objects themselves. That
this idea was entertained by the framers of the American Constitution is not only to be inferred from the nature of
the instrument, but from the language. Why else were some of the limitations found in the 9th section of the 1st
article introduced? It is also in some degree warranted by their having omitted to use any restrictive term which

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might prevent its receiving a fair and just interpretation. In considering this question, then, we must never forget
that it is a Constitution we are expounding.

Although, among the enumerated powers of Government, we do not find the word "bank" or "incorporation," we
find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a
war; and to raise and support armies and navies. The sword and the purse, all the external relations, and no
inconsiderable portion of the industry of the nation are intrusted to its Government. It can never be pretended that
these vast powers draw after them others of inferior importance merely because they are inferior. Such an idea can
never be advanced. But it may with great reason be contended that a Government intrusted with such ample
powers, on the due execution of which the happiness and prosperity of the Nation so vitally depends, must also be
intrusted with ample means for their execution. The power being given, it is the interest of the Nation to facilitate its
execution. It can never be their interest, and cannot be presumed to have been their intention, to clog and
embarrass its execution by withholding the most appropriate means. Throughout this vast republic, from the St.
Croix to the Gulf of Mexico, from the Atlantic to the Pacific, revenue is to be collected and expended, armies are to
be marched and supported. The exigencies of the Nation may require that the treasure raised in the north should
be transported to the south, that raised in the east, conveyed to the west, or that this order should be reversed. Is
that construction of the Constitution to be preferred which would render these operations difficult, hazardous and
expensive? Can we adopt that construction (unless the words imperiously require it) which would impute to the
framers of that instrument, when granting these powers for the public good, the intention of impeding their
exercise, by withholding a choice of means? If, indeed, such be the mandate of the Constitution, we have only to
obey; but that instrument does not profess to enumerate the means by which the powers it confers may be
executed; nor does it prohibit the creation of a corporation, if the existence of such a being be essential, to the
beneficial exercise of those powers. It is, then, the subject of fair inquiry how far such means may be employed.

It is not denied that the powers given to the Government imply the ordinary means of execution. That, for example,
of raising revenue and applying it to national purposes is admitted to imply the power of conveying money from
place to place as the exigencies of the Nation may require, and of employing the usual means of conveyance. But
it is denied that the Government has its choice of means, or that it may employ the most convenient means if, to
employ them, it be necessary to erect a corporation. On what foundation does this argument rest? On this alone:
the power of creating a corporation is one appertaining to sovereignty, and is not expressly conferred on Congress.
This is true. But all legislative powers appertain to sovereignty. The original power of giving the law on any subject
whatever is a sovereign power, and if the Government of the Union is restrained from creating a corporation as a
means for performing its functions, on the single reason that the creation of a corporation is an act of sovereignty, if
the sufficiency of this reason be acknowledged, there would be some difficulty in sustaining the authority of
Congress to pass other laws for the accomplishment of the same objects. The Government which has a right to do
an act and has imposed on it the duty of performing that act must, according to the dictates of reason, be allowed
to select the means, and those who contend that it may not select any appropriate means that one particular mode
of effecting the object is excepted take upon themselves the burden of establishing that exception.

The creation of a corporation, it is said, appertains to sovereignty. This is admitted. But to what portion of
sovereignty does it appertain? Does it belong to one more than to another? In America, the powers of sovereignty
are divided between the Government of the Union and those of the States. They are each sovereign with respect
to the objects committed to it, and neither sovereign with respect to the objects committed to the other. We cannot
comprehend that train of reasoning, which would maintain that the extent of power granted by the people is to be
ascertained not by the nature and terms of the grant, but by its date. Some State Constitutions were formed before,
some since, that of the United States. We cannot believe that their relation to each other is in any degree
dependent upon this circumstance. Their respective powers must, we think, be precisely the same as if they had
been formed at the same time. Had they been formed at the same time, and had the people conferred on the
General Government the power contained in the Constitution, and on the States the whole residuum of power,
would it have been asserted that the Government of the Union was not sovereign, with respect to those objects
which were intrusted to it, in relation to which its laws were declared to be supreme? If this could not have been
asserted, we cannot well comprehend the process of reasoning which maintains that a power appertaining to
sovereignty cannot be connected with that vast portion of it which is granted to the General Government, so far as
it is calculated to subserve the legitimate objects of that Government. The power of creating a corporation, though
appertaining to sovereignty, is not, like the power of making war or levying taxes or of regulating commerce, a
great substantive and independent power which cannot be implied as incidental to other powers or used as a

7
means of executing them. It is never the end for which other powers are exercised, but a means by which other
objects are accomplished. No contributions are made to charity for the sake of an incorporation, but a corporation
is created to administer the charity; no seminary of learning is instituted in order to be incorporated, but the
corporate character is conferred to subserve the purposes of education. No city was ever built with the sole object
of being incorporated, but is incorporated as affording the best means of being well governed. The power of
creating a corporation is never used for its own sake, but for the purpose of effecting something else. No sufficient
reason is therefore perceived why it may not pass as incidental to those powers which are expressly given if it be a
direct mode of executing them.

But the Constitution of the United States has not left the right of Congress to employ the necessary means for the
execution of the powers conferred on the Government to general reasoning. To its enumeration of powers is added
that of making "all laws which shall be necessary and proper for carrying into execution the foregoing powers, and
all other powers vested by this Constitution in the Government of the United States or in any department thereof."

The counsel for the State of Maryland have urged various arguments to prove that this clause, though in terms a
grant of power, is not so in effect, but is really restrictive of the general right which might otherwise be implied of
selecting means for executing the enumerated powers. In support of this proposition, they have found it necessary
to contend that this clause was inserted for the purpose of conferring on Congress the power of making laws. That,
without it, doubts might be entertained whether Congress could exercise its powers in the form of legislation.
But could this be the object for which it was inserted? A Government is created by the people having legislative,
executive and judicial powers. Its legislative powers are vested in a Congress, which is to consist of a senate and
house of representatives. Each house may determine the rule of its proceedings, and it is declared that every bill
which shall have passed both houses shall, before it becomes a law, be presented to the President of the United
States. The 7th section describes the course of proceedings by which a bill shall become a law, and then the 8th
section enumerates the powers of Congress. Could it be necessary to say that a legislature should exercise
legislative powers, in the shape of legislation? After allowing each house to prescribe its own course of proceeding,
after describing the manner in which a bill should become a law, would it have entered into the mind of a single
member of the convention that an express power to make laws was necessary to enable the legislature to make
them? That a legislature, endowed with legislative powers, can legislate is a proposition too self-evident to have
been questioned.

But the argument on which most reliance is placed is drawn from that peculiar language of this clause. Congress is
not empowered by it to make all laws which may have relation to the powers conferred on the Government, but
such only as may be "necessary and proper" for carrying them into execution. The word "necessary" is considered
as controlling the whole sentence, and as limiting the right to pass laws for the execution of the granted powers to
such as are indispensable, and without which the power would be nugatory. That it excludes the choice of means,
and leaves to Congress in each case that only which is most direct and simple.

Is it true that this is the sense in which the word "necessary" is always used? Does it always import an absolute
physical necessity so strong that one thing to which another may be termed necessary cannot exist without that
other? We think it does not. If reference be had to its use in the common affairs of the world or in approved
authors, we find that it frequently imports no more than that one thing is convenient, or useful, or essential to
another. To employ the means necessary to an end is generally understood as employing any means calculated to
produce the end, and not as being confined to those single means without which the end would be entirely
unattainable. Such is the character of human language that no word conveys to the mind in all situations one single
definite idea, and nothing is more common than to use words in a figurative sense. Almost all compositions contain
words which, taken in their rigorous sense, would convey a meaning different from that which is obviously
intended. It is essential to just construction that many words which import something excessive should be
understood in a more mitigated sense -- in that sense which common usage justifies. The word "necessary" is of
this description. It has not a fixed character peculiar to itself. It admits of all degrees of comparison, and is often
connected with other words which increase or diminish the impression the mind receives of the urgency it imports.
A thing may be necessary, very necessary, absolutely or indispensably necessary. To no mind would the same
idea be conveyed by these several phrases. The comment on the word is well illustrated by the passage cited at
the bar from the 10th section of the 1st article of the Constitution. It is, we think, impossible to compare the
sentence which prohibits a State from laying "imposts, or duties on imports or exports, except what may be
absolutely necessary for executing its inspection laws," with that which authorizes Congress "to make all laws

8
which shall be necessary and proper for carrying into execution" the powers of the General Government without
feeling a conviction that the convention understood itself to change materially the meaning of the word "necessary,"
by prefixing the word "absolutely." This word, then, like others, is used in various senses, and, in its construction,
the subject, the context, the intention of the person using them are all to be taken into view.

Let this be done in the case under consideration. The subject is the execution of those great powers on which the
welfare of a Nation essentially depends. It must have been the intention of those who gave these powers to insure,
so far as human prudence could insure, their beneficial execution. This could not be done by confiding the choice
of means to such narrow limits as not to leave it in the power of Congress to adopt any which might be appropriate,
and which were conducive to the end. This provision is made in a Constitution intended to endure for ages to
come, and consequently to be adapted to the various crises of human affairs. To have prescribed the means by
which Government should, in all future time, execute its powers would have been to change entirely the character
of the instrument and give it the properties of a legal code. It would have been an unwise attempt to provide by
immutable rules for exigencies which, if foreseen at all, must have been seen dimly, and which can be best
provided for as they occur. To have declared that the best means shall not be used, but those alone without which
the power given would be nugatory, would have been to deprive the legislature of the capacity to avail itself of
experience, to exercise its reason, and to accommodate its legislation to circumstances.

If we apply this principle of construction to any of the powers of the Government, we shall find it so pernicious in its
operation that we shall be compelled to discard it. The powers vested in Congress may certainly be carried into
execution, without prescribing an oath of office. The power to exact this security for the faithful performance of duty
is not given, nor is it indispensably necessary. The different departments may be established; taxes may be
imposed and collected; armies and navies may be raised and maintained; and money may be borrowed, without
requiring an oath of office. It might be argued with as much plausibility as other incidental powers have been
assailed that the convention was not unmindful of this subject. The oath which might be exacted -- that of fidelity to
the Constitution -- is prescribed, and no other can be required. Yet he would be charged with insanity who should
contend that the legislature might not superadd to the oath directed by the Constitution such other oath of office as
its wisdom might suggest.

So, with respect to the whole penal code of the United States, whence arises the power to punish in cases not
prescribed by the Constitution? All admit that the Government may legitimately punish any violation of its laws, and
yet this is not among the enumerated powers of Congress. The right to enforce the observance of law by punishing
its infraction might be denied with the more plausibility because it is expressly given in some cases.

Congress is empowered "to provide for the punishment of counterfeiting the securities and current coin of the
United States," and "to define and punish piracies and felonies committed on the high seas, and offences against
the law of nations." The several powers of Congress may exist in a very imperfect State, to be sure, but they may
exist and be carried into execution, although no punishment should be inflicted, in cases where the right to punish
is not expressly given.

Take, for example, the power "to establish post-offices and post-roads." This power is executed by the single act of
making the establishment. But from this has been inferred the power and duty of carrying the mail along the post
road from one post office to another. And from this implied power has again been inferred the right to punish those
who steal letters from the post office, or rob the mail. It may be said with some plausibility that the right to carry the
mail, and to punish those who rob it, is not indispensably necessary to the establishment of a post office and post
road. This right is indeed essential to the beneficial exercise of the power, but not indispensably necessary to its
existence. So, of the punishment of the crimes of stealing or falsifying a record or process of a Court of the United
States, or of perjury in such Court. To punish these offences is certainly conducive to the due administration of
justice. But Courts may exist, and may decide the causes brought before them, though such crimes escape
punishment.

The baneful influence of this narrow construction on all the operations of the Government, and the absolute
impracticability of maintaining it without rendering the Government incompetent to its great objects, might be
illustrated by numerous examples drawn from the Constitution and from our laws. The good sense of the public
has pronounced without hesitation that the power of punishment appertains to sovereignty, and may be exercised,
whenever the sovereign has a right to act, as incidental to his Constitutional powers. It is a means for carrying into

9
execution all sovereign powers, and may be used although not indispensably necessary. It is a right incidental to
the power, and conducive to its beneficial exercise.

If this limited construction of the word "necessary" must be abandoned in order to punish, whence is derived the
rule which would reinstate it when the Government would carry its powers into execution by means not vindictive in
their nature? If the word "necessary" means "needful," "requisite," "essential," "conducive to," in order to let in the
power of punishment for the infraction of law, why is it not equally comprehensive when required to authorize the
use of means which facilitate the execution of the powers of Government, without the infliction of punishment?

In ascertaining the sense in which the word "necessary" is used in this clause of the Constitution, we may derive
some aid from that with which it is associated. Congress shall have power "to make all laws which shall be
necessary and proper to carry into execution" the powers of the Government. If the word "necessary" was used in
that strict and rigorous sense for which the counsel for the State of Maryland contend, it would be an extraordinary
departure from the usual course of the human mind, as exhibited in composition, to add a word the only possible
effect of which is to qualify that strict and rigorous meaning, to present to the mind the idea of some choice of
means of legislation not strained and compressed within the narrow limits for which gentlemen contend.

But the argument which most conclusively demonstrates the error of the construction contended for by the counsel
for the State of Maryland is founded on the intention of the convention as manifested in the whole clause. To waste
time and argument in proving that, without it, Congress might carry its powers into execution would be not much
less idle than to hold a lighted taper to the sun. As little can it be required to prove that, in the absence of this
clause, Congress would have some choice of means. That it might employ those which, in its judgment, would
most advantageously effect the object to be accomplished. That any means adapted to the end, any means which
tended directly to the execution of the Constitutional powers of the Government, were in themselves Constitutional.
This clause, as construed by the State of Maryland, would abridge, and almost annihilate, this useful and
necessary right of the legislature to select its means. That this could not be intended is, we should think, had it not
been already controverted, too apparent for controversy.

We think so for the following reasons:

1st. The clause is placed among the powers of Congress, not among the limitations on those powers.

2d. Its terms purport to enlarge, not to diminish, the powers vested in the Government. It purports to be an
additional power, not a restriction on those already granted. No reason has been or can be assigned for thus
concealing an intention to narrow the discretion of the National Legislature under words which purport to enlarge it.
The framers of the Constitution wished its adoption, and well knew that it would be endangered by its strength, not
by its weakness. Had they been capable of using language which would convey to the eye one idea and, after
deep reflection, impress on the mind another, they would rather have disguised the grant of power than its
limitation. If, then, their intention had been, by this clause, to restrain the free use of means which might otherwise
have been implied, that intention would have been inserted in another place, and would have been expressed in
terms resembling these. "In carrying into execution the foregoing powers, and all others," &, "no laws shall be
passed but such as are necessary and proper." Had the intention been to make this clause restrictive, it would
unquestionably have been so in form, as well as in effect.

The result of the most careful and attentive consideration bestowed upon this clause is that, if it does not enlarge, it
cannot be construed to restrain, the powers of Congress, or to impair the right of the legislature to exercise its best
judgment in the selection of measures to carry into execution the Constitutional powers of the Government. If no
other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts
respecting the right to legislate on that vast mass of incidental powers which must be involved in the Constitution if
that instrument be not a splendid bauble.

We admit, as all must admit, that the powers of the Government are limited, and that its limits are not to be
transcended. But we think the sound construction of the Constitution must allow to the national legislature that
discretion with respect to the means by which the powers it confers are to be carried into execution which will
enable that body to perform the high duties assigned to it in the manner most beneficial to the people. Let the end
be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly

10
adapted to that end, which are not prohibited, but consist with the letter and spirit of the Constitution, are
Constitutional. *

That a corporation must be considered as a means not less usual, not of higher dignity, not more requiring a
particular specification than other means has been sufficiently proved. If we look to the origin of corporations, to the
manner in which they have been framed in that Government from which we have derived most of our legal
principles and ideas, or to the uses to which they have been applied, we find no reason to suppose that a
Constitution, omitting, and wisely omitting, to enumerate all the means for carrying into execution the great powers
vested in Government, ought to have specified this. Had it been intended to grant this power as one which should
be distinct and independent, to be exercised in any case whatever, it would have found a place among the
enumerated powers of the Government. But being considered merely as a means, to be employed only for the
purpose of carrying into execution the given powers, there could be no motive for particularly mentioning it.

The propriety of this remark would seem to be generally acknowledged by the universal acquiescence in the
construction which has been uniformly put on the 3d section of the 4th article of the Constitution. The power to
"make all needful rules and regulations respecting the territory or other property belonging to the United States" is
not more comprehensive than the power "to make all laws which shall be necessary and proper for carrying into
execution" the powers of the Government. Yet all admit the constitutionality of a Territorial Government, which is a
corporate body.

If a corporation may be employed, indiscriminately with other means, to carry into execution the powers of the
Government, no particular reason can be assigned for excluding the use of a bank, if required for its fiscal
operations. To use one must be within the discretion of Congress if it be an appropriate mode of executing the
powers of Government. That it is a convenient, a useful, and essential instrument in the prosecution of its fiscal
operations is not now a subject of controversy. All those who have been concerned in the administration of our
finances have concurred in representing its importance and necessity, and so strongly have they been felt that
Statesmen of the first class, whose previous opinions against it had been confirmed by every circumstance which
can fix the human judgment, have yielded those opinions to the exigencies of the nation. Under the Confederation,
Congress, justifying the measure by its necessity, transcended, perhaps, its powers to obtain the advantage of a
bank; and our own legislation attests the universal conviction of the utility of this measure. The time has passed
away when it can be necessary to enter into any discussion in order to prove the importance of this instrument as a
means to effect the legitimate objects of the Government.

But were its necessity less apparent, none can deny its being an appropriate measure; and if it is, the decree of its
necessity, as has been very justly observed, is to be discussed in another place. Should Congress, in the
execution of its powers, adopt measures which are prohibited by the Constitution, or should Congress, under the
pretext of executing its powers, pass laws for the accomplishment of objects not intrusted to the Government, it
would become the painful duty of this tribunal, should a case requiring such a decision come before it, to say that
such an act was not the law of the land. But where the law is not prohibited, and is really calculated to effect any of
the objects intrusted to the Government, to undertake here to inquire into the decree of its necessity would be to
pass the line which circumscribes the judicial department and to tread on legislative ground. This Court disclaims
all pretensions to such a power.

After this declaration, it can scarcely be necessary to say that the existence of State banks can have no possible
influence on the question. No trace is to be found in the Constitution of an intention to create a dependence of the
Government of the Union on those of the States, for the execution of the great powers assigned to it. Its means are
adequate to its ends, and on those means alone was it expected to rely for the accomplishment of its ends. To
impose on it the necessity of resorting to means which it cannot control, which another Government may furnish or
withhold, would render its course precarious, the result of its measures uncertain, and create a dependence on
other Governments which might disappoint its most important designs, and is incompatible with the language of the
Constitution. But were it otherwise, the choice of means implies a right to choose a national bank in preference to
State banks, and Congress alone can make the election.

After the most deliberate consideration, it is the unanimous and decided opinion of this Court that the act to
incorporate the Bank of the United States is a law made in pursuance of the Constitution, and is a part of the
supreme law of the land.

11
The branches, proceeding from the same stock and being conducive to the complete accomplishment of the
object, are equally constitutional. It would have been unwise to locate them in the charter, and it would be
unnecessarily inconvenient to employ the legislative power in making those subordinate arrangements. The great
duties of the bank are prescribed; those duties require branches; and the bank itself may, we think, be safely
trusted with the selection of places where those branches shall be fixed, reserving always to the Government the
right to require that a branch shall be located where it may be deemed necessary.

It being the opinion of the Court that the act incorporating the bank is constitutional, and that the power of
establishing a branch in the State of Maryland might be properly exercised by the bank itself, we proceed to
inquire:

2. Whether the State of Maryland may, without violating the Constitution, tax that branch?

That the power of taxation is one of vital importance; that it is retained by the States; that it is not abridged by the
grant of a similar power to the Government of the Union; that it is to be concurrently exercised by the two
Governments -- are truths which have never been denied. But such is the paramount character of the Constitution
that its capacity to withdraw any subject from the action of even this power is admitted. The States are expressly
forbidden to lay any duties on imports or exports except what may be absolutely necessary for executing their
inspection laws. If the obligation of this prohibition must be conceded -- if it may restrain a State from the exercise
of its taxing power on imports and exports -- the same paramount character would seem to restrain, as it certainly
may restrain, a State from such other exercise of this power as is in its nature incompatible with, and repugnant to,
the constitutional laws of the Union. A law absolutely repugnant to another as entirely repeals that other as if
express terms of repeal were used.

On this ground, the counsel for the bank place its claim to be exempted from the power of a State to tax its
operations. There is no express provision for the case, but the claim has been sustained on a principle which so
entirely pervades the Constitution, is so intermixed with the materials which compose it, so interwoven with its web,
so blended with its texture, as to be incapable of being separated from it without rending it into shreds.

This great principle is that the Constitution and the laws made in pursuance thereof are supreme; that they control
the Constitution and laws of the respective States, and cannot be controlled by them. From this, which may be
almost termed an axiom, other propositions are deduced as corollaries, on the truth or error of which, and on their
application to this case, the cause has been supposed to depend. These are, 1st. That a power to create implies a
power to preserve; 2d. That a power to destroy, if wielded by a different hand, is hostile to, and incompatible with
these powers to create and to preserve; 3d. That, where this repugnancy exists, that authority which is supreme
must control, not yield to that over which it is supreme.

These propositions, as abstract truths, would perhaps never be controverted. Their application to this case,
however, has been denied, and both in maintaining the affirmative and the negative, a splendor of eloquence, and
strength of argument seldom if ever surpassed have been displayed.

The power of Congress to create and, of course, to continue the bank was the subject of the preceding part of this
opinion, and is no longer to be considered as questionable.

That the power of taxing it by the States may be exercised so as to destroy it is too obvious to be denied. But
taxation is said to be an absolute power which acknowledges no other limits than those expressly prescribed in the
Constitution, and, like sovereign power of every other description, is intrusted to the discretion of those who use it.
But the very terms of this argument admit that the sovereignty of the State, in the article of taxation itself, is
subordinate to, and may be controlled by, the Constitution of the United States. How far it has been controlled by
that instrument must be a question of construction. In making this construction, no principle, not declared, can be
admissible which would defeat the legitimate operations of a supreme Government. It is of the very essence of
supremacy to remove all obstacles to its action within its own sphere, and so to modify every power vested in
subordinate governments as to exempt its own operations from their own influence. This effect need not be stated
in terms. It is so involved in the declaration of supremacy, so necessarily implied in it, that the expression of it could
not make it more certain. We must, therefore, keep it in view while construing the Constitution.

12
The argument on the part of the State of Maryland is not that the States may directly resist a law of Congress, but
that they may exercise their acknowledged powers upon it, and that the Constitution leaves them this right, in the
confidence that they will not abuse it. Before we proceed to examine this argument and to subject it to test of the
Constitution, we must be permitted to bestow a few considerations on the nature and extent of this original right of
taxation, which is acknowledged to remain with the States. It is admitted that the power of taxing the people and
their property is essential to the very existence of Government, and may be legitimately exercised on the objects to
which it is applicable, to the utmost extent to which the Government may choose to carry it. The only security
against the abuse of this power is found in the structure of the Government itself. In imposing a tax, the legislature
acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.

The people of a State, therefore, give to their Government a right of taxing themselves and their property, and as
the exigencies of Government cannot be limited, they prescribe no limits to the exercise of this right, resting
confidently on the interest of the legislator and on the influence of the constituent over their representative to guard
them against its abuse. But the means employed by the Government of the Union have no such security, nor is the
right of a State to tax them sustained by the same theory. Those means are not given by the people of a particular
State, not given by the constituents of the legislature which claim the right to tax them, but by the people of all the
States. They are given by all, for the benefit of all -- and, upon theory, should be subjected to that Government only
which belongs to all.

It may be objected to this definition that the power of taxation is not confined to the people and property of a State.
It may be exercised upon every object brought within its jurisdiction.

This is true. But to what source do we trace this right? It is obvious that it is an incident of sovereignty, and is
coextensive with that to which it is an incident. All subjects over which the sovereign power of a State extends are
objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from
taxation. This proposition may almost be pronounced self-evident.

The sovereignty of a State extends to everything which exists by its own authority or is introduced by its
permission, but does it extend to those means which are employed by Congress to carry into execution powers
conferred on that body by the people of the United States? We think it demonstrable that it does not. Those powers
are not given by the people of a single State. They are given by the people of the United States, to a Government
whose laws, made in pursuance of the Constitution, are declared to be supreme. Consequently, the people of a
single State cannot confer a sovereignty which will extend over them.

If we measure the power of taxation residing in a State by the extent of sovereignty which the people of a single
State possess and can confer on its Government, we have an intelligible standard, applicable to every case to
which the power may be applied. We have a principle which leaves the power of taxing the people and property of
a State unimpaired; which leaves to a State the command of all its resources, and which places beyond its reach
all those powers which are conferred by the people of the United States on the Government of the Union, and all
those means which are given for the purpose of carrying those powers into execution. We have a principle which is
safe for the States and safe for the Union. We are relieved, as we ought to be, from clashing sovereignty; from
interfering powers; from a repugnancy between a right in one Government to pull down what there is an
acknowledged right in another to build up; from the incompatibility of a right in one Government to destroy what
there is a right in another to preserve. We are not driven to the perplexing inquiry, so unfit for the judicial
department, what degree of taxation is the legitimate use and what degree may amount to the abuse of the power.
The attempt to use it on the means employed by the Government of the Union, in pursuance of the Constitution, is
itself an abuse because it is the usurpation of a power which the people of a single State cannot give.

We find, then, on just theory, a total failure of this original right to tax the means employed by the Government of
the Union, for the execution of its powers. The right never existed, and the question whether it has been
surrendered cannot arise.

But, waiving this theory for the present, let us resume the inquiry, whether this power can be exercised by the
respective States, consistently with a fair construction of the Constitution?

13
That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the
power to create; that there is a plain repugnance in conferring on one Government a power to control the
constitutional measures of another, which other, with respect to those very measures, is declared to be supreme
over that which exerts the control, are propositions not to be denied. But all inconsistencies are to be reconciled by
the magic of the word CONFIDENCE. Taxation, it is said, does not necessarily and unavoidably destroy. To carry it
to the excess of destruction would be an abuse, to presume which would banish that confidence which is essential
to all Government.

