[No. L-9408. October 31, 1956] 3.ID.; ID.

; WRONG CONSTRUCTION OF LAW CANNOT GIVE RISE TO VESTED

EMILIO Y. HILADO vs. CIR and CTA RIGHTS.—General Circular No. V-123, having been issued on a wrong construction of the law,
cannot give rise to a vested right that can be invoked by a taxpayer. The reason is obvious; a
1.TAXATION; INCOME TAX; LOSSES DEDUCTIBLE; LOSS CONSISTING OF PORTION vested right cannot spring from a wrong interpretation.
OF WAR DAMAGE CLAIM.—Petitioner claimed in his 1951 income tax return the
deduction of the portion of his war damage claim which had been duly approved by the 4.ADMINISTRATIVE LAW; CONSTRUCTION OF STATUTES BY ADMINISTRATIVE
Philippine War Damage Commission under the Philippine Rehabilitation Act of 1946 but OFFICIALS NOT BINDING ON THEIR SUCCESSORS.—The Secretary of Finance is vested
which was not paid and never has been paid pursuant to a notice served upon him by said with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessors in
Commission that said part of his claim will not be paid until the United States Congress office because the construction of a statute by those who adminminister it is not binding on
should make further appropriation. He claims that said amount represents a “business asset” their successors if thereafter the latter become satisfied that a different construction should be
within the meaning of said Act which he is entitled to deduct as a loss in his return for given. [Association of Clerical Employees vs. Brotherhood of Railway & Steamship Clerks, 85 F.
1951. Held:Assuming that the said amount represents a portion of petitioner’s war damage (2d) 152, 109 A.L. R., 345.]
claim which was not paid, the same would not be deductible as a loss in 1951 because,
according to petitioner, the last installment he received from the War Damage Commission, 5.INTERNATIONAL LAW; NATURE OF INTERNAL REVENUE LAWS; ENFORCEABLE
together with the notice that no further payment would be made on his claim, was in 1950. DURING ENEMY OCCUPATION.—Internal revenue laws are not political in nature and as
In the circumstance, said amount would at most be a proper deduction from his 1950 gross such were continued in force during- the period of enemy occupation and in effect were actually
income. Neither can the said amount be considered as a “business asset” which can be enforced by the occupation government. As a matter of fact, income tax returns were filed during
deducted as a loss in contemplation of law because its collections is not enforceable as a that period and income tax payments were effected and considered valid and legal. Such tax
matter of right, but is dependent merely upon the generosity and magnanimity of the U.S. laws are deemed to be the laws of the occupied territory and not of the occupying enemy.
government.
BAUTISTA ANGELO, J.:
2.ID.; LOSSES OF PROPERTY DURING THE WAR DEDUCTIBLE IN THE YEAR OF
ACTUAL DESTRUCTION.—It is true that under the authority of section 338 of the On March 31, 1952, petitioner filed his income tax return for 1951 with the treasurer of
National Internal Revenue Code the Secretary of Finance, in the exercise of his Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a
administrative powers, caused the issuance of General Circular No. V123 as an deductible item from his gross income pursuant to General Circular No. V-123 issued by
implementation or interpretative regulation of section 30 of the same Code, under which the the Collector of Internal Revenue. This circular was issued pursuant to certain rules laid
aforesaid amount was allowed to be deducted “in the year the last installment was received
with notice that no further payment would be made until the United States Congress makes
down by the Secretary of Finance On the basis of said return, an assessment notice
further appropriation therefore,” but such circular was found later to be wrong and was demanding the payment of P9,419 was sent to petitioner, who paid the tax in monthly
revoked and the Secretary of Finance, through the V-139 which not only revoked and installments, the last payment having been made on January 2, 1953.
declared void his previous Circular No. V-123 but laid down the rule that losses of property
which occurred during the period of World War II from fires, storms, shipwreck or other Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of
casualty, or from robbery, theft, or embezzlement are deductible for income tax purposes in Internal Revenue, issued General Circular No. V-139 which not only revoked and
the year of actual destruction of said property. As the amount claimed does not represent a declared void his general Circular No. V-123 but laid down the rule that losses of
“business asset” that may be deducted as a loss in 1951, it is clear that the. loss of the property which occurred during the period of World War II from fires, storms
corresponding asset or property could only be deducted in the year it was actually sustained. shipwreck or other casualty, or from robbery, theft or embezzlement are deductible in
This is in line with section 30(d) of the National Internal Revenue Code which prescribes the year of actual loss or destruction of said property. As a consequence, the amount of
that losses sustained are allowable as deduction only within the corresponding taxable year.