But is this a case of confidence? Would the people of any one State trust those of another with a power to control
the most insignificant operations of their State Government? We know they would not. Why, then, should we
suppose that the people of any one State should be willing to trust those of another with a power to control the
operations of a Government to which they have confided their most important and most valuable interests? In the
Legislature of the Union alone are all represented. The Legislature of the Union alone, therefore, can be trusted by
the people with the power of controlling measures which concern all, in the confidence that it will not be abused.
This, then, is not a case of confidence, and we must consider it is as it really is.

If we apply the principle for which the State of Maryland contends, to the Constitution generally, we shall find it
capable of changing totally the character of that instrument. We shall find it capable of arresting all the measures of
the Government, and of prostrating it at the foot of the States. The American people have declared their
Constitution and the laws made in pursuance thereof to be supreme, but this principle would transfer the
supremacy, in fact, to the States.

If the States may tax one instrument, employed by the Government in the execution of its powers, they may tax
any and every other instrument. They may tax the mail; they may tax the mint; they may tax patent rights; they may
tax the papers of the custom house; they may tax judicial process; they may tax all the means employed by the
Government to an excess which would defeat all the ends of Government. This was not intended by the American
people. They did not design to make their Government dependent on the States.

Gentlemen say they do not claim the right to extend State taxation to these objects. They limit their pretensions to
property. But on what principle is this distinction made? Those who make it have furnished no reason for it, and the
principle for which they contend denies it. They contend that the power of taxation has no other limit than is found
in the 10th section of the 1st article of the Constitution; that, with respect to everything else, the power of the States
is supreme, and admits of no control. If this be true, the distinction between property and other subjects to which
the power of taxation is applicable is merely arbitrary, and can never be sustained. This is not all. If the controlling
power of the States be established, if their supremacy as to taxation be acknowledged, what is to restrain their
exercising control in any shape they may please to give it? Their sovereignty is not confined to taxation; that is not
the only mode in which it might be displayed. The question is, in truth, a question of supremacy, and if the right of
the States to tax the means employed by the General Government be conceded, the declaration that the
Constitution and the laws made in pursuance thereof shall be the supreme law of the land is empty and unmeaning
declamation.

In the course of the argument, the Federalist has been quoted, and the opinions expressed by the authors of that
work have been justly supposed to be entitled to great respect in expounding the Constitution. No tribute can be
paid to them which exceeds their merit; but in applying their opinions to the cases which may arise in the progress
of our Government, a right to judge of their correctness must be retained; and to understand the argument, we
must examine the proposition it maintains and the objections against which it is directed. The subject of those
numbers from which passages have been cited is the unlimited power of taxation which is vested in the General
Government. The objection to this unlimited power, which the argument seeks to remove, is stated with fullness
and clearness. It is "that an indefinite power of taxation in the latter (the Government of the Union) might, and
probably would, in time, deprive the former (the Government of the States) of the means of providing for their own
necessities, and would subject them entirely to the mercy of the National Legislature. As the laws of the Union are
to become the supreme law of the land; as it is to have power to pass all laws that may be necessary for carrying
into execution the authorities with which it is proposed to vest it; the National Government might, at any time,
abolish the taxes imposed for State objects upon the pretence of an interference with its own. It might allege a
necessity for doing this, in order to give efficacy to the national revenues; and thus, all the resources of taxation

14
might, by degrees, become the subjects of federal monopoly, to the entire exclusion and destruction of the State
Governments."

The objections to the Constitution which are noticed in these numbers were to the undefined power of the
Government to tax, not to the incidental privilege of exempting its own measures from State taxation. The
consequences apprehended from this undefined power were that it would absorb all the objects of taxation, "to the
exclusion and destruction of the State Governments." The arguments of the Federalist are intended to prove the
fallacy of these apprehensions, not to prove that the Government was incapable of executing any of its powers
without exposing the means it employed to the embarrassments of State taxation. Arguments urged against these
objections and these apprehensions are to be understood as relating to the points they mean to prove. Had the
authors of those excellent essays been asked whether they contended for that construction of the Constitution
which would place within the reach of the States those measures which the Government might adopt for the
execution of its powers, no man who has read their instructive pages will hesitate to admit that their answer must
have been in the negative.

It has also been insisted that, as the power of taxation in the General and State Governments is acknowledged to
be concurrent, every argument which would sustain the right of the General Government to tax banks chartered by
the States, will equally sustain the right of the States to tax banks chartered by the General Government.

But the two cases are not on the same reason. The people of all the States have created the General Government,
and have conferred upon it the general power of taxation. The people of all the States, and the States themselves,
are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered
institutions of the States, they tax their constituents, and these taxes must be uniform. But when a State taxes the
operations of the Government of the United States, it acts upon institutions created not by their own constituents,
but by people over whom they claim no control. It acts upon the measures of a Government created by others as
well as themselves, for the benefit of others in common with themselves. The difference is that which always
exists, and always must exist, between the action of the whole on a part, and the action of a part on the whole --
between the laws of a Government declared to be supreme, and those of a Government which, when in opposition
to those laws, is not supreme.

But if the full application of this argument could be admitted, it might bring into question the right of Congress to tax
the State banks, and could not prove the rights of the States to tax the Bank of the United States.

The Court has bestowed on this subject its most deliberate consideration. The result is a conviction that the States
have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operations of the
constitutional laws enacted by Congress to carry into execution the powers vested in the General Government.
This is, we think, the unavoidable consequence of that supremacy which the Constitution has declared.

We are unanimously of opinion that the law passed by the Legislature of Maryland, imposing a tax on the Bank of
the United States is unconstitutional and void.

This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a
tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax
imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of
the same description throughout the State. But this is a tax on the operations of the bank, and is, consequently, a
tax on the operation of an instrument employed by the Government of the Union to carry its powers into execution.
Such a tax must be unconstitutional.

JUDGMENT. This cause came on to be heard, on the transcript of the record of the Court of Appeals of the State
of Maryland, and was argued by counsel; on consideration whereof, it is the opinion of this Court that the act of the
Legislature of Maryland is contrary to the Constitution of the United States, and void, and therefore that the said
Court of Appeals of the State of Maryland erred, in affirming the judgment of the Baltimore County Court, in which
judgment was rendered against James W. McCulloch; but that the said Court of Appeals of Maryland ought to have
reversed the said judgment of the said Baltimore County Court, and ought to have given judgment for the said
appellant, McCulloch. It is, therefore, adjudged and ordered that the said judgment of the said Court of Appeals of
the State of Maryland in this case be, and the same hereby is, reversed and annulled. And this Court, proceeding

15
to render such judgment as the said Court of Appeals should have rendered, it is further adjudged and ordered that
the judgment of the said Baltimore County Court be reversed and annulled, and that judgment be entered in the
said Baltimore County Court for the said James W. McCulloch.

* See Montague v. Richardson, 24 Conn. 348.

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COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX APPEALS, G.R. No.
L-28896 February 17, 1988

CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue
flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office
of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest.  3 A
search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition
for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant
of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted
doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed
its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR
a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was
based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed,
the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The
period started running again only on April 7, 1965, when the private respondent was definitely informed of the

16
implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on
April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In
fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such
authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after
its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC
properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission
that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the evidence, that
no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made, whether
by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a
tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but
periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a
family corporation where strict business procedures were not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of
all of the fees received by him or her, to make up the total of P75,000.00.  20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent
court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for salaries or other compensation for personal services
actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred
in carrying on any trade or business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service. This
test and deductibility in the case of compensation payments is whether they are reasonable and are, in
fact, payments purely for service. This test and its practical application may be further stated and
illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock.

17
This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the
excessive payment correspond or bear a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G.
No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it
was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond
in the form of tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate,
as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED  in toto, without costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.
 

RUFINO R. TAN vs. RAMON R. DEL ROSARIO, JR., as SEC. OF FINANCE & JOSE U. ONG, as CIR, G.R. No.
109289 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O.
CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR. vs. RAMON R. DEL ROSARIO, as
SEC OF FINANCE and JOSE U. ONG, as COMM. OF INTERNAL REVENUE, G.R. No. 109446, October 3,
1994

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of
Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending
certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6,
Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof.

18
Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any
person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed
their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at
least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and
Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged
In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as
Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:
Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. —
A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable
year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under Sections 21(a),
24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of
this section:  Provided,  however, That in computing taxable income subject to tax under Section 21 (f) in the case
of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as
deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of
their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity
stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which
must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business.

19
For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent
(40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as
the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory
law should be considered as having now adopted a gross income, instead of as having still retained
the net  income, taxation scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting,
however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax
concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to
be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole
act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such
publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the
fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual
compendium of the law which could not have been the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be
uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently
from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that
such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3)
the law applies, all things being equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs.
PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift
the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this
classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes
to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With
the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional
fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as
to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have
been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative
of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear
contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so
evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public respondents
have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act
No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership  — The general professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the
direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred

20
by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that would
apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress
during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor
leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned
implementing regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income
tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to
individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional partnerships are
subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged
in business or in the practice of their respective professions and partners in general professional partnerships. The
fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section
23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a common
profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the
net profits of the general professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this
Title.
(b) In determining his distributive share in the net income of the partnership, each partner —
(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or
credit to the extent provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross
income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession alone
or individually and one who does it through partnership (whether registered or not) with others in the exercise of a
common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment
income, under the present income tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as
an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic,
however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax
concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive
taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence
of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine
sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and
as to income).

21
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships,
no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships")
which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally
contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt
rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on
Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the
payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general  professional partnership is such an
example.4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner
does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the
general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, respectively, each of the individual
partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so
modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to  all individual
income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after
the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of
professionals who practice their respective professions individually and of those who do it through a general
professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and
Mendoza, JJ., concur. Padilla and Bidin, JJ., are on leave.

REPUBLIC OF THE PHILIPPINES vs. MAMBULAO LUMBER COMPANY, ET AL., G.R. No. L-17725, February
28, 1962

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

BARRERA, J.:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff
Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of the
complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal. 1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under the first cause of
action, for forest charges covering the period from September 10, 1952 to May 24, 1953, defendants admitted that
they have a liability of P587.37, which liability is covered by a bond executed by defendant General Insurance &
Surety Corporation for Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor of
herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and several liability in favor
of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under the third cause
of action, both defendants admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered by a
bond dated July 20, 1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of
plaintiff in the amount already mentioned is admitted, then what is the defense interposed by the defendants? The
defense presented by the defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July
31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the Philippines
P8,200.52 for 'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948, said
defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'. These reforestation were paid
to the plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there shall be collected, in
addition to the regular forest charges provided under Section 264 of Commonwealth Act 466 known as the
National Internal Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from
any public forest for commercial purposes. The amount collected shall be expended by the director of forestry, with

22
the approval of the secretary of agriculture and commerce, for reforestation and afforestation of watersheds,
denuded areas ... and other public forest lands, which upon investigation, are found needing reforestation or
afforestation .... The total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50,
and it is the contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has
not made use of those reforestation charges collected from it for reforesting the denuded area of the land covered
by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it
should be compensated with what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges. In line with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our account
with your bureau be credited with all the reforestation charges that you have imposed on us from July 1, 1947 to
June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted an
opinion of the secretary of justice, to the effect that he has no discretion to extend the time for paying the
reforestation charges and also explained why not all denuded areas are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company
to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the payment of the sum
of P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said sum
of P9,127.50, not having been used in the reforestation of the area covered by its license, the same is refundable
to it or may be applied in compensation of said sum of P4,802.37 due from it as forest charges.
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section two
hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the National Internal
Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first and second groups and forty
centavos for the third and fourth groups cut out and removed from any public forest for commercial purposes. The
amount collected shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture
and Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas and cogon
and open lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other public
forest lands, which upon investigation, are found needing reforestation or afforestation, or needing to be under
forest cover for the growing of economic trees for timber, tanning, oils, gums, and other minor forest products or
medicinal plants, or for watersheds protection, or for prevention of erosion and floods and preparation of necessary
plans and estimate of costs and for reconnaisance survey of public forest lands and for such other expenses as
may be deemed necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from the sale of
barks, medical plants and other products derived from plantations as herein provided shall constitute a fund to be
known as Reforestation Fund, to be expended exclusively in carrying out the purposes provided for under this Act.
All provincial or city treasurers and their deputies shall act as agents of the Director of Forestry for the collection of
the revenues or incomes derived from the provisions of this Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses
or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for
the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount collected
as reforestation charges should be used exclusively for the reforestation of the area covered by the license of a
licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe too, that the
licensee's area may or may not be reforested at all, depending on whether the investigation thereof by the Director
of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount paid by a
licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund, payable by
him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law expressly
provides, shall be expended in carrying out the purposes provided for thereunder, namely, the reforestation or
afforestation, among others, of denuded areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is applicable, such
that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in the
sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not mutually
creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed: .

23
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and
debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has
paid to the government, they are in the coffers of the government as taxes collected, and the government does not
owe anything, crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can
be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a
duty to, and are the positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when
called upon by the Collector, because he has a claim against the governmental body which is not included
in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against
the defendant-appellant. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De Leon, JJ.,
concur.

ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, G.R. No. L-67649,
June 28, 1988

GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow
him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the
latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio
San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters,
is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in
his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of
Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and
the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on
January 24, 1980.

24
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and
ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho
Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances
appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court  in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT
HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-
OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT
HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY
OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT
HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO
FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY,
THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property
was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon
himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant
of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of
the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no
off-setting of taxes against the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
In the case of  Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can
not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S.,
7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are

25
the positive acts of the government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a
claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city government
while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the
national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank
long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977
was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions
of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law
on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this
issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified   ... .(Petition
for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof
to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and the  general rule is that
the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings
leading up to the sale.  (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261).
This is actually an exception to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with,
the petitioner cannot, however, deny that he did receive the notice for the auction sale. The records sustain the
lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction
sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977
(Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was substantial
compliance with the requirements of the notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question
shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you
tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read
the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such
notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the
auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388)

26
we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering
the wide divergence between their assessed values and the amounts for which they had been actually sold.
However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such
does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction,
upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor
may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by
reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash.
162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner
would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it
would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367,
369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship from which we would be glad to
relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of
taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely
because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny
the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act
of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine
National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice
sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the
annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the
respondent court is affirmed.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

IN THE MATTER OF THE TESTATE ESTATE OF PATRICIO PONFERRADA, deceased. JOAQUIN

CORDERO, administrator-appellee, vs.
JOSE GONDA as Representative of the Commissioner of Internal Revenue, claimant-appellant. G.R. No. L-
22369, October 15, 1966

Artemio G. Raborar for administrator and appellee. Office of the Solicitor General for claimant and appellant.

SANCHEZ, J.:
On September 18, 1953, a demand by letter was made on Patricio Ponferrada by the Bureau of Internal
Revenue1 for the payment of P3,805.88, covering forest charges for the period from November 2, 1946 to January
29, 1949.2 Ponferrada made a partial payment of P262.37,3 leaving a balance of P3,543.51.

27
Ponferrada died on November 25, 1957. In the Testate Estate proceedings, 4 Joaquin Cordero was named
Administrator.
On July 29, 1959, the BIR, thru respondent Jose Gonda, filed in the proceedings just mentioned a claim for the
said sum of P3,543.51. The Administrator opposed. Ground: Prescription. 5
Upon a stipulation of facts, the probate court, on August 28, 1963, declared that said claim of P3,543.51 had
prescribed.6
BIR now appeals direct to this Court.7
1. Our Tax Code8 provides for two main periods of prescription. The first refers to assessment, 9 the second to the
remedies of collection.10 Not concerned with the first, we are with the second.
That an assessment has here been made, we do not doubt. By the very fact that, on September 18, 1953, a formal
demand was made by the government upon the deceased Patricio Ponferrada for the payment of forest charges in
a definite  amount — P3,805.88 — assessment is deemed to have been made. 11
September 18, 1953 then is a safe starting point  for the statutory limitation to commence collection suit. Here, the
court claim was filed on July 29, 1959. From September 18, 1953 to July 29, 1959, a period of 5 years, 10 months
and 11 days has passed. The five-year prescriptive period had thus elapsed. Section 332 (c) of the Tax Code
reads:
(c) Where the assessment of any internal-revenue tax has been made within the period of limitation above
prescribed such tax may be collected  by distraint or levy or by a proceeding in court, but only if begun (1) within
five years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in
writing  by the Commissioner of Internal Revenue and the taxpayer before the expiration of such five-year. The
period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the
period previously agreed upon.12
We note the narrowly-confined restriction of time within which a proceeding in court may be brought: "but only if
begun  (1) within five years after the assessment of the tax". Implicit in the words but only is that, unless otherwise
authorized by statute, the 5-year period is absolute.
The Code itself recognizes but one exception: If suit is started "prior to the expiration of any period for
collection agreed upon in writing  by the Commissioner of Internal Revenue and the taxpayer before the expiration
of such five-year period" — which may be extended by subsequent written agreements made "before the expiration
of the period previously agreed upon". In Collector of Internal Revenue vs. Pineda, etc., L-14522, May 31, 1961,
this Court13 said in terms equally pertinent here, that: "the only agreement that could have suspended the running
of the prescriptive period for the collection of the tax in question is, . . . a written  agreement between Solano (the
taxpayer) and the Collector, entered into before the expiration of the five-year prescriptive period, extending the
period of limitation prescribed by law (Sec. 332 [c], N.I.R.C.)." No such written agreement exists here. The original
five-year limit governs.
2. Appellant's brief draws our attention to jurisprudence where a taxpayer may not avail of the limitations
statute.14 These cases are inapposite. In Arcache, delay in tax collection was excused because of "his [taxpayer's]
own repeated requests for re-investigation and similarly repeated requests of extension of time to pay". In Sison,
"the taxpayer's petition for reconsideration or reinvestigation had stopped the running of the five-year limitation
period". In Capitol Subdivision, the pendency of a taxpayer's petition for clarification interrupted said period. None
of these situations obtains here.
The government also urges that partial payment is "acknowledgment of the tax obligation", hence, a "waiver of the
defense of prescription". But partial payment would not prevent the government from suing the taxpayer. Because,
by such act of payment, the government is not  thereby "persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harrassment or injustice is meant". Which, as stated in  Collector vs.
Suyoc Consolidated Mining Co., et al., L-11527, November 25, 1958, is the underlying reason behind the rule that
prescriptive period is arrested by the taxpayer's request for reexamination or reinvestigation — even if he "has not
previously waived it [prescription] in writing". And, partial payment is no waiver "in writing". Particularly is this true
here where, out of the claim of P3,805.88, but P262.27 were paid; and in reference to the other claim of
P6,220.65,15 appellee made a substantial payment of P6,000.00 and acknowledged  liability of P220.65.
3. The government leans heavily upon the Barretto case 16 to strengthen its claim that the action had not yet
prescribed. Because, this Court there said:
. . . Moreover, as already stated in the decision, forest charges and surcharges are payments for timber taken from
public forests, and they are considered as internal revenue taxes only in the sense that they are to be collected by
the Collector of Internal Revenue and the regulations for their collection are contained in the National Internal
Revenue Code. Forest products are obtained under licenses issued by the Government and forest charges are in

28
a sense contractual in origin. No prescriptive period having been prescribed by law for this case, Sec. 43 of the
Code of Civil Procedure should apply . . . .17
This opinion was planted on the views of the Tax Commission (1939), as follows:
Forest charges, which are not property taxes but rather the price paid for exploiting national resources, need to be
revised18 to make them more in harmony with present-day conditions in the industry and with public policies.
Forest charges are to be distinguished from taxes. They are, strictly speaking, the price which the Government
charges for the privilege granted to concessionaires to exploit the public domain, rather than a tax imposed to
support the general services of the government . . . . 19
Compelling reasons there are which constrain us to revise the views expressed in the Barretto case.
By law, forest charges have always  been categorized as internal revenue taxes for — all purposes. Our statute
books say so.
We start with the Tax Code. Forest charges appear below the heading "TITLE VIII — MISCELLANEOUS TAXES",
under Chapter V, along with such others as tax on banks (Chapter I), taxes on receipts of insurance companies
(Chapter II), franchise tax (Chapter III), and amusement taxes (Chapter IV). And Section 18 of the same Code,
includes "charges on forest products" in the list of those that "are deemed to be national internal revenue taxes",
thus:
SEC. 18. Sources of revenue.—The following taxes, fees and charges are deemed to be national internal revenue
taxes:
(a) Income tax;
(b) Estate, inheritance and gift taxes;
(c) Specific taxes on certain articles;
(d) Privilege taxes on business or occupation;
(e) Documentary stamp taxes;
(f) Mining taxes;
(g) Miscellaneous taxes, fees and charges, namely, taxes on banks and insurance companies, franchise taxes,
taxes on amusements, charges on forest products, fees for sealing weights and measures, firearms license fees,
tobacco inspection fees, and water rentals. (As amended by Rep. Act No. 1476, approved June 15, 1956.) 20
With the exception of radio registration fees, which were eliminated, the foregoing is a reproduction in toto  of the
original Section 18 of the Tax Code approved on June 15, 1939.
Section 1438, Administrative Code of 1917, the law which Section 18 of the Tax Code of 1939 replaced, states in
part:
SEC. 1438. Sources of taxes.—The following taxes, fees, and charges in the nature of tax are deemed to be
internal revenue taxes:
xxx           xxx           xxx
(f) Charges for forest products.
xxx           xxx           xxx
Section 1438 of the Administrative Code, in turn, proceeded from Section 21, Act 2339 of the Philippine Legislature
known as the Internal Revenue Law of 1914, which provides:
ARTICLE I. — Sources of internal revenue.
SEC. 21. Sources of taxes.—The following taxes, fees, and charges in the nature of tax are deemed to be internal-
revenue taxes:
xxx           xxx           xxx
(f) Charges for forest products;
xxx           xxx           xxx
Predecessor of this provision is Section 25 of Act 1189, known as the Internal Revenue Law of 1904, which reads:
SEC. 25. The following sources of revenue shall be included in the internal revenue for the Philippine Islands, and
the taxes imposed shall be collected by the Collector of Internal Revenue . . . and the revenue obtained therefrom
shall be devoted to the support of the several provinces and of the Insular and municipal governments in the
manner in this Act provided:
xxx           xxx           xxx
1. Tax on forestry products.
xxx           xxx           xxx
4. Now, the law on prescription in the Tax Code does not make any distinction at all as to the sources of taxes to
which it is made applicable. Its broad sweep is articulated in the terms "internal-revenue taxes" 21 and "any internal-
revenue tax".22 Since "charges on forest products" are "internal-revenue taxes", they are within the
coverage of the law on prescription of actions to collect "internal-revenue taxes" or "any internal-revenue

29
tax". Had the Tax Code intended that forest charges be outside the operational rule on prescription, that statute
should have so provided. We cannot insert therein any such exception now. Clearly, that is intrusion into the
legislative domain in violation of a definite proscription in the Constitution.
5. Authorities are not wanting to bring home the point that forest charges are in reality internal revenue taxes, as
such subject to the other provisions of internal revenue law. As early as 1918, 23 this Court held that forest charges
are in the nature of an internal revenue tax on property ["forest products removed from the public forest"] and a
distress warrant may be issued thereon.
One month before the Barretto decision came the Lacson case.24 There, this Court made mention of the
observations of the Tax Commission [heretofore textually copied], which recommended the enactment of the 1939
Internal Revenue Code. However, this Court sustained the views of the dissenting judge of the Court of Tax
Appeals, thus:
. . . There appears to be no legal basis for not considering forest charges as taxes when respondent considers
them as taxes under Republic Act No. 304, as amended, thus enabling holders of backpay certificates to pay forest
charges out of their backpay (B.I.R. ruling, November 22, 1955, Ex. B), and as internal revenue tax under Chapter
II, Title IX, of the Revenue Code, so as to authorize collection of said charges by distraint and levy (Op. Atty. Gen.,
Oct. 27, 1922). The argument that forest charges are not taxes because they are the  price paid for the sale by the
Government of forest products overlooks the fact that some forest charges are impose on forest products cut and
removed from unregistered private lands. (See Sec. 266, Revenue Code). The Government cannot sell forest
products which it does not own. From this it may be inferred that forest charges are  not in reality  the price
paid for the sale by the Government of forest products; they are essentially taxes  for the privilege of
cutting and removing forest products . . . They stand on the same footing as the mining taxes imposed
under Title VII of the Revenue Code . . . .25
Even the Chairman of the 1939 Tax Commission later on (November 20, 1939), in a decision he rendered as
Secretary of Finance, in the case of the Dulañgan Mining Interests Co., Inc., covering forest charges, adverted to
the ruling in the Hongkong and Shanghai Banking Corporation case, supra. He applied Section 1588 of the
Administrative Code and declared that every internal revenue tax — which includes forest charges — is a lien on
the property for which that tax is imposed.26
51 Am. Jur. p. 1072 is authority for the statement that:
Taxes which, although imposed under statutes containing many variations as to their precise phraseology, are
directed generally against the  production, or severance  from the soil, of such natural resources as timber, oil,
natural gas, ores, or the like, and are normally measured according to the quantity or value of the articles produced
or severed, are usually, although not invariably, regarded as excise rather than property taxes. 27
The view that forest charges are much like ad valorem taxes in mining, finds jurisprudential support.
In Cebu Portland Cement Company vs. Commissioner of Internal Revenue, L-18649, February 27, 1965, we
said that this ad valorem  tax (on minerals used for cement) "is a tax not on the minerals, but upon the
privilege of severing or extracting the same from the earth, the government's right to exact the said impost
springing from the Regalian theory of State ownership of its natural resources".28 So saying, this Court there
applied Section 306,29 under the Administrative Provisions [of the Tax Code] which include prescription  of actions
for tax collection.
In another case,30 upon the premise that forest charges "are in the coffers of the government as taxes collected",
the pronouncement was that internal revenue taxes cannot be the subject of compensation: Reason: government
and taxpayer "are not  mutually creditors and debtors of each other" under Article 1278 of the Civil Code and a
"claim for taxes is not  such a debt, demand, contract or judgment as is allowed to be set-off." This decision
inferentially takes forest charges out of the Barretto  rule, because they are taxes — not  "in a sense contractual in
origin."
The thoughts expressed in the authorities just cited funnel down to one idea: forest charges are internal revenue
taxes, whether one labels them taxes on property, or excise taxes, i.e., taxes upon the privilege of cutting and
carting away timber and forest products. And they fall under the philosophy of taxation — to support the general
services of government. They go into the general fund. 31
6. The provisions on prescription fall under Title IX, entitled General Administrative Provisions. This title applies to
all taxes, fees, and charges  collected under the Code. In this title's first provision (Section 305), injunction is
unavailing to a forest concessionaire "to restrain the collection of any national internal-revenue tax, fee,
or charge imposed by this Code". By Section 306, the concessionaire, may only sue for tax refunds within two
years from the date of payment. 32 Section 316 defines the "civil remedies for the collection of internal revenue
taxes, fees, or charges" to be distraint and levy, and judicial action.33

30
In Section 337, the forest concessionaire 34 — like all other taxpayers — is obligated to preserve his books of
account for a period of five years "from the date of the last entry in each book." Why? Because the government is
given a like period of five years within which to make assessment. If forest charges were "in a sense contractual in
origin", then the concessionaire should be required to keep his accounting records not for five years only, but for
ten years, to jibe with the 10-year prescriptive period in the Civil Code. 35
In sum, here is the situation of a man called upon to pay forest charges. Applicable to him are the Tax Code
provisions on distraint and levy; the two-year period for refund; the prohibition against injunction; the duty to keep
his books for five years. But, if we were to adhere to the Barretto decision, then the law on prescription in the Code
of Civil Procedure [now Art. 1144, Civil Code] 36 must have to be scissored and pasted over Sections 331 and 332
of the Tax Code. Uniformity in the application of the Tax Code provisions would suggest that we veer away from
this view.
7. Our stand is even fortified by the facts set forth in the Barretto case. Assessment was not there based on a
return. The judgment on prescription therein was grounded on fraud. Because, from an examination of the books, it
was found that "many purchases of logs were without invoices and sales under declared". The "deficiencies
amounting to fraud were discovered" in 1953. And applying the provisions of the Code of Civil Procedure, it was
there declared that the period for prescription should be reckoned" from 1953. But the situation presented in said
case is precisely covered by Section 332(a) of the Tax Code, which reads:
(a) In the case of a false or fraudulent  37 return with intent to evade tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any
time within ten years after the discovery of the falsity, fraud, or omission. 38
Our conclusion, therefore, is that the overwhelming implication from the text of the Tax Code leaves no
other reasonable construction except that: Forest charges come within the compass of the prescriptive
periods set forth therein.
The net result still is: From September 18, 1953 (when demand for payment was made) to July 29, 1953
(when court claim was filed), more than five (5) years have elapsed. By the terms of Article 332(c) of the
Tax Code, supra, action to collect has prescribed.
Upon the premises, the judgment appealed from is affirmed. No costs. So ordered.
Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro, JJ., concur. Reyes,
J.B.L., J., took no part.

NATIONAL POWER CORPORATION vs. PROV. OF QUEZON and MUN. OF PAGBILAO, G.R. No. 171586,
July 15, 2009

DECISION
BRION, J.:
We resolve in this petition for review on certiorari the question of whether the National Power Corporation (NPC),
as a government-owned and controlled corporation, can claim tax exemption under Section 234 of the Local
Government Code (LGC) for the taxes due from the Mirant Pagbilao Corporation (Mirant) 1 whose tax liabilities the
NPC has contractually assumed.
BACKGROUND FACTS
The NPC is a government-owned and controlled corporation mandated by law to undertake, among others, the
production of electricity from nuclear, geothermal, and other sources, and the transmission of electric power on a
nationwide basis.2 To pursue this mandate, the NPC entered into an Energy Conversion Agreement (ECA) with
Mirant on November 9, 1991. The ECA provided for a build-operate-transfer (BOT) arrangement between Mirant
and the NPC. Mirant will build and finance a coal-fired thermal power plant on the lots owned by the NPC in
Pagbilao, Quezon for the purpose of converting fuel into electricity, and thereafter, operate and maintain the power
plant for a period of 25 years. The NPC, in turn, will supply the necessary fuel to be converted by Mirant into
electric power, take the power generated, and use it to supply the electric power needs of the country. At the end
of the 25-year term, Mirant will transfer the power plant to the NPC without compensation. According to the NPC,
the power plant is currently operational and is one of the largest sources of electric power in the country. 3
Among the obligations undertaken by the NPC under the ECA was the payment of all taxes that the government
may impose on Mirant; Article 11.1 of the ECA4 specifically provides:
11.1 RESPONSIBILITY. [NPC] shall be responsible for the payment of (a) all taxes, import duties, fees, charges
and other levies imposed by the National Government of the Republic of the Philippines or any agency or
instrumentality thereof to which [Mirant] may at any time be or become subject in or in relation to the performance
of their obligations under this Agreement (other than (i) taxes imposed or calculated on the basis of the net income

31
[of Mirant] and (ii) construction permit fees, environmental permit fees and other similar fees and charges), and (b)
all real estate taxes and assessments, rates and other charges in respect of the Site, the buildings and
improvements thereon and the Power Station. [Emphasis supplied.]
In a letter dated March 2, 2000, the Municipality of Pagbilao assessed Mirant’s real property taxes on the power
plant and its machineries in the total amount of ₱1,538,076,000.00 for the period of 1997 to 2000. The Municipality
of Pagbilao furnished the NPC a copy of the assessment letter.
To protect its interests, the NPC filed a petition before the Local Board of Assessment Appeals ( LBAA) entitled "In
Re: Petition to Declare Exempt from Payment of Property Tax on Machineries and Equipment Used for Generation
and Transmission of Power, under Section 234(c) of RA 7160 [LGC], located at Pagbilao, Quezon xxx" 5 on April
14, 2000. The NPC objected to the assessment against Mirant on the claim that it (the NPC) is entitled to the tax
exemptions provided in Section 234, paragraphs (c) and (e) of the LGC. These provisions state:
Section 234. Exemptions from Real Property Tax. – The following are exempted from payment for the real property
tax:
x x x           x x x          x x x
(c) All machineries and equipment that are actually, directly, and exclusively used by local water districts and
government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation
and transmission of electric power;
x x x           x x x          x x x
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to, or presently
enjoyed by, all persons, whether natural or juridical, including government-owned or –controlled corporations are
hereby withdrawn upon the effectivity of the Code.
Assuming that it cannot claim the exemptions stated in these provisions, the NPC alternatively asserted that it is
entitled to:
a. the lower assessment level of 10% under Section 218(d) of the LGC for government-owned and controlled
corporations engaged in the generation and transmission of electric power, instead of the 80% assessment level
for commercial properties as imposed in the assessment letter; and
b. an allowance for depreciation of the subject machineries under Section 225 of the LGC.
The LBAA dismissed the NPC’s petition on the Municipality of Pagbilao’s motion, through a one-page Order dated
November 13, 2000.6
The NPC appealed the denial of its petition with the Central Board of Assessment Appeals (CBAA). Although it
noted the incompleteness of the LBAA decision for failing to state the factual basis of its ruling, the CBAA
nevertheless affirmed, in its decision of August 18, 2003, the denial of the NPC’s claim for exemption. The CBAA
likewise denied the NPC’s subsequent motion for reconsideration, prompting the NPC to institute an appeal before
the Court of Tax Appeals (CTA).
Before the CTA, the NPC claimed it was procedurally erroneous for the CBAA to exercise jurisdiction over its
appeal because the LBAA issued a sin perjuicio 7 decision, that is, the LBAA pronounced a judgment without any
finding of fact. It argued that the CBAA should have remanded the case to the LBAA. On substantive issues, the
NPC asserted the same grounds it relied upon to support its claimed tax exemptions.
The CTA en banc resolved to dismiss the NPC’s petition on February 21, 2006. From this ruling, the NPC filed the
present petition seeking the reversal of the CTA en banc’s decision.
THE PETITION
The NPC contends that the CTA en banc erred in ruling that the NPC is estopped from questioning the LBAA’s sin
perjuicio judgment; the LBAA decision, it posits, cannot serve as an appealable decision that would vest the CBAA
with appellate jurisdiction; a sin perjuicio decision, by its nature, is null and void.
The NPC likewise assails the CTA en banc ruling that the NPC was not the proper party to protest the real property
tax assessment, as it did not have the requisite "legal interest." The NPC claims that it has legal interest because
of its beneficial ownership of the power plant and its machineries; what Mirant holds is merely a naked title. Under
the terms of the ECA, the NPC also claims that it possesses all the attributes of ownership, namely, the rights to
enjoy, to dispose of, and to recover against the holder and possessor of the thing owned. That it will acquire and
fully own the power plant after the lapse of 25 years further underscores its "legal interest" in protesting the
assessment.
The NPC’s assertion of beneficial ownership of the power plant also supports its claim for tax exemptions under
Section 234(c) of the LGC. The NPC alleges that it has the right to control and supervise the entire output and
operation of the power plant. This arrangement, to the NPC, proves that it is the entity actually, directly, and
exclusively using the subject machineries. Mirant’s possession of the power plant is irrelevant since all of Mirant

32
activities relating to power generation are undertaken for and in behalf of the NPC. Additionally, all the electricity
Mirant generates is utilized by the NPC in supplying the power needs of the country; Mirant therefore operates the
power plant for the exclusive and direct benefit of the NPC. Lastly, the NPC posits that the machineries taxed by
the local government include anti-pollution devices which should have been excluded from the assessment under
Section 234(e) of the LGC.
Assuming that the NPC is liable to pay the assessed real property tax, it asserts that a reassessment is necessary
as it is entitled to depreciation allowance on the machineries and to the lower 10% assessment level under
Sections 225 and 218(d) of the LGC, respectively. This position is complemented by its prayer to have the case
remanded to the LBAA for the proper determination of its tax liabilities.
THE COURT’S RULING
This case is not one of first impression. We have previously ruled against the NPC’s claimed exemptions under the
LGC in the cases of FELS Energy, Inc. v. Province of Batangas 8 and NPC v. CBAA.9 Based on the principles we
declared in those cases, as well as the defects we found in the NPC’s tax assessment protest, we conclude that
the petition lacks merit.
The NPC is estopped from questioning the CBAA’s jurisdiction
The assailed CTA en banc decision brushed aside the NPC’s sin perjuicio arguments by declaring that:
The court finds merit in [NPC’s] claim that the Order of the LBAA of the Province of Quezon is a sin perjuicio
decision. A perusal thereof shows that the assailed Order does not contain findings of facts in support of the
dismissal of the case. It merely stated a finding of merit in the contention of the Municipality of Pagbilao xxx.
However, on appeal before the CBAA, [NPC] assigned several errors, both in fact and in law, pertaining to the
LBAA’s decision. Thus, petitioner is bound by the appellate jurisdiction of the CBAA under the principle of equitable
estoppel. In this regard, [NPC] is in no position to question the appellate jurisdiction of the CBAA as it is the same
party which sought its jurisdiction and participated in the proceedings therein. 10 [Emphasis supplied.]
We agree that the NPC can no longer divest the CBAA of the power to decide the appeal after invoking and
submitting itself to the board’s jurisdiction. We note that even the NPC itself found nothing objectionable in the
LBAA’s sin perjuicio decision when it filed its appeal before the CBAA; the NPC did not cite this ground as basis for
its appeal. What it cited were grounds that went into the merits of its case. In fact, its appeal contained no prayer
for the remand of the case to the LBAA.
A basic jurisdictional rule, essentially based on fairness, is that a party cannot invoke a court’s jurisdiction to secure
affirmative relief and, after failing to obtain the requested relief, repudiate or question that same
jurisdiction.11 Moreover, a remand would be unnecessary, as we find the CBAA’s and the CTA en banc’s denial of
NPC’s claims entirely in accord with the law and with jurisprudence.
The entity liable for tax has the right to protest the assessment
Before we resolve the question of the NPC's entitlement to tax exemption, we find it necessary to determine first
whether the NPC initiated a valid protest against the assessment. A taxpayer's failure to question the assessment
before the LBAA renders the assessment of the local assessor final, executory, and demandable, thus precluding
the taxpayer from questioning the correctness of the assessment, or from invoking any defense that would reopen
the question of its liability on the merits.12
Section 226 of the LGC lists down the two entities vested with the personality to contest an assessment:
the owner and the person with legal interest in the property.
A person legally burdened with the obligation to pay for the tax imposed on a property has legal interest in the
property and the personality to protest a tax assessment on the property. This is the logical and legal conclusion
when Section 226, on the rules governing an assessment protest, is placed side by side with Section 250 on the
payment of real property tax; both provisions refer to the same parties who may protest and pay the tax:

SECTION 226. Local Board of SECTION 250. Payment of Real

Assessment Appeals. - Any owner
or person having legal interest in
the property who is not satisfied
with the action of the provincial, city
or municipal assessor in the
assessment of his property may,
within sixty (60) days from the date
of receipt of the written notice of
assessment, appeal to the Board of
Assessment Appeals of the province
Property Taxes in Instalments. - The
owner of the real property or the
person having legal interest
therein may pay the basic real
property tax xxx due thereon without
interest in four (4) equal instalments
xxx.

33
 or city xxx.

The liability for taxes generally rests on the owner of the real property at the time the tax accrues. This is a
necessary consequence that proceeds from the fact of ownership. 13 However, personal liability for realty taxes may
also expressly rest on the entity with the beneficial use of the real property, such as the tax on property owned by
the government but leased to private persons or entities, or when the tax assessment is made on the basis of the
actual use of the property.14 In either case, the unpaid realty tax attaches to the property 15 but is directly
chargeable against the taxable person who has actual and beneficial use and possession of the property
regardless of whether or not that person is the owner. 16
In the present case, the NPC, contrary to its claims, is neither the owner nor the possessor/user of the subject
machineries.
The ECA’s terms regarding the power plant’s machineries clearly vest their ownership with Mirant. Article 2.12 of
the ECA17 states:
2.12 OWNERSHIP OF POWER STATION. From the Effective Date until the Transfer Date [that is, the day
following the last day of the 25-year period], [Mirant] shall, directly or indirectly, own the Power Station and all the
fixtures, fittings, machinery and equipment on the Site or used in connection with the Power Station which have
been supplied by it or at its cost. [Mirant] shall operate, manage, and maintain the Power Station for the purpose of
converting fuel of [NPC] into electricity. [Emphasis supplied.]
The NPC contends that it should nevertheless be regarded as the beneficial owner of the plant, since it will acquire
ownership thereof at the end of 25 years. The NPC also asserts, by quoting portions of the ECA, that it has the
right to control and supervise the construction and operation of the plant, and that Mirant has retained only naked
title to it. These contentions, unfortunately, are not sufficient to vest the NPC the personality to protest the
assessment.
In Cariño v. Ofilado,18 we declared that legal interest should be an interest that is actual and material, direct
and immediate, not simply contingent or expectant. The concept of the directness and immediacy involved
is no different from that required in motions for intervention under Rule 19 of the Rules of Court that allow
one who is not a party to the case to participate because of his or her direct and immediate interest,
characterized by either gain or loss from the judgment that the court may render. 19 In the present case, the
NPC’s ownership of the plant will happen only after the lapse of the 25-year period; until such time arrives, the
NPC's claim of ownership is merely contingent, i.e., dependent on whether the plant and its machineries exist at
that time. Prior to this event, the NPC’s real interest is only in the continued operation of the plant for the
generation of electricity. This interest has not been shown to be adversely affected by the realty taxes imposed and
is an interest that NPC can protect, not by claiming an exemption that is not due to Mirant, but by paying the taxes
it (NPC) has assumed for Mirant under the ECA.
To show that Mirant only retains a naked title, the NPC has selectively cited provisions of the ECA to make it
appear that it has the sole authority over the power plant and its operations. Contrary to these assertions, however,
a complete reading of the ECA shows that Mirant has more substantial powers in the control and supervision of the
power plant's construction and operations.
Under Articles 2.1 and 3.1 of the ECA, Mirant is responsible for the design, construction, equipping, testing, and
commissioning of the power plant. Article 5.1 on the operation of the power plant states that Mirant shall be
responsible for the power plant’s management, operation, maintenance, and repair until the Transfer Date. This is
reiterated in Article 5.3 where Mirant undertakes to operate the power plant to convert fuel into electricity.
While the NPC asserts that it has the power to authorize the closure of the power plant without any veto on the part
of Mirant, the full text of Article 8.5 of the ECA shows that Mirant is possessed with similar powers to terminate the
agreement:
8.5 BUYOUT. If the circumstances set out in Article 7.18, Article 9.4, Article 14.4 or Article 28.4 arise or if, not
earlier than 20 years after the Completion Date, [the NPC] gives not less than 90 days notice to [Mirant] that it
wishes to close the power station, or if [the NPC] has failed to ensure the due payment of any sum due
hereunder within three months of its due date then, upon [Mirant] giving to [the NPC] not less than 90 days
notice requiring [the NPC] to buy out [Mirant] or, as the case may be, [the NPC] giving not less than 90 days
notice requiring [Mirant] to sell out to [NPC], [NPC] shall purchase all [Mirant's] right, title, and interest in and to the
Power Station and thereupon all [Mirant's] obligations hereunder shall cease. [Emphasis supplied.]
On liability for taxes, the NPC indeed assumed responsibility for the taxes due on the power plant and its
machineries,20 specifically, "all real estate taxes and assessments, rates and other charges in respect of the site,
the buildings and improvements thereon and the [power plant]." At first blush, this contractual provision would
appear to make the NPC liable and give it standing to protest the assessment. The tax liability we refer to above,

34
however, is the liability arising from law that the local government unit can rightfully and successfully enforce, not
the contractual liability that is enforceable between the parties to a contract as discussed below. By law, the tax
liability rests on Mirant based on its ownership, use, and possession of the plant and its machineries.
In Testate of Concordia Lim v. City of Manila,21 we had occasion to rule that:
In [Baguio v. Busuego22], the assumption by the vendee of the liability for real estate taxes prospectively due was in
harmony with the tax policy that the user of the property bears the tax. In [the present case], the interpretation
that the [vendee] assumed a liability for overdue real estate taxes for the periods prior to the contract of sale is
incongruent with the said policy because there was no immediate transfer of possession of the properties previous
to full payment of the repurchase price.
xxxx
To impose the real property tax on the estate which was neither the owner nor the beneficial user of the property
during the designated periods would not only be contrary to law but also unjust.
For a fuller appreciation of this ruling, the Baguio case referred to a contract of sale wherein the vendee not only
assumed liability for the taxes on the property, but also acquired its use and possession, even though title
remained with the vendor pending full payment of the purchase price. Under this situation, we found the vendee
who had assumed liability for the realty taxes and who had been given use and possession to be liable. Compared
with Baguio, the Lim case supposedly involved the same contractual assumption of tax liabilities, 23 but possession
and enjoyment of the property remained with other persons. Effectively, Lim held that the contractual assumption
of the obligation to pay real property tax, by itself, is not sufficient to make one legally compellable by the
government to pay for the taxes due; the person liable must also have use and possession of the property.
Using the Baguio and Lim situations as guides, and after considering the comparable legal situations of the parties
assuming liability in these cases, we conclude that the NPC’s contractual liability alone cannot be the basis for the
enforcement of tax liabilities against it by the local government unit. In Baguio and Lim, the vendors still retained
ownership, and the effectiveness of the tax liabilities assumed by the vendees turned on the possession and use of
the property subject to tax. In other words, the contractual assumption of liability was supplemented by an interest
that the party assuming liability had on the property taxed; on this basis, the vendee in Baguio was found liable,
while the vendee in Lim was not. In the present case, the NPC is neither the owner, nor the possessor or user of
the property taxed. No interest on its part thus justifies any tax liability on its part other than its voluntary
contractual undertaking. Under this legal situation, only Mirant as the contractual obligor, not the local government
unit, can enforce the tax liability that the NPC contractually assumed; the NPC does not have the "legal interest"
that the law and jurisprudence require to give it personality to protest the tax imposed by law on Mirant.
By our above conclusion, we do not thereby pass upon the validity of the contractual stipulation between the NPC
and Mirant on the assumption of liability that the NPC undertook. All we declare is that the stipulation is entirely
between the NPC and Mirant, and does not bind third persons who are not privy to the contract between these
parties. We say this pursuant to the principle of relativity of contracts under Article 1311 of the Civil Code which
postulates that contracts take effect only between the parties, their assigns and heirs. Quite obviously, there is no
privity between the respondent local government units and the NPC, even though both are public corporations. The
tax due will not come from one pocket and go to another pocket of the same governmental entity. An LGU is
independent and autonomous in its taxing powers and this is clearly reflected in Section 130 of the LGC which
states:
SECTION 130. Fundamental Principles. - The following fundamental principles shall govern the exercise of the
taxing and other revenue-raising powers of local government units:
xxx
(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject
to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise
specifically provided herein; xxx. [Emphasis supplied.]
An exception to the rule on relativity of contracts is provided under the same Article 1311 as follows:
If the contract should contain some stipulation in favor of a third person, he may demand its fulfilment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.
[Emphasis supplied.]
The NPC’s assumption of tax liability under Article 11.1 of the ECA does not appear, however, to be in any way for
the benefit of the Municipality of Pagbilao and the Province of Quezon. In fact, if the NPC theory of the case were
to be followed, the NPC’s assumption of tax liability will work against the interests of these LGUs. Besides, based
on the objectives of the BOT Law 24 that underlie the parties’ BOT agreement, 25 the assumption of taxes clause is
an incentive for private corporations to take part and invest in Philippine industries. Thus, the principle of relativity

35
of contracts applies with full force in the relationship between Mirant and NPC, on the one hand, and the
respondent LGUs, on the other.
To reiterate, only the parties to the ECA agreement can exact and demand the enforcement of the rights and
obligations it established – only Mirant can demand compliance from the NPC for the payment of the real property
tax the NPC assumed to pay. The local government units (the Municipality of Pagbilao and the Province of
Quezon), as third parties to the ECA, cannot demand payment from the NPC on the basis of Article 11.1 of the
ECA alone. Corollarily, the local government units can neither be compelled to recognize the protest of a tax
assessment from the NPC, an entity against whom it cannot enforce the tax liability.
The test of exemption is the nature of the use, not ownership, of the subject machineries
At any rate, the NPC’s claim of tax exemptions is completely without merit. To successfully claim exemption under
Section 234(c) of the LGC, the claimant must prove two elements:
a. the machineries and equipment are actually, directly, and exclusively used by local water districts
and government-owned or controlled corporations; and
b. the local water districts and government-owned and controlled corporations claiming exemption must be
engaged in the supply and distribution of water and/or the generation and transmission of electric power.
As applied to the present case, the government-owned or controlled corporation claiming exemption must be the
entity actually, directly, and exclusively using the real properties, and the use must be devoted to the generation
and transmission of electric power. Neither the NPC nor Mirant satisfies both requirements. Although the plant’s
machineries are devoted to the generation of electric power, by the NPC’s own admission and as previously
pointed out, Mirant – a private corporation – uses and operates them. That Mirant operates the machineries solely
in compliance with the will of the NPC only underscores the fact that NPC does not actually, directly, and
exclusively use them. The machineries must be actually, directly, and exclusively used by the government-owned
or controlled corporation for the exemption under Section 234(c) to apply. 26
Nor will NPC find solace in its claim that it utilizes all the power plant’s generated electricity in supplying the power
needs of its customers. Based on the clear wording of the law, it is the machineries that are exempted from the
payment of real property tax, not the water or electricity that these machineries generate and distribute. 27
Even the NPC’s claim of beneficial ownership is unavailing. The test of exemption is the use, not the ownership of
the machineries devoted to generation and transmission of electric power. 28 The nature of the NPC’s ownership of
these machineries only finds materiality in resolving the NPC’s claim of legal interest in protesting the tax
assessment on Mirant. As we discussed above, this claim is inexistent for tax protest purposes.
Lastly, from the points of view of essential fairness and the integrity of our tax system, we find it essentially wrong
to allow the NPC to assume in its BOT contracts the liability of the other contracting party for taxes that the
government can impose on that other party, and at the same time allow NPC to turn around and say that no taxes
should be collected because the NPC is tax-exempt as a government-owned and controlled corporation. We
cannot be a party to this kind of arrangement; for us to allow it without congressional authority is to intrude into the
realm of policy and to debase the tax system that the Legislature established. We will then also be grossly unfair to
the people of the Province of Quezon and the Municipality of Pagbilao who, by law, stand to benefit from the tax
provisions of the LGC.
WHEREFORE, we DENY the National Power Corporation’s petition for review on certiorari, and AFFIRM the
decision of the Court of Tax Appeals en banc dated February 21, 2006. Costs against the petitioner.
SO ORDERED.
ARTURO D. BRION
Associate Justice

15
 LGC, Section 257 which states:
SECTION 257. Local Government Lien. – The basic real property tax and any other tax levied under this Title [Title
II – Real Property Taxation] constitute a lien on the property subject to tax, superior to all liens, charges, or
encumbrances in favor of any person irrespective of the owner or possessor thereof, enforceable by administrative
or judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses.
23
 The lower court, in the Lim case, found the contractual obligation to include assumption of liability for all taxes.
The Court, however, declared that what was actually assumed by the vendee was the liability for taxes and other
expenses "relative to the execution and/or implementation" of the Deed of Absolute Sale "including among others,
documentation, documentary and science stamps, expenses for registration and transfer of titles x x x," which did
not necessarily include real property tax.