P12,837.65 was disallowed as a deduction from the gross income of petitioner for 1951
1
and the Collector of Internal Revenue demanded from him the payment of the sum of issuance of General Circular No. V-123 as an implementation or interpretative
P3,546 as deficiency income tax for said year. When the petition for reconsideration regulation of section 30 of the same Code, under which the amount of P12,837.65 was
filed by petitioner was denied, he filed a petition for review with the Court of Tax allowed to be deducted “in the year the last installment was received with notice that
Appeals. In due time, this court rendered decision affirming the assessment made by no further payment would be made until the United States Congress makes further
respondent Collector of Internal Revenue. This is an appeal from said decision. appropriation therefor”, but such circular was found later to be wrong and was revoked.
Thus, when doubts arose as to the soundness or validity of such circular, the Secretary
It appears that petitioner claimed in his 1951 income tax return the deduction of the of Finance sought the advice of the Secretary of Justice who, accordingly, gave his
sum of P12,837.65 as a loss consisting in a portion of his war damage claim which had opinion the pertinent portion of which reads as follows:
been duly approved by the Philippine War Damage Commission under the Philippine
Rehabilitation Act of 1946 but which was not paid and never has been paid pursuant to “Yet it might be argued that war losses were not included as deductions for the year when
a notice served upon him by said Commission that said part of his claim will not be paid they were sustained because the taxpayers had prospects that losses would be compensated
until the United States Congress should make further appropriation. He claims that said for by the United States Government; that since only uncompensated losses are deductible,
amount of P12,837.65 represents a “business asset” within the meaning of said Act which they had to wait until after the determination by the Philippine War Damage Commission
he is entitled to deduct as a loss in his return for 1951. This claim is untenable. as to the compensability in part or in whole of their war losses so that they could exclude.
from the deductions those compensated for by the said Commission; and that, of necessity,
To begin with, assuming that said amount represents a portion of the 75% of his war such determination could be complete only much later than in the year when the loss was
damage claim which was not paid, the same would not be deductible as a loss in 1951 sustained. This contention falls to the ground when it is considered that the Philippine
because, according to petitioner, the last installment he received from the War Damage Rehabilitation Act which authorized the payment by the United States Government of war
Commission, together with the notice that no further payment would be made on his losses suffered by property owners in the Philippines was passed only on August 30, 1946,
claim, was in 1950. In the circumstance, said amount would at most be a proper long after the losses were sustained. It cannot be said therefore, that the property owners
had any conclusive assurance during the years said losses were sustained, that the
deduction from his 1950 gross income. In the second place, said amount cannot be
compensation was to be paid therefor. Whatever assurance they could have had, could have
considered as a “business asset” which can be deducted as a loss in contemplation of law been based only on some information less reliable and less conclusive than the passage of the
because its collection is not enforceable as a matter of right, but is dependent merely Act itself. Hence, as diligent property owners, they should adopt the safest alternative by
upon the generosity and magnanimity of the U.S. government. Note that, as of the end considering such losses deductible during the year when they were sustained.”