36
NAPOCOR vs. PROV OF QUEZON and MUN OF PAGBILAO, G.R. No. 171586, January 25, 2010

RESOLUTION
BRION, J.:
The petitioner National Power Corporation (Napocor) filed the present motion for reconsideration 1 of the Court’s
Decision of July 15, 2009, in which we denied Napocor’s claimed real property tax exemptions. For the resolution
of the motion, we deem it proper to provide first a background of the case.
BACKGROUND FACTS
The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real property taxes in the
amount of ₱1.5 Billion for the machineries located in its power plant in Pagbilao, Quezon. Napocor, which entered
into a Build-Operate-Transfer (BOT) Agreement (entitled Energy Conversion Agreement) with Mirant, was
furnished a copy of the tax assessment.
Napocor (nota bene, not Mirant) protested the assessment before the Local Board of Assessment Appeals (LBAA),
claiming entitlement to the tax exemptions provided under Section 234 of the Local Government Code (LGC),
which states:
Section 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property
tax:
xxxx
(c) All machineries and equipment that are actually, directly, and exclusively used by local water districts and
government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation
and transmission of electric power;
xxxx
(e) Machinery and equipment used for pollution control and environmental protection.
xxxx
Assuming that it cannot claim the above tax exemptions, Napocor argued that it is entitled to certain tax privileges,
namely:
a. the lower assessment level of 10% under Section 218(d) of the LGC for government-owned and controlled
corporations engaged in the generation and transmission of electric power, instead of the 80% assessment level
for commercial properties imposed in the assessment letter; and
b. an allowance for depreciation of the subject machineries under Section 225 of the LGC.
In the Court’s Decision of July 15, 2009, we ruled that Napocor is not entitled to any of these claimed tax
exemptions and privileges on the basis primarily of the defective protest filed by the Napocor. We found that
Napocor did not file a valid protest against the realty tax assessment because it did not possess the requisite legal
standing. When a taxpayer fails to question the assessment before the LBAA, the assessment becomes final,
executory, and demandable, precluding the taxpayer from questioning the correctness of the assessment or from
invoking any defense that would reopen the question of its liability on the merits. 2
Under Section 226 of the LGC, 3 any owner or person having legal interest in the property may appeal an
assessment for real property taxes to the LBAA. Since Section 250 adopts the same language in enumerating who
may pay the tax, we equated those who are liable to pay the tax to the same entities who may protest the tax
assessment. A person legally burdened with the obligation to pay for the tax imposed on the property has the legal
interest in the property and the personality to protest the tax assessment.
To prove that it had legal interest in the taxed machineries, Napocor relied on:.
1. the stipulation in the BOT Agreement that authorized the transfer of ownership to Napocor after 25 years;
2. its authority to control and supervise the construction and operation of the power plant; and
3. its obligation to pay for all taxes that may be incurred, as provided in the BOT Agreement.
Napocor posited that these indicated that Mirant only possessed naked title to the machineries.
We denied the first argument by ruling that legal interest should be one that is actual and material, direct and
immediate, not simply contingent or expectant. 4 We disproved Napocor’s claim of control and supervision under
the second argument after reading the full terms of the BOT Agreement, which, contrary to Napocor’s claims,
granted Mirant substantial power in the control and supervision of the power plant’s construction and operation. 5
For the third argument, we relied on the Court’s rulings in Baguio v. Busuego 6 and Lim v. Manila.7 In these cases,
the Court essentially declared that contractual assumption of tax liability alone is insufficient to make one liable for
taxes. The contractual assumption of tax liability must be supplemented by an interest that the party assuming the
liability had on the property; the person from whom payment is sought must have also acquired the beneficial use
of the property taxed. In other words, he must have the use and possession of the property – an element that was
missing in Napocor’s case.

37
We further stated that the tax liability must be a liability that arises from law, which the local government unit can
rightfully and successfully enforce, not the contractual liability that is enforceable only between the parties to the
contract. In the present case, the Province of Quezon is a third party to the BOT Agreement and could thus not
exact payment from Napocor without violating the principle of relativity of contracts. 8 Corollarily, for reasons of
fairness, the local government units cannot be compelled to recognize the protest of a tax assessment from
Napocor, an entity against whom it cannot enforce the tax liability.
At any rate, even if the Court were to brush aside the issue of legal interest to protest, Napocor could still not
successfully claim exemption under Section 234 (c) of the LGC because to be entitled to the exemption under that
provision, there must be actual, direct, and exclusive use of machineries. Napocor failed to satisfy these
requirements.
THE MOTION FOR RECONSIDERATION
Although Napocor insists that it is entitled to the tax exemptions and privileges claimed, the primary issue for the
Court to resolve, however, is to determine whether Napocor has sufficient legal interest to protest the tax
assessment because without the requisite interest, the tax assessment stands, and no claim of exemption or
privilege can prevail.
Section 226 of the LGC, as mentioned, limits the right to appeal the local assessor’s action to the owner or the
person having legal interest in the property. Napocor posits that it is the beneficial owner of the subject
machineries, with Mirant retaining merely a naked title to secure certain obligations. Thus, it argues that the BOT
Agreement is a mere financing agreement and is similar to the arrangement authorized under Article 1503 of the
Civil Code, which declares:
Art. 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve
the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of
possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a
carrier or other bailee for the purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the
order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form
of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller's property
in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations
under the contract.
xxxx
Pursuant to this arrangement, Mirant’s ownership over the subject machineries is merely a security interest, given
only for the purpose of ensuring the performance of Napocor’s obligations.
Napocor additionally contends that its contractual assumption liability (through the BOT Agreement) for all taxes
vests it with sufficient legal interest because it is actually, directly, and materially affected by the assessment.
While its motion for reconsideration was pending, Napocor filed a Motion to Refer the Case to the Court En Banc
considering that "the issues raised have far-reaching consequences in the power industry, the country’s economy
and the daily lives of the Filipino people, and since it involves the application of real property tax provision of the
LGC against Napocor, an exempt government instrumentality."9
Also, the Philippine Independent Power Producers Association, Inc. (PIPPA) filed a Motion for Leave to Intervene
and a Motion for Reconsideration-in-Intervention. PIPPA is a non-stock corporation comprising of privately-owned
power generating companies which includes TeaM Energy Corporation (TeaM Energy), successor of Mirant.
PIPPA is claiming interest in the case since any decision here will affect the other members of PIPPA, all of which
have executed similar BOT agreements with Napocor.
THE COURT’S RULING
At the outset, we resolve to deny the referral of the case to the Court en banc. We do not find the reasons raised
by Napocor meritorious enough to warrant the attention of the members of the Court en banc, as they are merely
reiterations of the arguments it raised in the petition for review on certiorari that it earlier filed with the Court. 10
Who may appeal a real property tax assessment
Legal interest is defined as interest in property or a claim cognizable at law, equivalent to that of a legal owner who
has legal title to the property.11 Given this definition, Napocor is clearly not vested with the requisite interest to
protest the tax assessment, as it is not an entity having the legal title over the machineries. It has absolutely no
solid claim of ownership or even of use and possession of the machineries, as our July 15, 2009 Decision
explained.
A BOT agreement is not a mere financing arrangement. In Napocor v. CBAA 12 – a case strikingly similar to the one
before us, we discussed the nature of BOT agreements in the following manner:
The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:

38
Build-operate-and-transfer – A contractual arrangement whereby the project proponent undertakes the
construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The
project proponent operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and
incorporated in the contract to enable the project proponent to recover its investment, and operating and
maintenance expenses in the project. The project proponent transfers the facility to the government agency or local
government unit concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x.
Under this concept, it is the project proponent who constructs the project at its own cost and subsequently
operates and manages it. The proponent secures the return on its investments from those using the project’s
facilities through appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as
negotiated. At the end of the fixed term agreed upon, the project proponent transfers the ownership of the facility to
the government agency. Thus, the government is able to put up projects and provide immediate services without
the burden of the heavy expenditures that a project start up requires.1avvphi1
A reading of the provisions of the parties’ BOT Agreement shows that it fully conforms to this concept. By its
express terms, BPPC has complete ownership – both legal and beneficial – of the project, including the
machineries and equipment used, subject only to the transfer of these properties without cost to
NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for the
construction of the power plant, including the machineries and equipment needed for power generation; thereafter,
it actually operated and still operates the power plant, uses its machineries and equipment, and receives payment
for these activities and the electricity generated under a defined compensation scheme. Notably, BPPC – as
owner-user – is responsible for any defect in the machineries and equipment.
xxxx
That some kind of "financing" arrangement is contemplated – in the sense that the private sector proponent shall
initially shoulder the heavy cost of constructing the project’s buildings and structures and of purchasing the needed
machineries and equipment – is undeniable. The arrangement, however, goes beyond the simple provision of
funds, since the private sector proponent not only constructs and buys the necessary assets to put up the project,
but operates and manages it as well during an agreed period that would allow it to recover its basic costs and earn
profits. In other words, the private sector proponent goes into business for itself, assuming risks and incurring costs
for its account. If it receives support from the government at all during the agreed period, these are pre-agreed
items of assistance geared to ensure that the BOT agreement’s objectives – both for the project proponent and for
the government – are achieved. In this sense, a BOT arrangement is sui generis and is different from the
usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a project
that it owns, subject only to a collateral security arrangement to guard against the nonpayment of the loan. It is
different, too, from an arrangement where a government agency borrows funds to put a project from a private
sector-lender who is thereafter commissioned to run the project for the government agency. In the latter case, the
government agency is the owner of the project from the beginning, and the lender-operator is merely its agent in
running the project.
If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined by law, it is
only in the way BPPC’s cost recovery is achieved; instead of selling to facility users or to the general public at
large, the generated electricity is purchased by NAPOCOR which then resells it to power distribution companies.
This deviation, however, is dictated, more than anything else, by the structure and usages of the power industry
and does not change the BOT nature of the transaction between the parties.
Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is
the actual user of its machineries and equipment. BPPC’s ownership and use of the machineries and
equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT
Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA committed no reversible error
in denying NAPOCOR’s claim for tax exemption. [Emphasis supplied.]
Given the special nature of a BOT agreement as discussed in the cited case, we find Article 1503 inapplicable to
define the contract between Napocor and Mirant, as it refers only to ordinary contracts of sale. We thus declared in
Tatad v. Garcia13 that under BOT agreements, the private corporations/investors are the owners of the facility or
machinery concerned. Apparently, even Napocor and Mirant recognize this principle; Article 2.12 of their BOT
Agreement provides that "until the Transfer Date, [Mirant] shall, directly or indirectly, own the Power Station and all
the fixtures, fitting, machinery and equipment on the Site x x x. [Mirant] shall operate, manage, and maintain the
Power Station for the purpose of converting fuel of Napocor into electricity."
Moreover, if Napocor truly believed that it was the owner of the subject machineries, it should have complied with
Sections 202 and 206 of the LGC which obligates owners of real property to:

39
a. file a sworn statement declaring the true value of the real property, whether taxable or exempt; 14 and
b. file sufficient documentary evidence supporting its claim for tax exemption. 15
While a real property owner’s failure to comply with Sections 202 and 206 does not necessarily negate its tax
obligation nor invalidate its legitimate claim for tax exemption, Napocor’s omission to do so in this case can be
construed as contradictory to its claim of ownership of the subject machineries. That it assumed liability for the
taxes that may be imposed on the subject machineries similarly does not clothe it with legal title over the same. We
do not believe that the phrase "person having legal interest in the property" in Section 226 of the LGC can include
an entity that assumes another person’s tax liability by contract.
A review of the provisions of the LGC on real property taxation shows that the phrase has been repeatedly adopted
and used to define an entity:
a. in whose name the real property shall be listed, valued, and assessed; 16
b. who may be summoned by the local assessor to gather information on which to base the market value of the
real property;17
c. who may protest the tax assessment before the LBAA 18 and may appeal the latter’s decision to the CBAA;19
d. who may be liable for the idle land tax,20 as well as who may be exempt from the same;21
e. who shall be notified of any proposed ordinance imposing a special levy, 22 as well as who may object the
proposed ordinance;23
f. who may pay the real property tax;24
g. who is entitled to be notified of the warrant of levy and against whom it may be enforced; 25
h. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge; 26 and
i. who may redeem the property after it was sold at the public auction for delinquent taxes. 27
For the Court to consider an entity assuming another person’s tax liability by contract as a person having legal
interest in the real property would extend to it the privileges and responsibilities enumerated above. The framers of
the LGC certainly did not contemplate that the listing, valuation, and assessment of real property can be made in
the name of such entity; nor did they intend to make the warrant of levy enforceable against it. Insofar as the
provisions of the LGC are concerned, this entity is a party foreign to the operation of real property tax laws and
could not be clothed with any legal interest over the property apart from its assumed liability for tax. The rights and
obligations arising from the BOT Agreement between Napocor and Mirant were of no legal interest to the tax
collector – the Province of Quezon – which is charged with the performance of independent duties under the
LGC.28
Some authorities consider a person whose pecuniary interests is or may be adversely affected by the tax
assessment as one who has legal interest in the property (hence, possessed of the requisite standing to protest it),
citing Cooley’s Law on Taxation.29 The reference to this foreign material, however, is misplaced. The tax laws of
the United States deem it sufficient that a person’s pecuniary interests are affected by the tax assessment to
consider him as a person aggrieved and who may thus avail of the judicial or administrative remedies against it. As
opposed to our LGC, mere pecuniary interest is not sufficient; our law has required legal interest in the property
taxed before any administrative or judicial remedy can be availed. The right to appeal a tax assessment is a purely
statutory right; whether a person challenging an assessment bears such a relation to the real property being
assessed as to entitle him the right to appeal is determined by the applicable statute – in this case, our own LGC,
not US federal or state tax laws.
In light of our ruling above, PIPPA’s motion to intervene and motion for reconsideration-in-intervention is already
mooted. PIPPA as an organization of independent power producers is not an interested party insofar as this case
is concerned. Even if TeaM Energy, as Mirant’s successor, is included as one of its members, the motion to
intervene and motion for reconsideration-in-intervention can no longer be entertained, as it amounts to a protest
against the tax assessment that was filed without the complying with Section 252 of the LGC, a matter that we
shall discuss below. Most importantly, our Decision has not touched or affected at all the contractual stipulations
between Napocor and its BOT partners for the former’s assumption of the tax liabilities of the latter.
Payment under protest is required before an appeal to the LBAA can be made
Apart from Napocor’s failure to prove that it has sufficient legal interest, a further review of the records revealed
another basis for disregarding Napocor’s protest against the assessment.
The LBAA dismissed Napocor’s petition for exemption for its failure to comply with Section 252 of the
LGC30 requiring payment of the assailed tax before any protest can be made. Although the CBAA ultimately
dismissed Napocor’s appeal for failure to meet the requirements for tax exemption, it agreed with Napocor’s
position that "the protest contemplated in Section 252 (a) is applicable only when the taxpayer is questioning the
reasonableness or excessiveness of an assessment. It presupposes that the taxpayer is subject to the tax but is
disputing the correctness of the amount assessed. It does not apply where, as in this case, the legality of the

40
assessment is put in issue on account of the taxpayer’s claim that it is exempt from tax." The CTA en banc agreed
with the CBAA’s discussion, relying mainly on the cases of Ty v. Trampe 31 and Olivarez v. Marquez.32
We disagree. The cases of Ty and Olivarez must be placed in their proper perspective.
The petitioner in Ty v. Trampe questioned before the trial court the increased real estate taxes imposed by and
being collected in Pasig City effective from the year 1994, premised on the legal question of whether or not
Presidential Decree No. 921 (PD 921) was repealed by the LGC. PD 921 required that the schedule of values of
real properties in the Metropolitan Manila area shall be prepared jointly by the city assessors in the districts created
therein; while Section 212 of the LGC stated that the schedule shall be prepared by the provincial, city or municipal
assessors of the municipalities within the Metropolitan Manila Area for the different classes of real property situated
in their respective local government units for enactment by ordinance of the Sanggunian concerned. The private
respondents assailed Ty’s act of filing a prohibition petition before the trial court contending that Ty should have
availed first the administrative remedies provided in the LGC, particularly Sections 252 (on payment under protest
before the local treasurer) and 226 (on appeals to the LBAA).
The Court, through former Chief Justice Artemio Panganiban, declared that Ty correctly filed a petition for
prohibition before the trial court against the assailed act of the city assessor and treasurer. The administrative
protest proceedings provided in Section 252 and 226 will not apply. The protest contemplated under Section 252 is
required where there is a question as to the reasonableness or correctness of the amount assessed. Hence, if a
taxpayer disputes the reasonableness of an increase in a real property tax assessment, he is required to "first pay
the tax" under protest. Otherwise, the city or municipal treasurer will not act on his protest. Ty however was
questioning the very authority and power of the assessor, acting solely and independently, to impose the
assessment and of the treasurer to collect the tax. These were not questions merely of amounts of the increase in
the tax but attacks on the very validity of any increase. Moreover, Ty was raising a legal question that is properly
cognizable by the trial court; no issues of fact were involved. In enumerating the power of the LBAA, Section 229
declares that "the proceedings of the Board shall be conducted solely for the purpose of ascertaining the facts x x
x." Appeals to the LBAA (under Section 226) are therefore fruitful only where questions of fact are involved.
Olivarez v. Marquez, on the other hand, involved a petition for certiorari, mandamus, and prohibition questioning
the assessment and levy made by the City of Parañaque. Olivarez was seeking the annulment of his realty tax
delinquency assessment. Marquez assailed Olivarez’ failure to first exhaust administrative remedies, particularly
the requirement of payment under protest. Olivarez replied that his petition was filed to question the assessor’s
authority to assess and collect realty taxes and therefore, as held in Ty v. Trampe, the exhaustion of administrative
remedies was not required. The Court however did not agree with Olivarez’s argument. It found that there was
nothing in his petition that supported his claim regarding the assessor’s alleged lack of authority. What Olivarez
raised were the following grounds: "(1) some of the taxes being collected have already prescribed and may no
longer be collected as provided in Section 194 of the Local Government Code of 1991; (2) some properties have
been doubly taxed/assessed; (3) some properties being taxed are no longer existent; (4) some properties are
exempt from taxation as they are being used exclusively for educational purposes; and (5) some errors are made
in the assessment and collection of taxes due on petitioners’ properties, and that respondents committed grave
abuse of discretion in making the improper, excessive and unlawful the collection of taxes against the petitioner."
The Olivarez petition filed before the trial court primarily involved the correctness of the assessments, which is a
question of fact that is not allowed in a petition for certiorari, prohibition, and mandamus. Hence, we declared that
the petition should have been brought, at the very first instance, to the LBAA, not the trial court.
Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a question of the correctness
of the assessment. A claim for tax exemption, whether full or partial, does not question the authority of local
assessor to assess real property tax. This may be inferred from Section 206 which states that:
SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real property is
declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or
municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary
evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, bylaws,
contracts, affidavits, certifications and mortgage deeds, and similar documents. If the required evidence is not
submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll.
However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll.
[Emphasis provided]
By providing that real property not declared and proved as tax-exempt shall be included in the assessment roll, the
above-quoted provision implies that the local assessor has the authority to assess the property for realty taxes, and
any subsequent claim for exemption shall be allowed only when sufficient proof has been adduced supporting the
claim. Since Napocor was simply questioning the correctness of the assessment, it should have first complied with

41
Section 252, particularly the requirement of payment under protest. Napocor’s failure to prove that this requirement
has been complied with thus renders its administrative protest under Section 226 of the LGC without any effect. No
protest shall be entertained unless the taxpayer first pays the tax.
It was an ill-advised move for Napocor to directly file an appeal with the LBAA under Section 226 without first
paying the tax as required under Section 252. Sections 252 and 226 provide successive administrative remedies to
a taxpayer who questions the correctness of an assessment. Section 226, in declaring that "any owner or person
having legal interest in the property who is not satisfied with the action of the provincial, city, or municipal assessor
in the assessment of his property may x x x appeal to the Board of Assessment Appeals x x x," should be read in
conjunction with Section 252 (d), which states that "in the event that the protest is denied x x x, the taxpayer may
avail of the remedies as provided for in Chapter 3, Title II, Book II of the LGC [Chapter 3 refers to Assessment
Appeals, which includes Sections 226 to 231]. The "action" referred to in Section 226 (in relation to a protest of real
property tax assessment) thus refers to the local assessor’s act of denying the protest filed pursuant to Section
252. Without the action of the local assessor, the appellate authority of the LBAA cannot be invoked. Napocor’s
action before the LBAA was thus prematurely filed.
For the foregoing reasons, we DENY the petitioner’s motion for reconsideration.
SO ORDERED.
ARTURO D. BRION

14
 SEC. 202. Declaration of Real Property by the Owner or Administrator. - It shall be the duty of all persons,
natural or juridical, owning or administering real property, including the improvements therein, within a city or
municipality, or their duly authorized representative, to prepare, or cause to be prepared, and file with the
provincial, city or municipal assessor, a sworn statement declaring the true value of their property, whether
previously declared or undeclared, taxable or exempt, which shall be the current and fair market value of the
property, as determined by the declarant. Such declaration shall contain a description of the property sufficient in
detail to enable the assessor or his deputy to identify the same for assessment purposes. The sworn declaration of
real property herein referred to shall be filed with the assessor concerned once every three (3) years during the
period from January first (1st) to June thirtieth (30th) commencing with the calendar year 1992. [emphasis
provided]
15
 SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real property is
declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or
municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary
evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, bylaws,
contracts, affidavits, certifications and mortgage deeds, and similar documents. If the required evidence is not
submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll.
However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll.
16
 SEC. 205. Listing of Real Property in the Assessment Rolls. - (a) In every province and city, including the
municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the provincial, city or
municipal assessor an assessment roll wherein shall be listed all real property, whether taxable or exempt, located
within the territorial jurisdiction of the local government unit concerned. Real property shall be listed, valued and
assessed in the name of the owner or administrator, or anyone having legal interest in the property. x x x x.
17
 SEC. 213. Authority of Assessor to Take Evidence. - For the purpose of obtaining information on which to base
the market value of any real property, the assessor of the province, city or municipality or his deputy may summon
the owners of the properties to be affected or persons having legal interest therein and witnesses, administer
oaths, and take deposition concerning the property, its ownership, amount, nature, and value.
18
 Supra note 3.
19
 SEC. 229. Action by the Local Board of Assessment Appeals. – x x x x
(c) The secretary of the Board shall furnish the owner of the property or the person having legal interest therein
and the provincial or city assessor with a copy of the decision of the Board. In case the provincial or city assessor
concurs in the revision or the assessment, it shall be his duty to notify the owner of the property or the person
having legal interest therein of such fact using the form prescribed for the purpose. The owner of the property or
the person having legal interest therein or the assessor who is not satisfied with the decision of the Board, may,
within thirty (30) days after receipt of the decision of said Board, appeal to the Central Board of Assessment
appeals, as herein provided. The decision of the Central Board shall be final and executory.
20
 SEC. 237. Idle Lands, Coverage. - For purposes of real property taxation, idle lands shall include the following:
(a) "Agricultural lands, more than one (1) hectare in area, suitable for cultivation, dairying, inland fishery, and other
agricultural uses, one-half (1/2) of which remain uncultivated or unimproved by the owner of the property or person

42
having legal interest therein." Agricultural lands planted to permanent or perennial crops with at least fifty (50) trees
to a hectare shall not be considered idle lands. Lands actually used for grazing purposes shall likewise not be
considered idle lands.
(b) Lands, other than agricultural, located in a city or municipality, more than one thousand (1,000) square meters
in area one-half (1/2) of which remain unutilized or unimproved by the owner of the property or person having legal
interest therein. Regardless of land area, this Section shall likewise apply to residential lots in subdivisions duly
approved by proper authorities, the ownership of which has been transferred to individual owners, who shall be
liable for the additional tax: Provided, however, That individual lots of such subdivisions, the ownership of which
has not been transferred to the buyer shall be considered as part of the subdivision, and shall be subject to the
additional tax payable by subdivision owner or operator.
21
 SEC. 238. Idle Lands Exempt from Tax. - A province or city or a municipality within the Metropolitan Manila Area
may exempt idle lands from the additional levy by reason of force majeure, civil disturbance, natural calamity or
any cause or circumstance which physically or legally prevents the owner of the property or person having legal
interest therein from improving, utilizing or cultivating the same.
22
 SEC. 242. Publication of Proposed Ordinance Imposing a Special Levy. - Before the enactment of an ordinance
imposing a special levy, the sanggunian concerned shall conduct a public hearing thereon; notify in writing the
owners of the real property to be affected or the persons having legal interest therein as to the date and place
thereof and afford the latter the opportunity to express their positions or objections relative to the proposed
ordinance.
23
 SEC. 244. Taxpayers' Remedies Against Special Levy. - Any owner of real property affected by a special levy or
any person having a legal interest therein may, upon receipt of the written notice of assessment of the special levy,
avail of the remedies provided for in Chapter 3, Title Two, Book II of this Code.
24
 SEC. 250. Payment of Real Property Taxes in Installments. - The owner of the real property or the person having
legal interest therein may pay the basic real property tax and the additional tax for Special Education Fund (SEF)
due thereon without interest in four (4) equal installments; the first installment to be due and payable on or before
March Thirty-first (31st); the second installment, on or before June Thirty (30); the third installment, on or before
September Thirty (30); and the last installment on or before December Thirty-first (31st), except the special levy
the payment of which shall be governed by ordinance of the sanggunian concerned. The date for the payment of
any other tax imposed under this Title without interest shall be prescribed by the sanggunian concerned. Payments
of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only
after said delinquencies are settled may tax payments be credited for the current period.
25
 SEC. 258. Levy on Real Property. - After the expiration of the time required to pay the basic real property tax or
any other tax levied under this Title, real property subject to such tax may be levied upon through the issuance of a
warrant on or before, or simultaneously with, the institution of the civil action for the collection of the delinquent tax.
The provincial or city treasurer, or a treasurer of a municipality within the Metropolitan Manila Area, as the case
may be, when issuing a warrant of levy shall prepare a duly authenticated certificate showing the name of the
delinquent owner of the property or person having legal interest therein, the description of the property, the amount
of the tax due and the interest thereon. The warrant shall operate with the force of a legal execution throughout the
province, city or a municipality within the Metropolitan Manila Area. The warrant shall be mailed to or served upon
the delinquent owner of the real property or person having legal interest therein, or in case he is out of the country
or cannot be located, to the administrator or occupant of the property. At the same time, written notice of the levy
with the attached warrant shall be mailed to or served upon the assessor and the Registrar of Deeds of the
province, city or a municipality within the Metropolitan Manila Area where the property is located, who shall
annotate the levy on the tax declaration and certificate of title of the property, respectively. The levying officer shall
submit a report on the levy to the sanggunian concerned within ten (10) days after receipt of the warrant by the
owner of the property or person having legal interest therein.
26
 SEC. 260. Advertisement and Sale. - Within thirty (30) days after service of the warrant of levy, the local
treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion thereof as may be
necessary to satisfy the tax delinquency and expenses of sale. The advertisement shall be effected by posting a
notice at the main entrance of the provincial, city or municipal building, and in a publicly accessible and
conspicuous place in the barangay where the real property is located, and by publication once a week for two (2)
weeks in a newspaper of general circulation in the province, city or municipality where the property is located. The
advertisement shall specify the amount of the delinquent tax, the interest due thereon and expenses of sale, the
date and place of sale, the name of the owner of the real property or person having legal interest therein, and a
description of the property to be sold. At any time before the date fixed for the sale, the owner of the real property
or person having legal interest therein may stay the proceedings by paying the delinquent tax, the interest due

43
thereon and the expenses of sale. The sale shall be held either at the main entrance of the provincial, city or
municipal building, or on the property to be sold, or at any other place as specified in the notice of the sale. Within
thirty (30) days after the sale, the local treasurer or his deputy shall make a report of the sale to
the sanggunian concerned, and which shall form part of his records. The local treasurer shall likewise prepare and
deliver to the purchaser a certificate of sale which shall contain the name of the purchaser, a description of the
property sold, the amount of the delinquent tax, the interest due thereon, the expenses of sale and a brief
description of the proceedings: Provided, however, That proceeds of the sale in excess of the delinquent tax, the
interest due thereon, and the expenses of sale shall be remitted to the owner of the real property or person having
legal interest therein. The local treasurer may, by ordinance duly approved, advance an amount sufficient to defray
the costs of collection thru the remedies provided for in this Title, including the expenses of advertisement and
sale.
27
 SEC. 254. Notice of Delinquency in the Payment of the Real Property Tax. – x x x x
(b) Such notice shall specify the date upon which the tax became delinquent and shall state that personal property
may be distrained to effect payment. It shall likewise state that at any time before the distraint of personal property,
payment of the tax with surcharges, interests and penalties may be made in accordance with the next following
Section, and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax is
due except when the notice of assessment or special levy is contested administratively or judicially pursuant to the
provisions of Chapter 3, Title II, Book II of this Code, the delinquent real property will be sold at public auction, and
the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the
property or any person having legal interest therein to redeem the property within one (1) year from the date of
sale.
SEC. 261. Redemption of Property Sold. - Within one (1) year from the date of sale, the owner of the delinquent
real property or person having legal interest therein, or his representative, shall have the right to redeem the
property upon payment to the local treasurer of the amount of the delinquent tax, including the interest due
thereon, and the expenses of sale from the date of delinquency to the date of sale, plus interest of not more than
two percent (2%) per month on the purchase price from the date of sale to the date of redemption. Such payment
shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or
person having legal interest therein shall be entitled to a certificate of redemption which shall be issued by the local
treasurer or his deputy. From the date of sale until the expiration of the period of redemption, the delinquent real
property shall remain in the possession of the owner or person having legal interest therein who shall be entitled to
the income and other fruits thereof. The local treasurer or his deputy, upon receipt from the purchaser of the
certificate of sale, shall forthwith return to the latter the entire amount paid by him plus interest of not more than two
percent (2%) per month. Thereafter, the property shall be free from the lien of such delinquent tax, interest due
thereon and expenses of sale.
28
 Hamilton Mfg. Co. v. City of Lowell, 274 Mass. 477, 175 N.E. 73.
29
 Cooley on Taxation (4th ed.), Volume 3, §1207, p. 2420.
30
 SEC. 252. Payment Under Protest. - (a) No protest shall be entertained unless the taxpayer first pays the tax.
There shall be annotated on the tax receipts the words "paid under protest". The protest in writing must be filed
within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of
a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested
shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a),
the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of this Code.

COMM OF INTERNAL REVENUE vs. CA, CITYTRUST BANKING CORP. and CTA, G.R. No. 106611, July 21,
1994

REGALADO, J.:
The judicial proceedings over the present controversy commenced with CTA Case No. 4099, wherein the Court of
Tax Appeals ordered herein petitioner Commissioner of Internal Revenue to grant a refund to herein private
respondent Citytrust Banking Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount reflected in its 1983
income tax return on the ground of prescription. 1 That judgment of the tax court was affirmed by respondent Court
of Appeals in its judgment in CA-G.R. SP

44
No. 26839.2 The case was then elevated to us in the present petition for review on  certiorari wherein the latter
judgment is impugned and sought to be nullified and/or set aside.
It appears that in a letter dated August 26, 1986, herein private respondent corporation filed a claim for refund with
the Bureau of Internal Revenue (BIR) in the amount of P19,971,745.00 representing the alleged aggregate of the
excess of its carried-over total quarterly payments over the actual income tax due, plus carried-over withholding tax
payments on government securities and rental income, as computed in its final income tax return for the calendar
year ending December 31, 1985.3
Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive period, Citytrust filed a
petition with the Court of Tax Appeals, docketed therein as CTA Case No. 4099, claiming the refund of its income
tax overpayments for the years 1983, 1984 and 1985 in the total amount of P19,971,745.00. 4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein respondent commissioner, it
was asserted that the mere averment that Citytrust incurred a net loss in 1985 does not ipso facto merit a refund;
that the amounts of P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax
overpayment, taxes withheld on proceeds of government securities investments, as well as on rental income,
respectively, are not properly documented; that assuming arguendo that petitioner is entitled to refund, the right to
claim the same has prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and 295 of the National
Internal Revenue Code of 1977, as amended, since the petition was filed only on August 28, 1986. 5
On February 20, 1991, the case was submitted for decision based solely on the pleadings and evidence submitted
by herein private respondent Citytrust. Herein petitioner could not present any evidence by reason of the repeated
failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation
report thereon, to the Solicitor General.6
However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and motion praying for the
suspension of the proceedings in the said case on the ground that the claim of Citytrust for tax refund in the
amount of P19,971,745.00 was already being processed by the Tax Credit/Refund Division of the BIR, and that
said bureau was only awaiting the submission by Citytrust of the required confirmation receipts which would show
whether or not the aforestated amount was actually paid and remitted to the BIR. 7
Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already acquired jurisdiction
over the case, it could no longer be divested of the same; and, further, that the proceedings therein could not be
suspended by the mere fact that the claim for refund was being administratively processed, especially where the
case had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in
the case, which clearly showed that there was an overpayment of income taxes and for which a tax credit or refund
was due to Citytrust. The Foregoing exhibits are allegedly conclusive proof of and an admission by herein
petitioner that there had been an overpayment of income taxes. 8
The tax court denied the motion to suspend proceedings on the ground that the case had already been submitted
for decision since February 20, 1991.9
Thereafter, said court rendered its decision in the case, the decretal portion of which declares:
WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for the overpaid taxes incurred in
1984 and 1985. The refundable amount as shown in its 1983 income tax return is hereby denied on the ground of
prescription. Respondent is hereby ordered to grant a refund to petitioner Citytrust Banking Corp. in the amount of
P13,314,506.14 representing the overpaid income taxes for 1984 and 1985, recomputed as follows:
1984 Income tax due P 4,715,533.00
Less: 1984 Quarterly payments P16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P— 0 —

Less: W/T on rentals 36,716.47*
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00

45
———————
Amount Refundable for 1985 P (17,842.47)
* Note:
These credits are smaller than the claimed amount because only the above figures are well supported by the
various exhibits presented during the hearing.
No pronouncement as to costs.
SO ORDERED.10
The order for refund was based on the following findings of the Court of Tax Appeals: (1) the fact of withholding
has been established by the statements and certificates of withholding taxes accomplished by herein private
respondent's withholding agents, the authenticity of which were neither disputed nor controverted by herein
petitioner; (2) no evidence was presented which could effectively dispute the correctness of the income tax
return filed by herein respondent corporation and other material facts stated therein; (3) no deficiency
assessment was issued by herein petitioner; and (4) there was an audit report submitted by the BIR
Assessment Branch, recommending the refund of overpaid taxes for the years concerned (Exhibits Y to Y-3),
which enjoys the presumption of regularity in the performance of official duty. 11
A motion for the reconsideration of said decision was initially filed by the Solicitor General on the sole ground that
the statements and certificates of taxes allegedly withheld are not conclusive evidence of actual payment and
remittance of the taxes withheld to the BIR. 12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private respondent had outstanding unpaid deficiency
income taxes. Petitioner alleged that through an inter-office memorandum of the Tax Credit/Refund Division, dated
August 8, 1991, he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by Demand/Assessment Notice No.
FAS-1-84-003291-003296.13
Oppositions to both the basic and supplemental motions for reconsideration were filed by private respondent
Citytrust.14 Thereafter, the Court of Tax Appeals issued a resolution denying both motions for the reason that
Section 52 (b) of the Tax Code, as implemented by Revenue Regulation 6-85, only requires that the claim for tax
credit or refund must show that the income received was declared as part of the gross income, and that the fact of
withholding was duly established. Moreover, with regard to the argument raised in the supplemental motion for
reconsideration anent the deficiency tax assessment against herein petitioner, the tax court ruled that since that
matter was not raised in the pleadings, the same cannot be considered, invoking therefor the salutary purpose of
the omnibus motion rule which is to obviate multiplicity of motions and to discourage dilatory pleadings. 15
As indicated at the outset, a petition for review was filed by herein petitioner with respondent Court of Appeals
which in due course promulgated its decision affirming the judgment of the Court of Tax Appeals. Petitioner
eventually elevated the case to this Court, maintaining that said respondent court erred in affirming the grant of the
claim for refund of Citytrust, considering that, firstly, said private respondent failed to prove and substantiate its
claim for such refund; and, secondly, the bureau's findings of deficiency income and business tax liabilities against
private respondent for the year 1984 bars such payment. 16
After a careful review of the records, we find that under the peculiar circumstances of this case, the ends
of substantial justice and public interest would be better subserved by the remand of this case to the Court
of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of Internal Revenue,
was denied its day in court by reason of the mistakes and/or negligence of its officials and employees. It
can readily be gleaned from the records that when it was herein petitioner's turn to present evidence, several
postponements were sought by its counsel, the Solicitor General, due to the unavailability of the necessary records
which were not transmitted by the Refund Audit Division of the BIR to said counsel, as well as the investigation
report made by the Banks/Financing and Insurance Division of the said bureau/ despite repeated requests. 17 It was
under such a predicament and in deference to the tax court that ultimately, said records being still unavailable,
herein petitioner's counsel was constrained to submit the case for decision on February 20, 1991 without
presenting any evidence.
For that matter, the BIR officials and/or employees concerned also failed to heed the order of the Court of Tax
Appeals to remand the records to it pursuant to Section 2, Rule 7 of the Rules of the Court of Tax Appeals which
provides that the Commissioner of Internal Revenue and the Commissioner of Customs shall certify and forward to
the Court of Tax Appeals, within ten days after filing his answer, all the records of the case in his possession, with
the pages duly numbered, and if the records are in separate folders, then the folders shall also be numbered.
The aforestated impassé came about due to the fact that, despite the filing of the aforementioned initiatory petition
in CTA Case No. 4099 with the Court of Tax Appeals, the Tax Refund Division of the BIR still continued to act

46
administratively on the claim for refund previously filed therein, instead of forwarding the records of the case to the
Court of Tax Appeals as ordered.18
It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its
agents.19 In the performance of its governmental functions, the State cannot be estopped by the neglect of
its agent and officers. Although the Government may generally be estopped through the affirmative acts of
public officers acting within their authority, their neglect or omission of public duties as exemplified in this
case will not and should not produce that effect.
Nowhere is the aforestated rule more true than in the field of taxation. 20 It is axiomatic that the Government cannot
and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through
which the government agencies continue to operate and with which the State effects its functions for the
welfare of its constituents.21 The errors of certain administrative officers should never be allowed to
jeopardize the Government's financial position,22 especially in the case at bar where the amount involves
millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic
lethargy.
Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's supplemental motion for
reconsideration alleging bringing to said court's attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for
the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are
true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the
claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return,
which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless
it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the
Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which
recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved. 23 This would necessarily require and entail additional efforts and expenses
on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and
legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or
refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only just and fair that the taxpayer
and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's
claim and to determine all matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it would necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both
parties as to all the matters subject thereof or necessarily involved therein.
The Court cannot end this adjudication without observing that what caused the Government to lose its case in the
tax court may hopefully be ascribed merely to the ennui or ineptitude of officialdom, and not to syndicated intent or
corruption. The evidential cul-de-sac in which the Solicitor General found himself once again gives substance to
the public perception and suspicion that it is another proverbial tip in the iceberg of venality in a government
bureau which is pejoratively rated over the years. What is so distressing, aside from the financial losses to the
Government, is the erosion of trust in a vital institution wherein the reputations of so many honest and dedicated

47
workers are besmirched by the acts or omissions of a few. Hence, the liberal view we have here taken  pro hac
vice, which may give some degree of assurance that this Court will unhesitatingly react to any bane in the
government service, with a replication of such response being likewise expected by the people from the executive
authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is hereby SET ASIDE and
the case at bar is REMANDED to the Court of Tax Appeals for further proceedings and appropriate action, more
particularly, the reception of evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.
SO ORDERED.
Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

BPI-FAMILY SAVINGS BANK, Inc., vs. CA, CTA &, G.R. No. 122480, 4-12-2000

PANGANIBAN, J.:
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund,
the State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should
enrich oneself at the expense of another.
The Case
Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals 1 (CA) in CA-GR
SP No. 34240, which affirmed the December 24, 1993 Decision 2 of the Court of Tax Appeals (CTA). The CA
disposed as follows:
WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit. 3
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows:
WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this Petition for
Review is DISMISSED for lack of merit.4
Also assailed is the November 8, 1995 CA Resolution 5 denying reconsideration.
The Facts
The facts of this case were summarized by the CA in this wise:
This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the
year 1989.
In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected:
Income P1,017,931,831.00
Deductions P1,026,218,791.00
Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00)
Less:
1988 Tax Credit P185,001.00
1989 Tax Credit P112,491.00
TOTAL AMOUNT P297,492.00
REFUNDABLE
It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of P297,492
inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in the
same 1989 Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax credit to
the succeeding taxable year.
On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent
Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00
(including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business
losses it incurred for the same year.
Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a
petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00.
The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present
as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet
credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present
controversy) to its 1990 income tax liability.

48
Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its Resolution
dated May 6, 1994.6
As earlier noted, the CA affirmed the CTA. Hence, this Petition. 7
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income Tax Return, the
amount of P297,492.00 (including P112,491.00), so as to refute its previous declaration in the 1989 Income Tax
Return that the said amount will be applied as a tax credit in the succeeding year of 1990. Having failed to submit
such requirement, there is no basis to grant the claim for refund. . . .
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority
and to be construed strictissimi juris against the person or entity claiming the exemption. In other words, the
burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement to the
claim for refund.8
Issue
In their Memorandum, respondents identify the issue in this wise:
The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90, representing
excess creditable withholding tax paid for the taxable year 1989. 9
The Court's Ruling
The Petition is meritorious.
Main Issue:
Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund
amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to
a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year,
petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the
succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it
would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was
forthcoming, petitioner filed its claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax
Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that
petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this
presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was
not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this
Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of
facts, or when the appellate court failed to notice certain relevant facts which if considered would justify a different
conclusion. 11 This case is one such exception.
In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit.
During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department,
testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's
vice-president, stating that the amount of P112,491 "has not been and/or will not be automatically credited/offset
against any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990."
Also presented were the quarterly returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence
at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's
claim. To repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for
Reconsideration filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a loss or
gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred
P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's
Motion and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration,
however, the CTA ignored the said Return. In the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after the trial. The law creating the
Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly by
the technical rules of evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the

49
quest for orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed
facts to arrive at a just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a
net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a
tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the
trial, the appellate court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action.
They are tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the
present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before
this Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no
tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to
withhold the tax refund which rightfully belongs to the petitioner.
Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not the final
adjustment Return, but petitioner's first two quarterly returns for 1990. 16 This allegation is wrong. An examination of
the records shows that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the
other hand, the two quarterly returns for 1990 mentioned by respondent were in fact attached to the Petition for
Review filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted before us its
Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment
Return for 1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax
Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 . . . ." 18 Respondent, however, urges this Court not to take
judicial notice of the said case. 19
As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when
such cases have been tried or are pending in the same court, and notwithstanding the fact that both cases may
have been heard or are actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to
judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No.
4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all
that the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said
Decision, claiming merely that the Court cannot take judicial notice thereof.
To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that
petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed,
it is noteworthy that respondents opted not to assail the fact appearing therein — that petitioner suffered a net loss
in 1990 — in the same way that it refused to controvert the same fact established by petitioner's other documentary
exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit
of information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed  strictissimi
juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner
may have failed to strictly comply with the rules of procedure; it may have even been negligent. These
circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner
suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted,
should not be misused by the government to keep money not belonging to it and thereby enrich itself at the
expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals
REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount
of P112,491 as excess creditable taxes paid in 1989. No costs.1âwphi1.nêt
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., abroad on official business.

50
EN BANC

COMMISSIONER OF INTERNAL REVENUE  vs. ROYAL INTEROCEAN LINES and THE COURT OF TAX
APPEALS, G.R. No. L-26806 July 30, 1970

CONCEPCION, C.J.:

Appeal by the Commissioner of Internal Revenue from a decision of the Court of Tax Appeals reversing that of said
official, in connection with the liability of the Royal Interocean Lines, Inc., for deficiency carrier's percentage tax,
plus surcharge.

Said Royal Interocean Liner, Inc. — hereinafter referred to as the taxpayer — is a foreign corporation duly licensed
to do business in the Philippines, with head office in Amsterdam, Holland. The taxpayer is engaged in the
operation of ocean-going vessels, plying between the Philippines and other countries, transporting passengers and
cargo. It is, likewise, an agent and representative of the Holland East Asia Lines, a Dutch shipping company, from
which the taxpayer receive compensation in the form of commissions for services rendered. It is not disputed that
from February to May, 1962, inclusive, vessels of the taxpayer and/or the Holland East Asia Lines called at
Philippine ports to load cargo, with freight, payable at destination, valued at US $37,501.50. This sum had been
collected by and paid to the taxpayer's head office in Holland, and was not actually turned over or forwarded, as
such freight fees, to the taxpayer in the Philippines. The only remittances received by the latter from its
aforementioned head office were those made, through its agent bank, for the operational expenses of the branch
office in the Philippines.

Prior to January, 1962, its dollar earnings derived from freight revenues were converted into the Philippine peso
equivalent thereof, under the prevailing free market rate, for purposes of the common carrier's tax prescribed in
Section 192 of the National Internal Revenue Code. Thereafter, the taxpayer discontinued this practice and, since
February, 1962, it reported said revenues, in its monthly returns for carrier's tax, based on the parity rate of P2 to
$1, and paid P1,500.00 as such carrier's tax. Upon examination of the records of the taxpayer, the Commissioner
of Internal Revenue, hereinafter referred to as the petitioner, held that, applying the free market converse on rate,
the taxpayer's gross receipts from February to May, 1962, aggregated P163,776.38, and, based thereon
demanded payment of P2,219,35 as deficiency common carrier's tax, plus surcharge and penalty. Having found,
soon later, that the sum of P29,920.50 had twice been included in the computation of said receipts, petitioner
subsequently agreed with the taxpayer that its gross receipts for the period in question, reckoned on the free
market conversion rate, amounted to P133,855.88, based on which petitioner demanded, in a letter received by the
taxpayer on January 18, 1963, payment of the total sum of P1,471.39, consisting of P1,177.12, as deficiency
carrier's tax, plus a 25% surcharge, computed as follows:

Total gross receipts ($37,501.50. U.S. currency)

converted to Philippine currency at market rate ................ P133,855.88

Percentage tax (2% of P133,855.88) .............................. P 2,677.12

Less:
Amount paid (based on P2.00 to $1.00, parity rate) ........ 1,500.00

Deficiency tax ................................................................. 1,177.12

25% surcharge ............................................................... 294.27

Total amount assessed .................................................... P 1,471.39

Petitioner, likewise, demanded payment of P200.00 as compromise penalty.

The taxpayer protested against this deficiency assessment, upon the ground that the conversion rate should be the
parity rate of P2 to a US dollar, not the current market rate, it being conceded that the freight fees in question had
not been physically remitted, as such, to the taxpayer in the Philippines, but were actually collected by its head

51
office abroad, which had remitted no funds to the former, except those needed for its operating expenses. The last
remittance therefor amounted to $20,000. Petitioner having overruled the protest, the taxpayer appealed to the
Court of Tax Appeals, which, relying mainly upon Commissioner of Internal Revenue v. United States
Lines,1 reversed petitioner's decision, without costs. Hence this appeal by the petitioner, which we find to be well
taken.

Indeed, "due to the pressure on the international reserve of the country and the threat to economic stability," as
well as "the state of exchange crisis the Monetary Board availed of the emergency power granted by Section 74 of
Republic Act No. 265, otherwise known as the Central Bank Act, and issued, on December 9, 1949, Circular No.
20 restricting "sales of exchange by the Central Bank," subjecting "all transactions in gold and foreign exchange to
licensing" by the same, and requiring the surrender thereto of 100% of all foreign exchange receipts at the official
parity rate of P2 to a US dollar. Section 2 of Circular No. 42 of the Central Bank, dated May 21, 1953,
provided, inter alia:

The following are foreign exchange transactions  and as required by Central Bank Circular No. 20
are subject to prior licensing  by or on behalf of the Central Bank:

xxx xxx xxx

(d) Any act by which a resident debits or credits the account  of a non-resident  in any currency or

the account of a resident in foreign currency;

xxx xxx xxx

(f) Any transaction by which a resident performs any service for a non-resident  other than tourists
or temporary visitors. If  the proper license is obtained, the former shall demand and obtain
payment for  such service within ninety days in U.S. dollars or in any other foreign currency
acceptable to the Central Bank;

xxx xxx xxx

(h) All collections of residents made abroad through their overseas branch offices, agents or
representatives. Such collections shall be brought or ordered to be brought by such residents into
the Philippines in U.S. currency or in any other currency acceptable to the Central Bank after
deducting normal business expenses incurred by such overseas branch offices, agents or
representatives;

xxx xxx xxx

(m) Any other transactions involving international financial implications.2

Subdivision (h) of said section 2 of Circular No. 42 was amended on May 27, 1957, to read as follows:

(h) All collections of residents made abroad  thru their overseas branch office, agents or
representatives. Such collections shall be brought or ordered to be brought by such residents into
the Philippines in U.S. currency or in any other currency acceptable to the Central Bank. 3

Pursuant to this provision, the aforementioned freight fees earned by the taxpayer are the product of "foreign
exchange" transactions, within the purview of Central Bank Circular No. 20, because, having been collected by the
taxpayer's main office in Amsterdam, said fees are deemed to have been paid to the taxpayer in the Philippines, on
behalf of which the former had acted; because they were due for services rendered in the Philippines, without
which said main office would have had no right to collect or receive said fees; because the same represented the
compensation for services performed by a resident of the Philippines — the taxpayer's branch office therein;
because they represented "collections of residents made abroad," to which subdivision (h) of said section 2 refers;
and because they fall under the category of "(a)ny other transactions involving international financial implications,"
covered by subdivision (m) of the same section.

It should be noted that on July 16, 1959, the policy incorporated in Circular No. 20 and implemented in subsequent
circulars, was relaxed with the enactment of Republic Act No. 2609, which directed the monetary authorities to take
steps for the adoption of a four-year program of gradual decontrol, during which the Monetary Board, with the
approval of the President, could and did fix the conversion rate of the Philippine peso to the US dollar at a
ratio other than that prescribed in Section 48 of Republic Act 265. During the period involved in the case at bar, the
52
free market conversion rate ranged from P3.47 to P3.65 to a US dollar, at which rates the freight fees in question
were computed in the contested assessment. Inasmuch as said fees were revenues derived from "foreign
exchange" transactions, it follows necessarily that the petitioner was fully justified in computing the taxpayer's
receipts at said free market rates.

The theory of the taxpayer to the effect that, not having been physically remitted to the Philippines, the fees in
question do not partake of the nature of revenues derived from foreign exchange transactions, is manifestly devoid
of merit. The transactions from which said revenues were derived involved the loading of cargo in the Philippines,
the transportation of said cargo to its ports of destination, the delivery of the cargo to the respective consignees,
and the payment of the corresponding fees to the taxpayer's head office at Amsterdam. As regards the taxpayer,
the transactions were consummated upon delivery of the cargo to the consignee. Upon the other hand, the
obligations of the latter or the shipper were discharged upon payment of the freight. Insofar as the parties to said
transaction were concerned, the same were fully completed upon payment of the fees at Amsterdam. The question
whether or not such fees were to be remitted by the taxpayer's head office in that City to its branch office in the
Philippines, which had earned it, was one that concerned exclusively the former and the latter, it
being independent of the rights and obligations of the parties to the aforementioned transactions, which were
extinguished upon delivery of the cargo at destination and payment of the freight to said maid office of the
taxpayer. In short, the remittance or non-remittance of said fees could not affect the nature of said transactions, as
involving foreign exchange, not being a part thereof in any manner whatsoever.

Then again, we take it that — in line with the ordinary course of business, adherence to which is presumed, in the
absence of proof to the — contrary upon receipt of said freight, the same must have been credited in the records of
the taxpayer's main office in Amsterdam in favor of its branch office in the Philippines, and that, upon notice of
such payment to the head office in Amsterdam, the branch office in the Philippines must have, in turn,  debited  said
fees against its main office. Such processes of bookkeeping and accounting are, for legal purposes, tantamount to
delivery, receipt, or remittance. In fact, by so crediting said fees, the taxpayer's main office in Amsterdam in effect
acknowledged being, in a way, indebted to its Philippine branch, as debited in the latter's records, in much the
same way as the former would have been had it received the fees directly from the latter. Incidentally, this is in
accord with established practice especially among merchants the world over, who seldom bring or send money
physically from one country to another, but, generally resort to bills, notes or other conventional forms of
transacting business in the manner they may deem most practical and suitable to their respective interests.

Needless to say, the remittances made by the taxpayer's head office to its Philippine branch, for the operational
expenses thereof — or for any other purposes — must have been credited in the books of account of the latter in
favor of the former in the records of which they must have been debited said branch, and, hence, deducted from its
assets in Amsterdam, including the freight revenues involved herein.