of 1945, there was absolutely no law under which petitioner could claim compensation
for the destruction of his properties during the battle for the liberation of the In line with this opinion, the Secretary of Finance, through the Collector of Internal
Philippines. And under the Philippine Rehabilitation Act of 1946, the payments of Revenue, issued General Circular No. V-139 which not only revoked and declared void
claims by the War Damage Commission merely depended upon its discretion to be his previous Circular No. V—123 but laid down the rule that losses of property which
exercised in the manner it may see fit, but the non-payment of which cannot give rise to occurred during the period of World War II from fires, storms, shipwreck or other
any enforceable right, for, under said Act, “All findings of the Commission concerning casualty, or from robbery, theft, or embezzlement are deductible for income tax
the amount of loss or damage sustained, the cause of such loss or damage, the persons to purposes in the year of actual destruction of said property. We can hardly argue against
whom compensation pursuant to this title is payable, and the value of the property lost this opinion. Since we have already stated that the amount claimed does not represent
or damaged, shall be conclusive and shall not be reviewable by any court”. (section 113). a “business asset” that may be deducted as a loss in 1951, it is clear that the loss of the
corresponding asset or property could only be deducted in the year it was actually
It is true that under the authority of section 338 of the National Internal Revenue sustained. This is in line with section 30 (d) of the National Internal Revenue Code
Code the Secretary of Finance, in the exercise of his administrative powers, caused the
2
which prescribes that losses sustained are allowable as deduction only within the
corresponding taxable year. “When the Commissioner determined in 1937 that the petitioner was not exempt and never
had been, it was his duty to determine, assess and collect the tax due for all years not barred
Petitioner’s contention that during the last war and as a consequence of enemy by the statutes of limitation. The conclusion reached and announced by his predecessor in
occupation in the Philippines “there was no taxable year” within the meaning of our 1924 was not binding upon him. It did not exempt the petitioner from tax, This same point
internal revenue laws because during that period they were unenforceable, is without was decided in this way in Stanford University Bookstore, 29 B.T. A., 1280; affd., 83 Fed. (2d)
merit. It is well known that our internal revenue laws are not political in nature and as 710." (Southern Maryland Agricultural Fair Association vs.Commissioner of Internal
such were continued in force during the period of enemy occupation and in effect were Revenue, 40 B.T. A., 549, 554).
actually enforced by the occupation government. As a matter of fact, income tax returns
were filed during that period and income tax payment were effected and considered With regard to the contention that General Circular No. V-139 cannot be given
valid and legal. Such tax laws are deemed to be the laws of the occupied territory and retroactive effect because that would affect and obliterate the vested right acquired by
not of the occupying enemy. petitioner under the previous circular, suffice it to say that General Circular No. V-123,
having been issued on a wrong construction of the law, cannot give rise to a vested right
that can be invoked by a taxpayer. The reason is obvious: a vested right cannot spring
“Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once from a wrong interpretation. This is too clear’ to require elaboration.
established continues until changed by some competent legislative power. It is not changed
merely by change of sovereignty.’ (Joseph H. Beale, Cases on Conflict of Laws, III, Summary “It seems too clear for serious argument that an administrative officer can not change a law
section 9, citing Commonwealth vs.Chapman, 13 Met., 68.) As the same author says, in his enacted by Congress. A regulation that is merely an interpretation of the statute when once
Treatise on the Conflict of Laws (Cambridge, 1916, section 131): ‘There can be no break or determined to have been erroneous becomes nullity. An erroneous construction of the law
interregnun in law. From the time the law comes into existence with the first-felt by the Treasury Department or the collector of internal revenue does not preclude or estop
corporateness of a primitive people it must last until the final disappearance of human the government from collecting a tax which is legally due.” (Ben Stocker, et al., 12 B.T. A.,
society. Once created, it persists until a change takes place, and when changed it continues 1351.) “Art. 2254.—No vested or acquired right can arise from acts or omissions which are
in such changed condition until the next change and so forever. Conquest or colonization is against the law or which infringe upon the rights of others.” (Article 2254, New Civil Code.)
impotent to bring law to an end; inspite of change of constitution, the law continues
unchanged until the new sovereign by legislative act creates a change.'" (Co Kim Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.
Chan vs. Valdez Tan Keh and Dizon, 75 Phil., 113, 142–143.)
_____________
It is likewise contended that the power to pass upon the validity of General Circular No.
V-123 is vested exclusively in our courts in view of the principle of separation of powers
and, therefore, the Secretary of Finance acted without valid authority in revoking it and
approving in lieu thereof General Circular No. V-139. It cannot be denied, however, that
the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts
or previous rulings of his predecessor in office because the construction of a statute by
those administering it is not binding on their successors if thereafter the latter become
satisfied that a different construction should be given. [Association of Clerical
Employees vs. Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R.,
345.]