The infirmity of the taxpayer's theory becomes readily apparent when We consider that, if upheld, its effect would
be to subject to the carrier's tax at the free market rate all business enterprises that bring their dollar earnings into
the Philippines, and to exempt from such tax  or apply the parity rate to those who do not bring in their dollars or
other foreign exchange, thereby discriminating against those who help maintain or increase our international
reserve and in favor  of these who do not only fail to do so, but jeopardize  the condition of such reserved, by
keeping abroad their dollar and other earnings and, worse still, by inducing other merchants in the Philippines,
engaged in foreign trade, to adopt the same practice, in order to avoid, evade or cut down the payment of said tax .
This result could not surely have been intended or countenanced by the framers of our tax laws, much less by
those responsible for our policy of control and, later, of gradual decontrol, considering their grave concern for our
international reserve and stability of the Philippine currency.

The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is anchored,
refers to transactions that took place before the approval of Republic Act 2609, on July 16, 1959, when
the only legal rate of exchange obtaining in the Philippines was P2 to $1, and all foreign exchange had to be
surrendered to the Central Bank, subject to its disposition pursuant to its own rules and regulations. Upon the other
hand, the present case refers to transactions that took place during the effectivity of Republic Act 2609, when there
was, apart from  the parity rate, a legal free market conversion rate for foreign exchange transactions, which rate
had been fixed in open trading, such as those involved in the case at bar. Although the decision in the case cited
contains a phrase suggesting that there can be no foreign exchange operation when the amount involved therein is
not remitted to the Philippines, this implied pronouncement was a mere obiter, inasmuch as the result would have
been the same had there been a remittance of said amount, there being, at that time, no other legal rate of
exchange of US dollars than the parity rate.

It is, thus, our considered view that the freight revenues accruing to the taxpayer in the present case, even though
collected abroad and, not remitted to its branch office in the Philippines, are part of its foreign exchange operations
and subject to the common carrier's tax, computed at the free market rate then prevailing.

53
It is next urged that the 25% surcharge sought to be collected by the petitioner should not be imposed upon the
taxpayer, it having acted in good faith in doing what it did, for it merely followed the advice of counsel. The
aforementioned surcharge was imposed by petitioner herein in accordance with Section 183 of the National
Internal Revenue Code,4 subdivision (a) of which reads:

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

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

In case of willful neglect to file the return within the period prescribed herein, or in case a false or
fraudulent return is wilfully made, there shall be added 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 its amount. The amount so added to any tax shall be
collected at the same time and in the same manner and as part of the tax unless the tax has been
paid before the discovery of the falsity or fraud, in which case the amount so added shall be
collected in the same manner as the tax.5

Pursuant to this provision, if the tax in question is not paid "within twenty days after the end of each month, ... the
amount of the tax shall be increased  by twenty five per centum the increment to be a part of the tax." As early as
February 11, 1925, We held in Lim Co Chui v. Posadas6 construing a similar provision, that the same is
"mandatory," and, accordingly, sanctioned the imposition of the 25% surcharge on the sales tax involved therein,
which had been paid one day late, or October 21, 1924, because of a riot against the Chinese in Manila on
October 18, 19 and 20, 1924. This view was reiterated in Koppel (Phil.) Inc. v. Collector of Internal
Revenue7 referring to a similar tax payable not later than January 20, 1942, but not paid then, owing to the
outbreak of war in the Pacific and the military occupation of the Philippines by Japanese forces. To the same effect
are Insular Lumber Co. v. Collector of Internal Revenue,8 Republic of the Philippines v. Luzon Industrial Corp., 9 —
in which a check, issued on time and brought by a passenger to the office of the City Treasurer on April 20, 1948,
could not be delivered to him on that date, on account of the numerous taxpayers then lined up in his office, and
was not actually received by said official until April 22, 1948 — Pirovano v. Commissioner of Internal
Revenue  1 0 and the Republic of the Philippines v. Lim Tian Teng Sons & Co., Inc. 1 1

Connel Bros. Co. v. Collector of Internal Revenue  1 2 and Imus Electric Co. v. Court of Tax Appeals, 1 3 upon
which the taxpayer relies, are not in point.

In the first case, the issue was whether the sales tax of 5% of the "gross selling price" of certain articles shall be
imposed upon the price set forth in the corresponding invoices, notwithstanding the fact that the phrase "5% sales
tax included" appeared thereon. The question was resolved in the affirmative, upon the ground that a circular of the
Bureau of Internal Revenue, implementing the law imposing said tax, provided:

... Unless billed to the purchaser as separate items in the invoice, the amounts intended to cover
the sales tax shall be considered as part of the gross selling price of the articles sold, and
deductions thereof will not be allowed.

and that the taxpayer had not complied with it since January 18, 1948, — although it had adhered thereto up to
then, by issuing invoices containing an itemization of the actual selling price and of the 5% sales tax thereon which
was added to the selling price and shifted to the customer, who paid the total amount.

It should be noted, however, that — unlike the taxpayer in the case at bar, which declared its revenues from
February to May 1962 as P75,003.00, when, in fact, the revenues aggregated P133,855.88 — Connel Bros Co.
had set forth in its invoices the true  amounts collected from its customers and the issue hinged merely on
the application  of the law thereto, namely, whether the sales tax shall be based upon said amounts, or should be
computed after deducting therefrom the sum corresponding to the tax. Moreover, although disagreeing with the
position taken by the Bureau of Internal Revenue, Connel Bros. had forthwith deposited the amount assessed by
the same, and the deposit was later converted into payment, followed by a formal request for refund and then,
upon denial thereof, by the corresponding petition for review in the Court of Tax Appeals. Thus, upon demand, the
amount representing the taxes sought to be collected by the Government was placed at the latters disposed,
54
subject only to the taxpayer's claim that it was not legally due. Hence, the reason for the imposition of a surcharge
— which is non-payment within the period prescribed by law — did not, in effect, exist in Connel Bros' case.

The second case initially referred to a similar claim for refund of payments made of the corporate franchise tax —
provided in section 259 of the Tax Code, as amended by Rep. Act No. 39, effective in 1946 — of 5% of the gross
earnings or receipts of a corporation that had, since 1930, a municipal franchise imposing a tax of 1% the earnings
for the first 20 years and 2% for the next 15 years. The taxpayer maintained that the application of the Tax Code
impaired its vested rights under said municipal franchise. The claim for refund had an exchange of views, between
the Bureau of Internal Revenue and the taxpayer, that dragged for a number of years, culminating, in September
1961, in an assessment for deficiency franchise tax, for the period from January 1956 to September 1960, plus
25% surcharge Although the claim of impairment of contractual obligation was overruled, for the reason that the
municipal franchise contained an express reservation that it was subject to amendment or repeal, We exempted
the taxpayer from the payment of the surcharge upon the authority of the Connel Bros.' case.

Regardless of our present opinion on the applicability to the Imus case of the view taken in the Connel Bros.' case
concerning the payment of surcharges, the fact is that, in such case, there had been  no  failure to pay the tax
assessed therein, so that there really was no legal justification for the imposition of surcharges. The circumstance
that Imus Electric Co. had begun  by demanding a refund  of the payments it had made, for the period from 1948 to
1951, pursuant to the Tax Code, to which it later claimed, it could not be made subject without violating rights
vested under its municipal franchise, may, perhaps, account for the reliance upon the Connel Bros.' case, although
the issue between the electric company and the Government, eventually, became one for collection of the
deficiency franchise tax from 1956 to 1960.

At any rate, neither case nor both suffice to outweigh the above-mentioned six cases declaring that the provision
imposing surcharges is mandatory. The alleged good faith of the taxpayer herein is — apart from being insufficient
to justify a departure from the rule laid down and repeatedly applied in said cases — merely based upon the advice
said to have been given by its counsel. Considering, moreover, that, up to December 1961, the taxpayer had
reported its earnings at the free market conversion rate — thereby indicating that such was, in its belief, the rate at
which its foreign exchange transactions should be computed — its change of policy in 1962, allegedly following
said advice of counsel, implied no more than the taking of a calculated risk.

WHEREFORE, the appealed decision of the Court Of Tax Appeals is reversed, and judgment shall be entered
affirming that of the Commissioner of Internal Revenue, except as to the compromise penalty of P200.00, which is
hereby eliminated, and sentencing respondent corporation, Royal Interocean Lines, Inc., to pay to petitioner here
the sum of P1,471.39. with interest thereon at the legal rate from January 18, 1963, when it received the letter of
demand of said petitioner, until full payment, 1 4 With costs against said respondent. It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ., concur.

TRIDHARMA MARKETING CORPORATION, Petitioner, - versus - COURT OF TAX APPEALS, SECOND

DIVISION, AND THE COMMISSIONER OF INTERNAL REVENUE, Respondents. G.R. No. 215950 Present:
SERENO, C.J., ~ LEONARDO-DE CASTRO, BERSAMIN, PERLAS-BERNABE, and CAGUIOA,JJ
Promulgated: JUN 2 o 2016

JOSE B. L. REYES and EDMUNDO A. REYES vs. PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE
ROÑO, in their capacities as appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT
APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as
appointed and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS
CATIIL in his capacity as City Assessor of Manila, respondents. G.R. Nos. L-49839-46             April 26, 1991

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

55
PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of Assessment
Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment
Appeals of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax
Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of
Manila" and "Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and
assessments made by the City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta.
Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants
were paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the
National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in
monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not
exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter.
The said Act also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity
thereby disallowing the ejectment of lessees upon the expiration of the usual legal period of lease. On October 12,
1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly
rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting
leases with a definite period. Consequently, the Reyeses, petitioners herein, were precluded from raising the
rentals and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed
the value of the subject properties based on the schedule of market values duly reviewed by the Secretary of
Finance. The revision, as expected, entailed an increase in the corresponding tax rates prompting petitioners to file
a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that the
reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering
that the taxes imposed upon them greatly exceeded the annual income derived from their properties. They argued
that the income approach should have been used in determining the land values instead of the comparable sales
approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however,
considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence which could
overcome the presumptive regularity of the classification and assessments appear to be in accordance
with the base schedule of market values and of the base schedule of building unit values, as approved by
the Secretary of Finance, the cases should be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They submitted, among others, the
summary of the yearly rentals to show the income derived from the properties. Respondent City Assessor, on the
other hand, submitted three (3) deeds of sale showing the different market values of the real property situated in
the same vicinity where the subject properties of petitioners are located. To better appreciate the locational and
physical features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the
presence of two representatives of the City Assessor prior to the healing of the case. Neither the owners nor their
authorized representatives were present during the said ocular inspection despite proper notices served them. It
was found that certain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which
reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax
Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the
appealed Decision is modified by allowing a 20% reduction in their respective market values and applying
therein the assessment level of 30% to arrive at the corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

56
The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD
IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners
maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of the
restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the City of
Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that the
resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by
the dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to their
properties as revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income
approach is used in determining land values in some vicinities, it maintains that when income is affected by some
sort of price control, the same is rejected in the consideration and study of land values as in the case of properties
affected by the Rent Control Law for they do not project the true market value in the open market ( Rollo, p. 21).
Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that the value estimate of
the properties predicated upon prices paid in actual, market transactions would be a uniform and a more credible
standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market value of
properties within its coverage. In any event, it is unquestionable that both the "Comparable Sales Approach" and
the "Income Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on Transfer
and Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one as
against the other would of course depend on several factors. Hence, as early as 1923 in the case of Army & Navy
Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in
finding the value of the property, have to consider all the circumstances and elements of value and must exercise a
prudent discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform,
but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class
shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation required
in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the need to
examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its
rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for
all its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property
rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate
in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief
Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the
power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984];
Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property.
That would be a clear abuse of power (Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the
government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no
support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar

57
circumstances or that all persons must be treated in the same manner, the conditions not being different both in
the privileges conferred and the liabilities imposed (Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental
Principle to guide the appraisal and assessment of real property for taxation purposes is that the property must be
"appraised at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the
market value of properties not so covered. The former has naturally a much lesser market value in view of the
rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under the
"comparable sales approach" were presented by the public respondents, namely: (1) that the sale must represent
a bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that for
properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a
general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties
were comparable with other residential properties not burdened by P.D. 20. Neither can the given circumstances
be nonchalantly dismissed by public respondents as imposed under distressed conditions clearly implying that the
same were merely temporary in character. At this point in time, the falsity of such premises cannot be more
convincingly demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in
sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
However, such collection should be made in accordance with law as any arbitrariness will negate the very reason
for government itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved
(Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason
that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D.
20) under the principle of social justice should not now be penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would amount to only P10.00
per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are
REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City
Assessor of Manila are ordered to make a new assessment by the income approach method to guarantee a fairer
and more realistic basis of computation (Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin, Sarmiento,
Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.

Footnotes

1
 Penned by former Chairman and Acting Minister Pedro Almanzor and concurred in by the then Minister of
Justice Vicente Abad Santos and Minister of Local Government and Community Development Jose Rono.

2
 Rendered by then Acting Register of Deeds of Manila Teresita H. Noblejas and concurred in by former City
Engineer of Manila Romulo M. del Rosario and OIC of the Office of the City of Auditor Raul C. Flores.

EN BANC

G.R. No. 210551               June 30, 2015

58
JOSE J. FERRER, JR., Petitioner,
vs.
CITY MAYOR HERBERT BAUTISTA, CITY COUNCIL OF QUEZON CITY, CITY TREASURER OF QUEZON
CITY, and CITY ASSESSOR OF QUEZON CITY, Respondents.

DECISION

PERALTA, J.:

Before this Court is a petition for certiorari under Rule 65 of the Rules of Court with prayer for the issuance of a
temporary restraining order (TRO) seeking to declare unconstitutional and illegal Ordinance Nos. SP-2095, S-2011
and SP-2235, S-2013 on the Socialized Housing Tax and Garbage Fee, respectively, which are being imposed by
the respondents.

The Case

On October 17, 2011,1 respondent Quezon City Council enacted Ordinance No. SP-2095, S-2011, 2 or the
Socialized Housing Tax of Quezon City, Section 3 of which provides:

SECTION 3. IMPOSITION. A special assessment equivalent to one-half percent (0.5%) on the assessed value of
land in excess of One Hundred Thousand Pesos (Php100,000.00) shall be collected by the City Treasurer which
shall accrue to the Socialized Housing Programs of the Quezon City Government. The special assessment shall
accrue to the General Fund under a special account to be established for the purpose.

Effective for five (5) years, the Socialized Housing Tax ( SHT ) shall be utilized by the Quezon City Government for
the following projects: (a) land purchase/land banking; (b) improvement of current/existing socialized housing
facilities; (c) land development; (d) construction of core houses, sanitary cores, medium-rise buildings and other
similar structures; and (e) financing of public-private partners hip agreement of the Quezon City Government and
National Housing Authority ( NHA ) with the private sector. 3

Under certain conditions, a tax credit shall be enjoyed by taxpayers regularly paying the special assessment:

SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special assessment tax as imposed by this ordinance
shall enjoy a tax credit. The tax credit may be availed of only after five (5) years of continue[d] payment. Further,
the taxpayer availing this tax credit must be a taxpayer in good standing as certified by the City Treasurer and City
Assessor.

The tax credit to be granted shall be equivalent to the total amount of the special assessment paid by the property
owner, which shall be given as follows:

1. 6th year - 20%

2. 7th year - 20%

3. 8th year - 20%

4. 9th year - 20%

5. 10th year - 20%

Furthermore, only the registered owners may avail of the tax credit and may not be continued by the subsequent
property owners even if they are buyers in good faith, heirs or possessor of a right in whatever legal capacity over
the subject property.4

On the other hand, Ordinance No. SP-2235, S-2013 5 was enacted on December 16, 2013 and took effect ten days
after when it was approved by respondent City Mayor. 6 The proceeds collected from the garbage fees on
residential properties shall be deposited solely and exclusively in an earmarked special account under the general
fund to be utilized for garbage collections. 7 Section 1 of the Ordinance se t forth the schedule and manner for the
collection of garbage fees:

59
SECTION 1. The City Government of Quezon City in conformity with and in relation to Republic Act No. 7160,
otherwise known as the Local Government Code of 1991 HEREBY IMPOSES THE FOLLOWING SCHEDULE
AND MANNER FOR THE ANNUAL COLLECTION OF GARBAGE FEES, AS FOLLOWS: On all domestic
households in Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

On all condominium unit and socialized housing projects/units in Quezon City;

FLOOR AREA IMPOSABLE FEE

Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PHP 100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00

On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high- rise condominiums shall pay the
annual garbage fee on the total size of the entire condominium and socialized Housing Unit and an
additional garbage fee shall be collected based on area occupied for every unit already so ld or being
amortized.

b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual garbage fee on the
total lot size of the entire apartment and an additional garbage fee based on the schedule prescribed
herein for every unit occupied.

The collection of the garbage fee shall accrue on the first day of January and shall be paid simultaneously with the
payment of the real property tax, but not later than the first quarter installment. 8 In case a household owner refuses
to pay, a penalty of 25% of the garbage fee due, plus an interest of 2% per month or a fraction thereof, shall be
charged.9

Petitioner alleges that he is a registered co-owner of a 371-square-meter residential property in Quezon City which
is covered by Transfer Certificate of Title (TCT ) No. 216288, and that, on January 7, 2014, he paid his realty tax
which already included the garbage fee in the sum of

Php100.00.10

The instant petition was filed on January 17, 2014. We issued a TRO on February 5, 2014, which enjoined the
enforcement of Ordinance Nos. SP-2095 and SP-2235 and required respondents to comment on the petition
without necessarily giving due course thereto.11

Respondents filed their Comment12 with urgent motion to dissolve the TRO on February 17, 2014. Thereafter,
petitioner filed a Reply and a Memorandum on March 3, 2014 and September 8, 2014, respectively.

Procedural Matters

A. Propriety of a Petition for Certiorari

60
Respondents are of the view that this petition for certiorari is improper since they are not tribunals, boards or
officers exercising judicial or quasi-judicial functions. Petitioner, however, counters that in enacting Ordinance Nos.
SP-2095 and SP-2235, the Quezon City Council exercised quasi-judicial function because the ordinances ruled
against the property owners who must pay the SHT and the garbage fee, exacting from them funds for basic
essential public services that they should not be held liable. Even if a Rule 65 petition is improper, petitioner still
asserts that this Court, in a number of cases like in Rosario v. Court of Appeals, 13 has taken cognizance of an
improper remedy in the interest of justice.

We agree that respondents neither acted in any judicial or quasi-judicial capacity nor arrogated unto themselves
any judicial or quasi-judicial prerogatives.

A respondent is said to be exercising judicial function where he has the power to determine what the law is and
what the legal rights of the parties are, and then undertakes to determine these questions and adjudicate upon the
rights of the parties.

Quasi-judicial function, on the other hand, is "a term which applies to the actions, discretion, etc., of public
administrative officers or bodies … required to investigate facts or ascertain the existence of facts, hold hearings,
and draw conclusions from them as a basis for their official action and to exercise discretion of a judicial nature."

Before a tribunal, board, or officer may exercise judicial or quasi-judicial acts, it is necessary that there be a law
that gives rise to some specific rights of person s or property under which adverse claims to such rights are made,
and the controversy en suing therefrom is brought before a tribunal, board, or officer clothed with power and
authority to determine the law and adjudicate the respective rights of the contending parties. 14

For a writ of certiorari to issue, the following requisites must concur: (1) it must be directed against a tribunal,
board, or officer exercising judicial or quasi-judicial functions; (2) the tribunal, board, or officer must have acted
without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction; and
(3) there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law. The enactment by
the Quezon City Council of the assailed ordinances was done in the exercise of its legislative, not judicial or quasi-
judicial, function. Under Republic Act (R.A.) No.7160, or the Local Government Code of 1991 (LGC), local
legislative power shall be exercised by the Sangguniang Panlungsod for the city. 15Said law likewise is specific in
providing that the power to impose a tax, fee, or charge , or to generate revenue shall be exercised by the
sanggunian of the local government unit concerned through an appropriate ordinance. 16

Also, although the instant petition is styled as a petition for certiorari, it essentially seeks to declare the
unconstitutionality and illegality of the questioned ordinances. It, thus, partakes of the nature of a petition for
declaratory relief, over which this Court has only appellate, not original, jurisdiction. 17

Despite these, a petition for declaratory relief may be treated as one for prohibition or mandamus, over which we
exercise original jurisdiction, in cases with far-reaching implications or one which raises transcendental issues or
questions that need to be resolved for the public good. 18The judicial policy is that this Court will entertain direct
resort to it when the redress sought cannot be obtained in the proper courts or when exceptional and compelling
circumstances warrant availment of a remedy within and calling for the exercise of Our primary jurisdiction. 19

Section 2, Rule 65 of the Rules of Court lay down under what circumstances a petition for prohibition may be filed:

SEC. 2. Petition for prohibition. - When the proceedings of any tribunal, corporation, board, officer or person,
whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction, or
with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain,
speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition
in the proper court, alleging the facts with certainty and praying that judgment be rendered commanding the
respondent to desist from further proceeding in the action or matter specified therein, or otherwise granting such
incidental reliefs as law and justice may require.

In a petition for prohibition against any tribunal, corporation, board, or person – whether exercising judicial, quasi-
judicial, or ministerial functions – who has acted without or in excess of jurisdiction or with grave abuse of
discretion, the petitioner prays that judgment be rendered, commanding the respondents to desist from further
proceeding in the action or matter specified in the petition. In this case, petitioner's primary intention is to prevent
respondents from implementing Ordinance Nos. SP-2095 and SP-2235. Obviously, the writ being sought is in the
nature of a prohibition, commanding desistance.

61
We consider that respondents City Mayor, City Treasurer, and City Assessor are performing ministerial functions.
A ministerial function is one that an officer or tribunal performs in the context of a given set of facts, in a prescribed
manner and without regard for the exercise of his or its own judgment, upon the propriety or impropriety of the act
done.20 Respondent Mayor, as chief executive of the city government, exercises such powers and performs such
duties and functions as provided for by the LGC and other laws. 21 Particularly, he has the duty to ensure that all
taxes and other revenues of the city are collected, and that city funds are applied to the payment of expenses and
settlement of obligations of the city, in accordance with law or ordinance. 22 On the other hand, under the LGC, all
local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their
duly-authorized deputies, while the assessor shall take charge, among others, of ensuring that all laws and policies
governing the appraisal and assessment of real properties for taxation purposes are properly executed. 23 Anent the
SHT, the Department of Finance (DOF) Local Finance Circular No. 1-97, dated April 16, 1997, is more specific:

6.3 The Assessor’s office of the Identified LGU shall:

a. immediately undertake an inventory of lands within its jurisdiction which shall be subject
to the levy of the Social Housing Tax (SHT) by the local sanggunian concerned;

b. inform the affected registered owners of the effectivity of the SHT; a list of the lands and
registered owners shall also be posted in 3 conspicuous places in the city/municipality;

c. furnish the Treasurer’s office and the local sanggunian concerned of the list of lands
affected;

6.4 The Treasurer’s office shall:

a. collect the Social Housing Tax on top of the Real Property Tax, SEF Tax and other
special assessments;

b. report to the DOF, thru the Bureau of Local Government Finance, and the Mayor’s office
the monthly collections on Social Housing Tax (SHT). An annual report should likewise be
submitted to the HUDCC on the total revenues raised during the year pursuant to Sec. 43,
R.A. 7279 and the manner in which the same was disbursed.

Petitioner has adduced special and important reasons as to why direct recourse to us should be allowed. Aside
from presenting a novel question of law, this case calls for immediate resolution since the challenged ordinances
adversely affect the property interests of all paying constituents of Quezon City. As well, this petition serves as a
test case for the guidance of other local government units (LGUs).Indeed, the petition at bar is of transcendental
importance warranting a relaxation of the doctrine of hierarchy of courts. In Social Justice Society (SJS) Officers, et
al. v. Lim ,24the Court cited the case of Senator Jaworski v. Phil. Amusement & Gaming Corp., 25 where We
ratiocinated:

Granting arguendo that the present action cannot be properly treated as a petition for prohibition, the
transcendental importance of the issues involved in this case warrants that we set aside the technical defects and
take primary jurisdiction over the petition at bar . x x x This is in accordance with the well entrenched principle that
rules of procedure are not inflexible tools designed to hinder or delay, but to facilitate and promote the
administration of justice. Their strict and rigid application, which would result in technicalities that tend to frustrate,
rather than promote substantial justice, must always be eschewed. 26

B. Locus Standi of Petitioner

Respondents challenge petitioner’s legal standing to file this case on the ground that, in relation to Section 3 of
Ordinance No. SP-2095, petitioner failed to allege his ownership of a property that has an assessed value of more
than Php100,000.00 and, with respect to Ordinance No. SP-2335, by what standing or personality he filed the case
to nullify the same. According to respondents, the petition is not a class suit, and that, for not having specifically
alleged that petitioner filed the case as a taxpayer, it could only be surmised whether he is a party-in-interest who
stands to be directly benefited or injured by the judgment in this case.

It is a general rule that every action must be prosecuted or defended in the name of the real party-in-interest, who
stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.

Jurisprudence defines interest as "material interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental interest. By real interest is meant a
62
present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or
consequential interest." "To qualify a person to be a real party-in-interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be enforced." 27

"Legal standing" or locus standi calls for more than just a generalized grievance. 28 The concept has been define d
as a personal and substantial interest in the case such that the party has sustained or will sustain direct injury as a
result of the government al act that is being challenged. 29 The gist of the question of standing is whether a party
alleges such personal stake in the outcome of the controversy as to assure that concrete adverseness which
sharpens the presentation of issues upon which the court depends for illumination of difficult constitutional
questions.30

A party challenging the constitutionality of a law, act, or statute must show "not only that the law is invalid, but also
that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its
enforcement, and not merely that he suffers thereby in some indefinite way." It must be shown that he has been, or
is about to be, denied some right or privilege to which he is lawfully entitled, or that he is about to be subjected to
some burdens or penalties by reason of the statute complained of. 31

Tested by the foregoing, petitioner in this case clearly has legal standing to file the petition. He is a real party-in-
interest to assail the constitutionality and legality of Ordinance Nos. SP-2095 and SP-2235 because respondents
did not dispute that he is a registered co-owner of a residential property in Quezon City an d that he paid property
tax which already included the SHT and the garbage fee. He has substantial right to seek a refund of the payments
he made and to stop future imposition. While he is a lone petitioner, his cause of action to declare the validity of the
subject ordinances is substantial and of paramount interest to similarly situated property owners in Quezon City.

C. Litis Pendentia

Respondents move for the dismissal of this petition on the ground of litis pendentia. They claim that, as early as
February 22, 2012, a case entitled Alliance of Quezon City Homeowners, Inc., et al., v. Hon. Herbert Bautista, et al.
, docketed as Civil Case No. Q-12- 7-820, has been pending in the Quezon City Regional Trial Court, Branch 104,
which assails the legality of Ordinance No. SP-2095. Relying on City of Makati, et al. v. Municipality (now City) of
Taguig, et al.,32 respondents assert that there is substantial identity of parties between the two cases because
petitioner herein and plaintiffs in the civil case filed their respective cases as taxpayers of Quezon City.

For petitioner, however, respondents’ contention is untenable since he is not a party in Alliance and does not even
have the remotest identity or association with the plaintiffs in said civil case. Moreover, respondents’ arguments
would deprive this Court of its jurisdiction to determine the constitutionality of laws under Section 5, Article VIII of
the 1987 Constitution.33

Litis pendentia is a Latin term which literally means "a pending suit" and is variously referred to in some decisions
as lis pendens and auter action pendant. 34 While it is normally connected with the control which the court has on a
property involved in a suit during the continuance proceedings, it is more interposed as a ground for the dismissal
of a civil action pending in court.35 In Film Development Council of the Philippines v. SM Prime Holdings, Inc.,36
We elucidated:

Litis pendentia, as a ground for the dismissal of a civil action, refers to a situation where two actions are pending
between the same parties for the same cause of action, so that one of them becomes unnecessary and vexatious.
It is based on the policy against multiplicity of suit and authorizes a court to dismiss a case motu proprio.

xxxx

The requisites in order that an action may be dismissed on the ground of litis pendentia are: (a) the identity of
parties, or at least such as representing the same interest in both actions; (b) the identity of rights asserted and
relief prayed for, the relief being founded on the same facts, and (c) the identity of the two cases such that
judgment in one, regardless of which party is successful, would amount to res judicata in the other.

The underlying principle of litis pendentia is the theory that a party is not allowed to vex another more than once
regarding the same subject matter and for the same cause of action. This theory is founded on the public policy
that the same subject matter should not be the subject of controversy in courts more than once, in order that
possible conflicting judgments may be avoided for the sake of the stability of the rights and status of persons, and
also to avoid the costs and expenses incident to numerous suits.

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Among the several tests resorted to in ascertaining whether two suits relate to a single or common cause of action
are: (1) whether the same evidence would support and sustain both the first and second causes of action; and (2)
whether the defenses in one case may be used to substantiate the complaint in the other.

The determination of whether there is an identity of causes of action for purposes of litis pendentia is inextricably
linked with that of res judicata , each constituting an element of the other. In either case, both relate to the sound
practice of including, in a single litigation, the disposition of all issues relating to a cause of action that is before a
court.37

There is substantial identity of the parties when there is a community of interest between a party in the first case
and a party in the second case albeit the latter was not impleaded in the first case. 38 Moreover, the fact that the
positions of the parties are reversed, i.e., the plaintiffs in the first case are the defendants in the second case or
vice-versa, does not negate the identity of parties for purposes of determining whether the case is dismissible on
the ground of litis pendentia .39

In this case, it is notable that respondents failed to attach any pleading connected with the alleged civil case
pending before the Quezon City trial court.1âwphi1 Granting that there is substantial identity of parties between
said case and this petition, dismissal on the ground of litis pendentia still cannot be had in view of the absence of
the second and third requisites. There is no way for us to determine whether both cases are based on the same
set of facts that require the presentation of the same evidence. Even if founded on the same set of facts, the rights
asserted and reliefs prayed for could be different. Moreover, there is no basis to rule that the two cases are
intimately related and/or intertwined with one another such that the judgment that may be rendered in one,
regardless of which party would be successful, would amount to res judicata in the other.

D. Failure to Exhaust Administrative Remedies

Respondents contend that petitioner failed to exhaust administrative remedies for his non-compliance with Section
187 of the LGC, which mandates:

Section 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public
Hearings. – The procedure for approval of local tax ordinances and revenue measures shall be in accordance with
the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the
enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or
revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of
Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however,
That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the
decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.

The provision, the constitutionality of which was sustained in Drilon v. Lim , 40 has been construed as
mandatory41 considering that –

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most
effective instrument to raise needed revenues to finance and support the myriad activities of local government units
for the delivery of basic services essential to the promotion of the general welfare and enhancement of peace,
progress, and prosperity of the people. Consequently, any delay in implementing tax measures would be to the
detriment of the public. It is for this reason that protests over tax ordinances are required to be done within certain
time frames. x x x.42

The obligatory nature of Section 187 was underscored in Hagonoy Market Vendor Asso. v. Municipality of
Hagonoy:43

x x x [T]he timeframe fixed by law fo r parties to avail of their legal remedies before competent courts is not a "mere
technicality" that can be easily brushed aside. The periods stated in Section 187 of the Local Government Code
are mandatory. x x x Being its lifeblood, collection of revenues by the government is of paramount importance. The
funds for the operation of its agencies and provision of basic services to its inhabitants are largely derived from its
revenues and collections. Thus, it is essential that the validity of revenue measures is not left uncertain for a
considerable length of time. Hence, the law provided a time limit for an aggrieved party to assail the legality of
revenue measures and tax ordinances."44

64
Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones, 45held that there was no need for petitioners
therein to exhaust administrative remedies before resorting to the courts, considering that there was only a pure
question of law, the parties did not dispute any factual matter on which they had to present evidence. Likewise, in
Cagayan Electric Power and Light Co., Inc. v. City of Cagayan de Oro, 46 We relaxed the application of the rules in
view of the more substantive matters. For the same reasons, this petition is an exception to the general rule.

Substantive Issues

Petitioner asserts that the protection of real properties from informal settlers and the collection of garbage are basic
and essential duties and functions of the Quezon City Government. By imposing the SHT and the garbage fee, the
latter has shown a penchant and pattern to collect taxes to pay for public services that could be covered by its
revenues from taxes imposed on property, idle land, business, transfer, amusement, etc., as well as the Internal
Revenue Allotment (IRA ) from the National Government. For petitioner, it is noteworthy that respondents did not
raise the issue that the Quezon City Government is in dire financial state and desperately needs money to fund
housing for informal settlers and to pay for garbage collection. In fact, it has not denied that its revenue collection in
2012 is in the sum of ₱13.69 billion.

Moreover, the imposition of the SHT and the garbage fee cannot be justified by the Quezon City Government as an
exercise of its power to create sources of income under Section 5, Article X of the 1987 Constitution. 47 According to
petitioner, the constitutional provision is not a carte blanche for the LGU to tax everything under its territorial and
political jurisdiction as the provision itself admits of guidelines and limitations.

Petitioner further claims that the annual property tax is an ad valorem tax, a percentage of the assessed value of
the property, which is subject to revision every three (3) years in order to reflect an increase in the market value of
the property. The SHT and the garbage fee are actually increases in the property tax which are not based on the
assessed value of the property or its reassessment every three years; hence, in violation of Sections 232 and 233
of the LGC.48

For their part, respondents relied on the presumption in favor of the constitutionality of Ordinance Nos. SP-2095
and SP-2235, invoking Victorias Milling Co., Inc. v. Municipality of Victorias, etc., 49 People v. Siton, et al., 50 and
Hon. Ermita v. Hon. Aldecoa-Delorino .51 They argue that the burden of establishing the invalidity of an ordinance
rests heavily upon the party challenging its constitutionality. They insist that the questioned ordinances are proper
exercises of police power similar to Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC52 and Social
Justice Society (SJS), et al. v. Hon. Atienza, Jr. 53 and that their enactment finds basis in the social justice principle
enshrined in Section 9,54 Article II of the 1987 Constitution.

As to the issue of publication, respondents argue that where the law provides for its own effectivity, publication in
the Official Gazette is not necessary so long as it is not punitive in character, citing Balbuna, et al. v. Hon.
Secretary of Education, et al. 55 and Askay v. Cosalan .[56]] Thus, Ordinance No. SP-2095 took effect after its
publication, while Ordinance No. SP-2235 became effective after its approval on December 26, 2013.

Additionally, the parties articulate the following positions:

On the Socialized Housing Tax

Respondents emphasize that the SHT is pursuant to the social justice principle found in Sections 1 and 2, Article
XIII57 of the 1987 Constitution and Sections 2 (a)58 and 4359 of R.A. No. 7279, or the "Urban Development and
Housing Act of 1992 ( UDHA ).

Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente, 60and Victorias Milling Co., Inc. v. Municipality
of Victorias, etc.,61respondents assert that Ordinance No. SP-2095 applies equally to all real property owners
without discrimination. There is no way that the ordinance could violate the equal protection clause because real
property owners and informal settlers do not belong to the same class.

Ordinance No. SP-2095 is also not oppressive since the tax rate being imposed is consistent with the UDHA. While
the law authorizes LGUs to collect SHT on properties with an assessed value of more than ₱50,000.00, the
questioned ordinance only covers properties with an assessed value exceeding ₱100,000.00. As well, the
ordinance provides for a tax credit equivalent to the total amount of the special assessment paid by the property
owner beginning in the sixth (6th) year of the effectivity of the ordinance.

On the contrary, petitioner claims that the collection of the SHT is tantamount to a penalty imposed on real property
owners due to the failure of respondent Quezon City Mayor and Council to perform their duty to secure and protect
65
real property owners from informal settlers, thereby burdening them with the expenses to provide funds for
housing. For petitioner, the SHT cannot be viewed as a "charity" from real property owners since it is forced, not
voluntary.

Also, petitioner argues that the collection of the SHT is a kind of class legislation that violates the right of property
owners to equal protection of the laws since it favors informal settlers who occupy property not their own and pay
no taxes over law-abiding real property owners w ho pay income and realty taxes.

Petitioner further contends that respondents’ characterization of the SHT as "nothing more than an advance
payment on the real property tax" has no statutory basis. Allegedly, property tax cannot be collected before it is
due because, under the LGC, chartered cities are authorized to impose property tax based on the assessed value
and the general revision of assessment that is made every three (3) years.

As to the rationale of SHT stated in Ordinance No. SP-2095, which, in turn, was based on Section 43 of the UDHA,
petitioner asserts that there is no specific provision in the 1987 Constitution stating that the ownership and
enjoyment of property bear a social function. And even if there is, it is seriously doubtful and far-fetched that the
principle means that property owners should provide funds for the housing of informal settlers and for home site
development. Social justice and police power, petitioner believes, does not mean imposing a tax on one, or that
one has to give up something, for the benefit of another. At best, the principle that property ownership and
enjoyment bear a social function is but a reiteration of the Civil Law principle that property should not be enjoyed
and abused to the injury of other properties and the community, and that the use of the property may be restricted
by police power, the exercise of which is not involved in this case.

Finally, petitioner alleges that 6 Bistekvilles will be constructed out of the SHT collected. Bistek is the monicker of
respondent City Mayor. The Bistekvilles makes it clear, therefore, that politicians will take the credit for the tax
imposed on real property owners.

On the Garbage Fee

Respondents claim that Ordinance No. S-2235, which is an exercise of police power, collects on the average from
every household a garbage fee in the meager amount of thirty-three (33) centavos per day compared with the sum
of ₱1,659.83 that the Quezon City Government annually spends for every household for garbage collection and
waste management.62

In addition, there is no double taxation because the ordinance involves a fee. Even assuming that the garbage fee
is a tax, the same cannot be a direct duplicate tax as it is imposed on a different subject matter and is of a different
kind or character. Based on Villanueva, et al. v. City of Iloilo 63 and Victorias Milling Co., Inc. v. Municipality of
Victorias, etc.,64 there is no "taxing twice" because the real property tax is imposed on ownership based on its
assessed value, while the garbage fee is required on the domestic household. The only reference to the property is
the determination of the applicable rate and the facility of collection.

Petitioner argues, however, that Ordinance No. S-2235 cannot be justified as an exercise of police power. The
cases of Calalang v. Williams, 65 Patalinghug v. Court of Appeals, 66 and Social Justice Society (SJS), et al. v. Hon.
Atienza, Jr.,67 which were cited by respondents, are inapplicable since the assailed ordinance is a revenue
measure and does not regulate the disposal or other aspect of garbage.

The subject ordinance, for petitioner, is discriminatory as it collects garbage fee only from domestic households
and not from restaurants, food courts, fast food chains, and other commercial dining places that spew garbage
much more than residential property owners.

Petitioner likewise contends that the imposition of garbage fee is tantamount to double taxation because garbage
collection is a basic and essential public service that should be paid out from property tax, business tax, transfer
tax, amusement tax, community tax certificate, other taxes, and the IRA of the Quezon City Government. To
bolster the claim, he states that the revenue collection of the Quezon City Government reached Php13.69 billion in
2012. A small portion of said amount could be spent for garbage collection and other essential services.

It is further noted that the Quezon City Government already collects garbage fee under Section 47 68 of R.A. No.
9003, or the Ecological Solid Waste Management Act of 2000, which authorizes LGUs to impose fees in amounts
sufficient to pay the costs of preparing, adopting, and implementing a solid waste management plan, and that
LGUs have access to the Solid Waste Management (SWM) Fund created under Section 46 69 of the same law.
Also, according to petitioner, it is evident that Ordinance No. S2235 is inconsistent with R.A. No. 9003 for whil e the
law encourages segregation, composting, and recycling of waste, the ordinance only emphasizes the collection

66
and payment of garbage fee; while the law calls for an active involvement of the barangay in the collection,
segregation, and recycling of garbage, the ordinance skips such mandate. Lastly, in challenging the ordinance,
petitioner avers that the garbage fee was collected even if the required publication of its approval had not yet
elapsed. He notes that on January 7, 2014, he paid his realty tax which already included the garbage fee.

The Court's Ruling

Respondents correctly argued that an ordinance, as in every law, is presumed valid.

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the
municipal conditions as a whole and the nature of the business made subject to imposition. 70

For an ordinance to be valid though, it must not only be within the corporate powers of the LGU to enact and must
be passed according to the procedure prescribed by law, it should also conform to the following requirements: (1)
not contrary to the Constitution or any statute; (2) not unfair or oppressive; (3) not partial or discriminatory; (4) not
prohibit but may regulate trade; (5) general and consistent with public policy; and (6) not unreasonable. 71 As
jurisprudence indicates, the tests are divided into the formal (i.e., whether the ordinance was enacted within the
corporate powers of the LGU and whether it was passed in accordance with the procedure prescribed by law), and
the substantive ( i.e., involving inherent merit, like the conformity of the ordinance with the limitations under the
Constitution and the statutes, as well as with the requirements of fairness and reason, and its consistency with
public policy).72

An ordinance must pass muster under the test of constitutionality and the test of consistency with the prevailing
laws.73 If not, it is void.74

Ordinance should uphold the principle of the supremacy of the Constitution. 75 As to conformity with existing
statutes,

Batangas CATV, Inc. v. Court of Appeals76 has this to say:

It is a fundamental principle that municipal ordinances are inferior in status and subordinate to the laws of the state.
An ordinance in conflict with a state law of general character and statewide application is universally held to be
invalid. The principle is frequently expressed in the declaration that municipal authorities, under a general grant of
power, cannot adopt ordinances which infringe the spirit of a state law or repugnant to the general policy of the
state. In every power to pass ordinances given to a municipality, there is an implied restriction that the ordinances
shall be consistent with the general law. In the language of Justice Isagani Cruz (ret.), this Court, in Magtajas vs.
Pryce Properties Corp., Inc., ruled that:

The rationale of the requirement that the ordinances should not contravene a statute is obvious. Municipal
governments are only agents of the national government. Local councils exercise only delegated legislative powers
conferred on them by Congress as the national lawmaking body. The delegate cannot be superior to the principal
or exercise powers higher than those of the latter. It is a heresy to suggest that the local government units can
undo the acts of Congress, from which they have derived their power in the first place, and negate by mere
ordinance the mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights wholly from the legislature. It
breathes into them the breath of life, without which they cannot exist. As it creates, so it may destroy. As it may
destroy, it may abridge and control. Unless there is some constitutional limitation on the right, the legislature might,
by a single act, and if we can suppose it capable of so great a folly and so great a wrong, sweep from existence all
of the municipal corporations in the State, and the corporation could not prevent it. We know of no limitation on the
right so far as to the corporation themselves are concerned. They are so to phrase it, the mere tenants at will of the
legislature.

This basic relationship between the national legislature and the local government units has not been enfeebled by
the new provisions in the Constitution strengthening the policy of local autonomy. Without meaning to detract from
that policy, we here confirm that Congress retains control of the local government units although in significantly
reduced degree now than under our previous Constitutions. The power to create still includes the power to destroy.
The power to grant still includes the power to withhold or recall. True, there are certain notable innovations in the
Constitution, like the direct conferment on the local government units of the power to tax, which cannot now be

67
withdrawn by mere statute. By and large, however, the national legislature is still the principal of the local
government units, which cannot defy its will or modify or violate it. 77

LGUs must be reminded that they merely form part of the whole; that the policy of ensuring the autonomy of local
governments was never intended by the drafters of the 1987 Constitution to create an imperium in imperio and
install an intra-sovereign political subdivision independent of a single sovereign state. 78

"[M]unicipal corporations are bodies politic and corporate, created not only as local units of local self-government,
but as governmental agencies of the state. The legislature, by establishing a municipal corporation, does not divest
the State of any of its sovereignty; absolve itself from its right and duty to administer the public affairs of the entire
state; or divest itself of any power over the inhabitants of the district which it possesses before the charter was
granted."79

LGUs are able to legislate only by virtue of a valid delegation of legislative power from the national legislature; they
are mere agents vested with what is called the power of subordinate legislation. 80 "Congress enacted the LGC as
the implementing law for the delegation to the various LGUs of the State’s great powers, namely: the police power,
the power of eminent domain, and the power of taxation. The LGC was fashioned to delineate the specific
parameters and limitations to be complied with by each LGU in the exercise of these delegated powers with the
view of making each LGU a fully functioning subdivision of the State subject to the constitutional and statutory
limitations."81

Specifically, with regard to the power of taxation, it is indubitably the most effective instrument to raise needed
revenues in financing and supporting myriad activities of the LGUs for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. 82 As this
Court opined in National Power Corp. v. City of Cabanatuan: 83

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives. Taxation assume s even greater
significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, Section 5 of the 1987 Constitution, viz: "Section 5. Each Local Government unit shall
have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the local governments."

This paradigm shift results from the realization that genuine development can be achieved only by strengthening
local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized
government structure has bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, Section 3 of Article X of the 1987 Constitution mandates Congress
to enact a local government code that will, consistent with the basic policy of local autonomy , set the guidelines
and limitations to this grant of taxing powers x x x84

Fairly recently, We also stated in Pelizloy Realty Corporation v. Province of Benguet 85 that:

The rule governing the taxing power of provinces, cities, municipalities and barangays is summarized in Icard v.
City Council of Baguio :

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The
charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it. And the
power when granted is to be construed in strictissimi juris . Any doubt or ambiguity arising out of the term used in
granting that power must be resolved against the municipality. Inferences, implications, deductions – all these –
have no place in the interpretation of the taxing power of a municipal corporation. [Underscoring supplied]

xxxx

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges." Nevertheless, such
authority is "subject to such guidelines and limitations as the Congress may provide."

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In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No. 7160,
otherwise known as the Local Government Code of 1991. Book II of the LGC governs local taxation and fiscal
matters.86

Indeed, LGUs have no inherent power to tax except to the extent that such power might be delegated to them
either by the basic law or by the statute. 87 "Under the now prevailing Constitution , where there is neither a grant
nor a prohibition by statute , the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of
local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law
did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure
that, while the local government units are being strengthened and made more autonomous , the legislature must
still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions;
(b) each local government unit will have its fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just." 88

Subject to the provisions of the LGC and consistent with the basic policy of local autonomy, every LGU is now
empowered and authorized to create its own sources of revenue and to levy taxes, fees, and charges which shall
accrue exclusively to the local government unit as well as to apply its resources and assets for productive,
developmental, or welfare purposes, in the exercise or furtherance of their governmental or proprietary powers and
functions.89 The relevant provisions of the LGC which establish the parameters of the taxing power of the LGUs are
as follows:

SECTION 130. Fundamental Principles. – The following fundamental principles shall govern th e exercise of the
taxing and other revenue-raising powers of local government units:

(a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall:

(1) be equitable and based as far as practicable on the taxpayer’s ability to pay;

(2) be levied and collected only for public purposes;

(3) not be unjust, excessive, oppressive, or confiscatory;

(4) not be contrary to law, public policy, national economic policy, or in restraint of trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case be left to any private
person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be
subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise
provided herein;

(d) Customs duties, registration fees of vessel and wharage on wharves, tonnage dues, and all other kinds
of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local
government unit concerned;

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 (e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through,
the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a
period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and
taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of
passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided
herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly
registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines" respectively; and

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and
local government units.

SECTION 151. Scope of Taxing Powers. – Except as otherwise provided in this Code, the city, may levy the taxes,
fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality
by not more than fifty percent (50%) except the rates of professional and amusement taxes.

SECTION 186. Power to Levy Other Taxes, Fees or Charges. – Local government units may exercise the power to
levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.

On the Socialized Housing Tax

Contrary to petitioner’s submission, the 1987 Constitution explicitly espouses the view that the use of property
bears a social function and that all economic agents shall contribute to the common good. 90 The Court already
recognized this in Social Justice Society (SJS), et al. v. Hon. Atienza, Jr.: 91

Property has not only an individual function, insofar as it has to provide for the needs of the owner, but also a
social function insofar as it has to provide for the needs of the other members of society. The principle is this:

Police power proceeds from the principle that every holder of property, however absolute and unqualified may be
his title, holds it under the implied liability that his use of it shall not be injurious to the equal enjoyment of others
having an equal right to the enjoyment of their property, no r injurious to the right of the community. Rights of
70
property, like all other social and conventional rights, are subject to reasonable limitations in their enjoyment as
shall prevent them from being injurious, and to such reasonable restraints and regulations established by law as
the legislature, under the governing an d controlling power vested in them by the constitution, may think necessary
and expedient.92

Police power, which flows from the recognition that salus populi est suprema lex (the welfare of the people is the
supreme law), is the plenary power vested in the legislature to make statutes and ordinances to promote the
health, morals, peace, education, good order or safety and general welfare of the people. 93 Property rights of
individuals may be subjected to restraints and burdens in order to fulfill the objectives of the government in the
exercise of police power. 94 In this jurisdiction, it is well-entrenched that taxation may be made the implement of the
state’s police power.95

Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to 0.5% on the assessed value of land in
excess of Php100,000.00. This special assessment is the same tax referred to in R.A. No. 7279 or the
UDHA.96 The SHT is one of the sources of funds for urban development and housing program. 97 Section 43 of the
law provides:

Sec. 43. Socialized Housing Tax . – Consistent with the constitutional principle that the ownership and enjoyment
of property bear a social function and to raise funds for the Program, all local government units are hereby
authorized to impose an additional one-half percent (0.5%) tax on the assessed value of all lands in urban areas in
excess of Fifty thousand pesos (₱50,000.00).

The rationale of the SHT is found in the preambular clauses of the subject ordinance, to wit:

WHEREAS, the imposition of additional tax is intended to provide the City Government with sufficient funds to
initiate, implement and undertake Socialized Housing Projects and other related preliminary activities;

WHEREAS, the imposition of 0.5% tax will benefit the Socialized Housing Programs and Projects of the City
Government, specifically the marginalized sector through the acquisition of properties for human settlements;

WHEREAS, the removal of the urban blight will definitely increase fair market value of properties in the city[.]

The above-quoted are consistent with the UDHA, which the LGUs are charged to implement in their respective
localities in coordination with the Housing and Urban Development Coordinating Council, the national housing
agencies, the Presidential Commission for the Urban Poor, the private sector, and other non-government
organizations.98 It is the declared policy of the State to undertake a comprehensive and continuing urban
development and housing program that shall, among others, uplift the conditions of the underprivileged and
homeless citizens in urban areas and in resettlement areas, and provide for the rational use and development of
urban land in order to bring a bout, among others, reduction in urban dysfunctions, particularly those that adversely
affect public health, safety and ecology, and access to land and housing by the underprivileged and homeless
citizens.99 Urban renewal and resettlement shall include the rehabilitation and development of blighted and slum
areas100 and the resettlement of program beneficiaries in accordance with the provisions of the UDHA. 101 Under the
UDHA, socialized housing102 shall be the primary strategy in providing shelter for the underprivileged and
homeless.103 The LGU or the NHA, in cooperation with the private developers and concerned agencies, shall
provide socialized housing or re settlement areas with basic services and facilities such as potable water, power
and electricity, and an adequate power distribution system, sewerage facilities, and an efficient and adequate solid
waste disposal system; and access to primary roads and transportation facilities. 104 The provisions for health,
education, communications, security, recreation, relief and welfare shall also be planned and be given priority for
implementation by the LGU and concerned agencies in cooperation with the private sector and the beneficiaries
themselves.105

Moreover, within two years from the effectivity of the UDHA, the LGUs, in coordination with the NHA, are directed
to implement the relocation and resettlement of persons living in danger areas such as esteros , railroad tracks,
garbage dumps, riverbanks, shorelines, waterways, and other public places like sidewalks, roads, parks, and
playgrounds.106 In coordination with the NHA, the LG Us shall provide relocation or resettlement sites with basic
services and facilities and access to employment and livelihood opportunities sufficient to meet the basic needs of
the affected families.107

Clearly, the SHT charged by the Quezon City Government is a tax which is within its power to impose. Aside from
the specific authority vested by Section 43 of the UDHA, cities are allowed to exercise such other powers and
discharge such other functions and responsibilities as are necessary, appropriate, or incidental to efficient and
effective provision of the basic services and facilities which include, among others, programs and projects for low-

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cost housing and other mass dwellings.108 The collections made accrue to its socialized housing programs and
projects.

The tax is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory purpose. The
levy is primarily in the exercise of the police power for the general welfare of the entire city. It is greatly imbued with
public interest. Removing slum areas in Quezon City is not only beneficial to the underprivileged and homeless
constituents but advantageous to the real property owners as well. The situation will improve the value of the their
property investments, fully enjoying the same in view of an orderly, secure, and safe community, and will enhance
the quality of life of the poor, making them law-abiding constituents and better consumers of business products.

Though broad and far-reaching, police power is subordinate to constitutional limitations and is subject to the
requirement that its exercise must be reasonable and for the public good. 109 In the words of City of Manila v. Hon.
Laguio, Jr.:110

The police power granted to local government units must always be exercised with utmost observance of the rights
of the people to due process and equal protection of the law. Such power cannot be exercised whimsically,
arbitrarily or despotically as its exercise is subject to a qualification, limitation or restriction demanded by the
respect and regard due to the prescription of the fundamental law, particularly those forming part of the Bill of
Rights. Individual rights, it bears emphasis, may be adversely affected only to the extent that may fairly be required
by the legitimate demands of public interest or public welfare. Due process requires the intrinsic validity of the law
in interfering with the rights of the person to his life, liberty and property.

xxxx

To successfully invoke the exercise of police power as the rationale for the enactment of the Ordinance, and to free
it from the imputation of constitutional infirmity, not only must it appear that the interests of the public generally, as
distinguished from those of a particular class, require an interference with private rights, but the means adopted
must be reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.
It must be evident that no other alternative for the accomplishment of the purpose less intrusive of private rights
can work. A reasonable relation must exist between the purposes of the police measure and the means employed
for its accomplishment, for even under the guise of protecting the public interest, personal rights and those
pertaining to private property will not be permitted to be arbitrarily invaded.

Lacking a concurrence of these two requisites, the police measure shall be struck down as an arbitrary intrusion
into private rights – a violation of the due process clause. 111

As with the State, LGUs may be considered as having properly exercised their police power only if there is a lawful
subject and a lawful method or, to be precise, if the following requisites are met: (1) the interests of the public
generally, as distinguished from those of a particular class, require its exercise and (2) the mean s employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 112

In this case, petitioner argues that the SHT is a penalty imposed on real property owners because it burdens them
with expenses to provide funds for the housing of informal settlers, and that it is a class legislation since it favors
the latter who occupy properties which is not their own and pay no taxes.

We disagree.

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. 113 The guarantee means that no person or class of persons shall be denied
the same protection of laws which is enjoyed by other persons or other classes in like circumstances. 114 Similar
subjects should not be treated differently so as to give undue favor to some and unjustly discriminate against
others.115 The law may, therefore, treat and regulate one class differently from another class provided there are real
and substantial differences to distinguish one class from another. 116

An ordinance based on reasonable classification does not violate the constitutional guaranty of the equal protection
of the law. The requirements for a valid and reasonable classification are: (1) it must rest on substantial
distinctions; (2) it must be germane to the purpose of the law; (3) it must not be limited to existing conditions only;
and (4) it must apply equally to all members of the same class. 117For the purpose of undertaking a comprehensive
and continuing urban development and housing program, the disparities between a real property owner and an
informal settler as two distinct classes are too obvious and need not be discussed at length. The differentiation
conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the
Constitution. Notably, the public purpose of a tax may legally exist even if the motive which impelled the legislature

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to impose the tax was to favor one over another. 118 It is inherent in the power to tax that a State is free to select the
subjects of taxation.119 Inequities which result from a singling out of one particular class for taxation or exemption
infringe no constitutional limitation.120

Further, the reasonableness of Ordinance No. SP-2095 cannot be disputed. It is not confiscatory or oppressive
since the tax being imposed therein is below what the UDHA actually allows. As pointed out by respondents, while
the law authorizes LGUs to collect SHT on lands with an assessed value of more than ₱50,000.00, the questioned
ordinance only covers lands with an assessed value exceeding ₱100,000.00. Even better, on certain conditions,
the ordinance grants a tax credit equivalent to the total amount of the special assessment paid beginning in the
sixth (6th) year of its effectivity. Far from being obnoxious, the provisions of the subject ordinance are fair and just.

On the Garbage Fee

In the United States of America, it has been held that the authority of a municipality to regulate garbage falls within
its police power to protect public health, safety, and welfare. 121 As opined, the purposes and policy underpinnings
of the police power to regulate the collection and disposal of solid waste are: (1) to preserve and protect the public
health and welfare as well as the environment by minimizing or eliminating a source of disease and preventing and
abating nuisances; and (2) to defray costs and ensure financial stability of the system for the benefit of the entire
community, with the sum of all charges marshalled and designed to pay for the expense of a systemic refuse
disposal scheme.122

Ordinances regulating waste removal carry a strong presumption of

validity.123 Not surprisingly, the overwhelming majority of U.S. cases addressing a city's authority to impose
mandatory garbage service and fees have upheld the ordinances against constitutional and statutory challenges. 124

A municipality has an affirmative duty to supervise and control the collection of garbage within its corporate
limits.125 The LGC specifically assigns the responsibility of regulation and oversight of solid waste to local governing
bodies because the Legislature determined that such bodies were in the best position to develop efficient waste
management programs.126 To impose on local governments the responsibility to regulate solid waste but not grant
them the authority necessary to fulfill the same would lead to an absurd result." 127 As held in one U.S. case:

x x x When a municipality has general authority to regulate a particular subject matter, the manner and means of
exercising those powers, where not specifically prescribed by the legislature, are left to the discretion of the
municipal authorities. x x x Leaving the manner of exercising municipal powers to the discretion of municipal
authorities "implies a range of reasonableness within which a municipality's exercise of discretion will not be
interfered with or upset by the judiciary."128

In this jurisdiction, pursuant to Section 16 of the LGC and in the proper exercise of its corporate powers under
Section 22 of the same, the Sangguniang Panlungsod of Quezon City, like other local legislative bodies, is
empowered to enact ordinances, approve resolutions, and appropriate funds for the genera l welfare of the city and
its inhabitants.129Section 16 of the LGC provides:

SECTION 16. General Welfare . – Every local government unit shall exercise the powers expressly granted, those
necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and effective
governance, and those which are essential to the promotion of the general welfare. Within their respective
territorial jurisdictions, local government units shall ensure and support, among other things, the preservation and
enrichment of culture, promote health and safety, enhance the right of the people to a balanced ecology,
encourage and support the development of appropriate and self-reliant scientific and technological capabilities,
improve public morals, enhance economic prosperity and social justice, promote full employment among their
residents, maintain peace and order, and preserve the comfort and convenience of their inhabitants.

The general welfare clause is the delegation in statutory form of the police power of the State to LGUs. 130 The
provisions related thereto are liberally interpreted to give more powers to LGUs in accelerating economic
development and upgrading the quality of life for the people in the community. 131 Wide discretion is vested on the
legislative authority to determine not only what the interests of the public require but also what measures are
necessary for the protection of such interests since the Sanggunian is in the best position to determine the needs
of its constituents.132

One of the operative principles of decentralization is that, subject to the provisions of the LGC and national
policies, the LGUs shall share with the national government the responsibility in the management and maintenance
of ecological balance within their territorial jurisdiction. 133 In this regard, cities are allowed to exercise such other

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powers and discharge such other functions and responsibilities as are necessary, appropriate, or incidental to
efficient and effective provision of the basic services and facilities which include, among others, solid waste
disposal system or environmental management system and services or facilities related to general hygiene and
sanitation.134 R.A. No. 9003, or the Ecological Solid Waste Management Act of 2000, 135 affirms this authority as it
expresses that the LGUs shall be primarily responsible for the implementation and enforcement of its provisions
within their respective jurisdictions while establishing a cooperative effort among the national government, other
local government units, non-government organizations, and the private sector. 136

Necessarily, LGUs are statutorily sanctioned to impose and collect such reasonable fees and charges for services
rendered.137 "Charges" refer to pecuniary liability, as rents or fees against persons or property, while "Fee" means
a charge fixed by law or ordinance for the regulation or inspection of a business or activity. 138

The fee imposed for garbage collections under Ordinance No. SP-2235 is a charge fixed for the regulation of an
activity. The basis for this could be discerned from the foreword of said Ordinance, to wit:

WHEREAS, Quezon City being the largest and premiere city in the Philippines in terms of population and urban
geographical areas, apart from being competent and efficient in the delivery of public service, apparently requires a
big budgetary allocation in order to address the problems relative and connected to the prompt and efficient
delivery of basic services such as the effective system of waste management, public information programs on
proper garb age and proper waste disposal, including the imposition of waste regulatory measures;

WHEREAS, to help augment the funds to be spent for the city’s waste management system, the City Government
through the Sangguniang Panlungsod deems it necessary to impose a schedule of reasonable fees or charges for
the garbage collection services for residential (domestic household) that it renders to the public.

Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax. In Smart Communications, Inc. v.
Municipality of Malvar, Batangas ,139the Court had the occasion to distinguish these two concepts:

In Progressive Development Corporation v. Quezon City, the Court declared that "if the generating of revenue is
the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court reiterated that the purpose and effect of the
imposition determine whether it is a tax or a fee, and that the lack of any standards for such imposition gives the
presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition
is properly a license tax or a license fee.1awp++i1 The determining factors are the purpose and effect of the
imposition as may be apparent from the provisions of the ordinance. Thus, "[w]hen no police inspection,
supervision, or regulation is provided, nor any standard set for the applicant to establish, or that he agrees to attain
or maintain, but any and all persons engaged in the business designated, without qualification or hindrance, may
come, and a license on payment of the stipulated sum will issue, to do business, subject to no prescribed rule of
conduct and under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and
licensee, the presumption is strong that the power of taxation, and not the police power, is being exercised."

In Georgia, U.S.A., assessments for garbage collection services have been consistently treated as a fee and not a
tax.140

In another U.S. case,141 the garbage fee was considered as a "service charge" rather than a tax as it was actually a
fee for a service given by the city which had previously been provided at no cost to its citizens.

Hence, not being a tax, the contention that the garbage fee under Ordinance No. SP-2235 violates the rule on
double taxation142 must necessarily fail.

Nonetheless, although a special charge, tax, or assessment may be imposed by a municipal corporation, it must
be reasonably commensurate to the cost of providing the garbage service. 143 To pass judicial scrutiny, a regulatory
fee must not produce revenue in excess of the cost of the regulation because such fee will be construed as an
illegal tax when the revenue generated by the regulation exceeds the cost of the regulation. 144

Petitioner argues that the Quezon City Government already collects garbage fee under Section 47 of R.A. No.
9003, which authorizes LGUs to impose fees in amounts sufficient to pay the costs of preparing, adopting, and
implementing a solid waste management plan, and that it has access to the SWM Fund under Section 46 of the
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same law. Moreover, Ordinance No. S-2235 is inconsistent with R.A. No. 9003, because the ordinance
emphasizes the collection and payment of garbage fee with no concern for segregation, composting and recycling
of wastes. It also skips the mandate of the law calling for the active involvement of the barangay in the collection,
segregation, and recycling of garbage.

We now turn to the pertinent provisions of R.A. No. 9003.

Under R.A. No. 9003, it is the declared policy of the State to adopt a systematic, comprehensive and ecological
solid waste management program which shall, among others, ensure the proper segregation, collection, transport,
storage, treatment and disposal of solid waste through the formulation and adoption of the best environmental
practices in ecological waste management. 145 The law provides that segregation and collection of solid waste shall
be conducted at the barangay level, specifically for biodegradable, compostable and reusable wastes, while the
collection of non-recyclable materials and special wastes shall be the responsibility of the municipality or
city.146 Mandatory segregation of solid wastes shall primarily be conducted at the source, to include household,
institutional, industrial, commercial and agricultural sources. 147 Segregation at source refers to a solid waste
management practice of separating, at the point of origin, different materials found in soli d waste in order to
promote recycling and re-use of resources and to reduce the volume of waste for collection and disposal. 148 Based
on Rule XVII of the Department of Environment and Natural Resources (DENR) Administrative Order No. 2001-34,
Series of 2001,149 which is the Implementing Rules and Regulations ( IRR ) of R.A. No. 9003, barangays shall be
responsible for the collection, segregation, and recycling of biodegradable, recyclable , compostable and reusable
wastes.150

For the purpose, a Materials Recovery Facility (MRF), which shall receive biodegradable wastes for composting
and mixed non-biodegradable wastes for final segregation, re-use and recycling, is to be established in every
barangay or cluster of barangays.151

According to R.A. 9003, an LGU, through its local solid waste management board, is mandated by law to prepare a
10-year solid waste management plan consistent with the National Solid Waste Management Framework. 152 The
plan shall be for the re-use, recycling and composting of wastes generated in its jurisdiction; ensure the efficient
management of solid waste generated within its jurisdiction; and place primary emphasis on implementation of all
feasible re-use, recycling, and composting programs while identifying the amount of landfill and transformation
capacity that will be needed for solid waste which cannot be re-used, recycled, or composted. 153 One of the
components of the so lid waste management plan is source reduction:

(e) Source reduction – The source reduction component shall include a program and implementation schedule
which shows the methods by which the LGU will, in combination with the recycling and composting components,
reduce a sufficient amount of solid waste disposed of in accordance with the diversion requirements of Section 20.

The source reduction component shall describe the following:

(1) strategies in reducing the volume of solid waste generated at source;

(2) measures for implementing such strategies and the resources necessary to carry out such activities;

(3) other appropriate waste reduction technologies that may also be considered, provide d that such
technologies conform with the standards set pursuant to this Act;

(4) the types of wastes to be reduced pursuant to Section 15 of this Act;

(5) the methods that the LGU will use to determine the categories of solid wastes to be diverted from
disposal at a disposal facility through re-use , recycling and composting; and

(6) new facilities and of expansion of existing facilities which will be needed to implement re-use, recycling
and composting.

The LGU source reduction component shall include the evaluation and identification of rate structures and fees for
the purpose of reducing the amount of waste generated, and other source reduction strategies, including but not
limited to, program s and economic incentives provided under Sec. 45 of this Act to reduce the use of non-
recyclable materials, replace disposable materials and products with reusable materials and products, reduce
packaging, and increase the efficiency of the use of paper, cardboard, glass, metal, and other materials. The waste
reduction activities of the community shall al so take into account, among others, local capability, economic

75
viability, technical requirements, social concerns, disposition of residual waste and environmental impact: Provided
, That, projection of future facilities needed and estimated cost shall be incorporated in the plan. x x x 154

The solid waste management pl an shall also include an implementation schedule for solid waste diversion:

SEC. 20. Establishing Mandatory Solid Waste Diversion. – Each LGU plan shall include an implementation
schedule which shows that within five (5) years after the effectivity of this Act, the LGU shall divert at least 25% of
all solid waste from waste disposal facilities through re-use, recycling, and composting activities and other resource
recovery activities: Provided , That the waste diversion goals shall be increased every three (3) years thereafter:
Provided , further, That nothing in this Section prohibits a local government unit from implementing re-use,
recycling, and composting activities designed to exceed the goal.

The baseline for the twenty-five percent (25%) shall be derived from the waste characterization result 155 that each
LGU is mandated to undertake.156In accordance with Section 46 of R.A. No. 9003, the LGUs are entitled to avail of
the SWM Fund on the basis of their approved solid waste management plan. Aside from this, they may also
impose SWM Fees under Section 47 of the law, which states:

SEC. 47. Authority to Collect Solid Waste Management Fees – The local government unit shall impose fees in
amounts sufficient to pay the costs of preparing, adopting, and implementing a solid waste management plan
prepared pursuant to this Act. The fees shall be based on the following minimum factors:

(a) types of solid waste;

(b) amount/volume of waste; and

(c) distance of the transfer station to the waste management facility.

The fees shall be used to pay the actual costs incurred by the LGU in collecting the local fees. In determining the
amounts of the fees, an LGU shall include only those costs directly related to the adoption and implementation of
the plan and the setting and collection of the local fees.

Rule XVII of the IRR of R.A. No. 9003 sets forth the details:

Section 1. Power to Collect Solid Waste Management Fees . – The Local SWM Board/Local SWM Cluster Board
shall impose fees on the SWM services provided for by the LGU and/or any authorized organization or unit. In
determining the amounts of the fees, a Local SWM Board/Local SWM Cluster Board shall include only those costs
directly related to the adoption and implementation of the SWM Plan and the setting and collection of the local
fees. This power to impose fees may be ceded to the private sector and civil society groups which have been duly
accredited by the Local SWM Boar d/Local SWM Cluster Board; provided, the SWM fees shall be covered by a
Contract or Memorandum of Agreement between the respective boa rd and the private sector or civil society group.

The fees shall pay for the costs of preparing, adopting and implementing a SWM Plan prepared pursuant to the
Act. Further, the fees shall also be used to pay the actual costs incurred in collecting the local fees and for project
sustainability.

Section 2. Basis of SWM Service Fees

Reasonable SWM service fees shall be computed based on but not limited to the following minimum factors:

a) Types of solid waste to include special waste

b) amount/volume of waste

c) distance of the transfer station to the waste management facility

d) capacity or type of LGU constituency

e) cost of construction

f) cost of management

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 g) type of technology

Section 3. Collection of Fees. – Fees may be collected corresponding to the following levels:

a) Barangay – The Barangay may impose fees for collection and segregation of biodegradable,
compostable and reusable wastes from households, commerce, other sources of domestic wastes, and for
the use of Barangay MRFs. The computation of the fees shall be established by the respective SWM
boards. The manner of collection of the fees shall be dependent on the style of administration of respective
Barangay Councils. However, all transactions shall follow the Commission on Audit rules on collection of
fees.

b) Municipality – The municipal and city councils may impose fees on the barangay MRFs for the collection
and transport of non-recyclable and special wastes and for the disposal of these into the sanitary landfill.
The level and procedure for exacting fees shall be defined by the Local SWM Board/Local SWM Cluster
Board and supported by LGU ordinances; however, payments shall be consistent with the accounting
system of government.

c) Private Sector/Civil Society Group – On the basis of the stipulations of contract or Memorandum of
Agreement, the private sector or civil society group shall impose fees for collection, transport and tipping in
their SLFs. Receipts and invoices shall be issued to the paying public or to the government.

From the afore-quoted provisions, it is clear that the authority of a municipality or city to impose fees is limited to
the collection and transport of non-recyclable and special wastes and for the disposal of these into the sanitary
landfill. Barangays, on the other hand, have the authority to impose fees for the collection and segregation of
biodegradable, compostable and reusable wastes from households, commerce, other sources of domestic wastes,
and for the use of barangay MRFs. This is but consistent with

Section 10 of R.A. No. 9003 directing that segregation and collection of biodegradable, compostable and reusable
wastes shall be conducted at the barangay level, while the collection of non-recyclable materials and special
wastes shall be the responsibility of the municipality or city.

In this case, the alleged bases of Ordinance No. S-2235 in imposing the garbage fee is the volume of waste
currently generated by each person in Quezon City, which purportedly stands at 0.66 kilogram per day, and the
increasing trend of waste generation for the past three years. 157 Respondents

did not elaborate any further. The figure presented does not reflect the specific types of wastes generated –
whether residential, market, commercial, industrial, construction/demolition, street waste, agricultural, agro-
industrial, institutional, etc. It is reasonable, therefore, for the Court to presume that such amount pertains to the
totality of wastes, without any distinction, generated by Quezon City constituents. To reiterate, however, the
authority of a municipality or city to impose fees extends only to those related to the collection and transport of non-
recyclable and special wastes.

Granting, for the sake of argument, that the 0.66 kilogram of solid waste per day refers only to non-recyclable and
special wastes, still, We cannot sustain the validity of Ordinance No. S-2235. It violates the equal protection clause
of the Constitution and the provisions of the LGC that an ordinance must be equitable and based as far as
practicable on the taxpayer’s ability to pay, and not unjust, excessive, oppressive, confiscatory. 158

In the subject ordinance, the rates of the imposable fee depend on land or floor area and whether the payee is an
occupant of a lot, condominium, social housing project or apartment. For easy reference, the relevant provision is
again quoted below:

On all domestic households in Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

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On all condominium unit and socialized housing projects/units in Quezon City;

FLOOR AREA IMPOSABLE FEE

Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PH₱100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00

On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high rise condominiums shall pay the annual
garbage fee on the total size of the entire condominium and socialized Housing Unit and an additional
garbage fee shall be collected based on area occupied for every unit already so ld or being amortized.

b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual garbage fee on the
total lot size of the entire apartment and an additional garbage fee based on the schedule prescribed
herein for every unit occupied.

For the purpose of garbage collection, there is, in fact, no substantial distinction between an occupant of a lot, on
one hand, and an occupant of a unit in a condominium, socialized housing project or apartment, on the other hand.
Most likely, garbage output produced by these types of occupants is uniform and does not vary to a large degree;
thus, a similar schedule of fee is both just and equitable. 159

The rates being charged by the ordinance are unjust and inequitable: a resident of a 200 sq. m. unit in a
condominium or socialized housing project has to pay twice the amount than a resident of a lot similar in size;
unlike unit occupants, all occupants of a lot with an area of 200 sq. m. and less have to pay a fixed rate of
Php100.00; and the same amount of garbage fee is imposed regardless of whether the resident is from a
condominium or from a socialized housing project.

Indeed, the classifications under Ordinance No. S-2235 are not germane to its declared purpose of "promoting
shared responsibility with the residents to attack their common mindless attitude in over-consuming the present
resources and in generating waste." 160 Instead of simplistically categorizing the payee into land or floor occupant of
a lot or unit of a condominium, socialized housing project or apartment, respondent City Council should have
considered factors that could truly measure the amount of wastes generated and the appropriate fee for its
collection. Factors include, among others, household age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and actual occupancy of the property. R.A. No. 9003 may also
be looked into for guidance. Under said law, WM service fees may be computed based on minimum factors such
as type s of solid waste to include special waste, amount/volume of waste, distance of the transfer station to the
waste management facility, capacity or type of LGU constituency, cost of construction, cost of management, and
type of technology. With respect to utility rates set by municipalities, a municipality has the right to classify
consumers under reasonable classifications based upon factors such as the cost of service, the purpose for which
the service or the product is received, the quantity or the amount received, the different character of the service
furnished, the time of its use or any other matter which presents a substantial difference as a ground of
distinction.161[A] lack of uniformity in the rate charged is not necessarily unlawful discrimination. The establishment
of classifications and the charging of different rates for the several classes is not unreasonable and does not
violate the requirements of equality and uniformity. Discrimination to be unlawful must draw an unfair line or strike
an unfair balance between those in like circumstances having equal rights and privileges. Discrimination with
respect to rates charged does not vitiate unless it is arbitrary and without a reasonable fact basis or justification. 162

On top of an unreasonable classification, the penalty clause of Ordinance No. SP-2235, which states:

SECTION 3. Penalty Clause – A penalty of 25% of the garbage fee due plus an interest of 2% per month or a
fraction thereof (interest) shall be charged against a household owner who refuses to pay the garbage fee herein
imposed. lacks the limitation required by Section 168 of the LGC, which provides:

SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges. – The sanggunian may impose a
surcharge not exceeding twenty-five (25%) of the amount of taxes, fees or charges not paid on time and an interest
at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges,

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until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed
thirty-six (36) months. (Emphasis supplied)

Finally, on the issue of publication of the two challenged ordinances.

Petitioner argues that the garbage fee was collected even if the required publication of its approval had not yet
elapsed. He notes that he paid his realty tax on January 7, 2014 which already included the garbage fee.
Respondents counter that if the law provides for its own effectivity, publication in the Official Gazette is not
necessary so long as it is not penal in nature. Allegedly, Ordinance No. SP-2095 took effect after its publication
while Ordinance No. SP-2235 became effective after its approval on December 26, 2013.

The pertinent provisions of the LGC state:

SECTION 59. Effectivity of Ordinances or Resolutions. – (a) Unless otherwise stated in the ordinance or the
resolution approving the local development plan and public investment program, the same shall take effect after
ten (10) days from the date a copy thereof is posted in a bulletin board at the entrance of the provincial capital or
city, municipal, or barangay hall, as the case may be, and in at least two (2) other conspicuous places in the local
government unit concerned.

(b) The secretary to the sanggunian concerned shall cause the posting of an ordinance or resolution in the
bulletin board at the entrance of the provincial capital and the city, municipal, or barangay hall in at least
two

(2) conspicuous places in the local government unit concerned not later than five (5) days after approval
thereof.

The text of the ordinance or resolution shall be disseminated and posted in Filipino or English and in the
language or dialect understood by the majority of the people in the local government unit concerned, and
the secretary to the sanggunian shall record such fact in a book kept for the purpose, stating the dates of
approval and posting.

(c) The gist of all ordinances with penal sanctions shall be published in a newspaper of general circulation
within the province where the local legislative body concerned belongs. In the absence of any newspaper
of general circulation within the province, posting of such ordinances shall be made in all municipalities and
cities of the province where the sanggunian of origin is situated.

(d) In the case of highly urbanized and independent component cities, the main features of the ordinance
or resolution duly enacted or adopted shall, in addition to being posted, be published once in a local
newspaper of general circulation within the city: Provided, That in the absence thereof the ordinance or
resolution shall be published in any newspaper of general circulation.

SECTION 188. Publication of Tax Ordinances and Revenue Measures. – Within ten (10) days after their approval,
certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in
full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That in provinces, cities
and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2)
conspicuous and publicly accessible places. (Emphasis supplied)

On October 17, 2011, respondent Quezon City Council enacted Ordinance No. SP-2095, which provides that it
would take effect after its publication in a newspaper of general circulation. 163 On the other hand, Ordinance No.
SP-2235, which was passed by the City Council on December 16, 2013, provides that it would be effective upon its
approval.164

Ten (10) days after its enactment, or on December 26, 2013, respondent City Mayor approved the same. 165

The case records are bereft of any evidence to prove petitioner’s negative allegation that respondents did not
comply with the posting and publication requirements of the law. Thus, We are constrained not to give credit to his
unsupported claim.

WHEREFORE, the petition is PARTIALLY GRANTED. The constitutionality and legality of Ordinance No. SP-2095,
S-2011, or the "Socialized Housing Tax of Quezon City," is· SUSTAINED for being consistent ·with Section·43 of
Republic Act No. ·7279. On the other hand, Ordinance No. SP-2235, S-2013, which collects an annual garbage fee
on all domestic households in Quezon City, is hereby declared as UNCONSTITUTIONAL AND ILLEGAL.
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Respondents are DIRECTED to REFUND with reasonable dispatch the sums of money collected relative to its
enforcement. The temporary restraining order issued by the Court on February 5, 2014 is LIFTED with respect to
Ordinance No. SP-2095. In contrast, respondents are PERMANENTLY ENJOINED from taking any further action
to enforce Ordinance No. SP. 2235.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

WE CONCUR:

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