3
 G.R. No. 115349. April 18, 1997. * Same; Same; Same; Same; There is no evidence that Ateneo’s Institute of Philippine Culture ever sold its
CIR vs. CA, CTA and ATENEO DE MANILA UNIVERSITY services for a fee to anyone or was ever engaged in business apart from and independently of the aca-demic
purposes of the university.—After reviewing the records of this case, we find no evidence that
Taxation; Statutory Construction; It is error to apply the principles of tax exemption without first Ateneo’s Institute of Philippine Culture ever sold its services for a fee to anyone or was ever
applying the well-settled doctrine of strict interpretation in the imposition of taxes—it is obviously both illogical engaged in a business apart from and independently of the academic purposes of the university.
and impractical to determine who are exempted without first determining who are covered by a provision of the Stressing that “it is not the Ateneo de Manila University per sewhich is being taxed,” Petitioner
National Internal Revenue Code.—Petitioner Commissioner of Internal Revenue erred in applying Commissioner of Internal Revenue contends that “the tax is due on its activity of conducting researches
the principles of tax exemption without first applying the well-settled doctrine of strict for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter entered to
interpretation in the imposition of taxes. It is obviously both illogical and impractical to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable
determine who are exempted without first determining who are covered by the aforesaid activity. x x x [T]he sale of services of private respondent is made under a contract and the
provision. The Commissioner should have determined first if private respondent was covered various contractors entered into between private respondent and its clients are almost of the
by Section 205, applying the rule of strict interpretation of laws imposing taxes and other same terms, showing, among others, the compensation and terms of payment.” (Italics
burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court supplied.) In theory, the Commissioner of Internal Revenue may be correct. However, the
takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that “(a) records do not show that Ateneo’s IPC in fact contracted to sell its research services for a fee.
statute will not be construed as imposing a tax unless it does so clearly, Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner’s theory
expressly,and unambiguously. x x x (A) tax cannot be imposed without clear and express words for that is inapplicable to the established factual milieu obtaining in the instant case.
purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by Same; Same; Same; Sales; Transfer of title or an agreement to transfer it for a price paid or promised to be
implication.” Parenthetically, in answering the question of who is subject to tax statutes, it is paid is the essence of sale.—It is also well to stress that the questioned transactions of Ateneo’s
basic that “in case of doubt, such statutes are to be construed most strongly against the Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract for a
government and in favor of the subjects or citizens because burdens are not to be imposed nor piece of work. “By the contract of sale, one of the contracting parties obligates himself to transfer
presumed to be imposed beyond what statutes expressly and clearly import.” the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain
in money or its equivalent.” By its very nature, a contract of sale requires a transfer of ownership.
Same; Same; Schools and Universities; Contractor’s Tax; To impose the three percent contractor’s tax on Thus, Article 1458 of the Civil Code “expressly makes the obligation to transfer ownership as an
Ateneo’s Institute of Philippine Culture, it should be sufficiently proven that it is indeed selling its services for a essential element of the contract of sale, following modern codes, such as the German and the
fee in pursuit of an independent business.—To fall under its coverage, Section 205 of the National Swiss. Even in the absence of this express requirement, however, most writers, including
Internal Revenue Code requires that the independent contractor be engaged in the business of Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer
selling its services. Hence, to impose the three percent contractor’s tax on Ateneo’s Institute of of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that
Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting
its services for a fee in pursuit of an independent business. And it is only after private respondent ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid
has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption is the essence of sale.”
therefrom would arise. Only after such coverage is shown does the rule of construction—that
tax exemptions are to be strictly construed against the taxpayer—come into play, contrary to Same; Same; Same; Contract for a Piece of Work; In a contract for a piece of work, the contractor binds
petitioner’s position. This is the main line of reasoning of the Court of Tax Appeals in its himself to execute a piece of work for the employer, in consideration of a certain price or compensation.—In the
decision, which was affirmed by the CA. case of a contract for a piece of work, “the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or compensation. x x x If the contractor
agrees to produce the work from materials furnished by him, he shall deliver the thing produced
to the employer and transfer dominion over the thing. x x x.” Ineludably, whether the contract
4
be one of sale or one for a piece of work, a transfer of ownership is involved and a party the Decision of the Respondent Court of Appeals in CA-G.R. SP No. 31790 promulgated
1 2

necessarily walks away with an object. In the case at bench, it is clear from the evidence on on April 27, 1994 affirming that of the Court of Tax Appeals. 3

record that there was no sale either of objects or services because, as adverted to earlier, there
was no transfer of ownership over the research data obtained or the results of research projects
undertaken by the Institute of Philippine Culture.
The Antecedent Facts

Same; Same; Same; The research activity of the Institute of Philippine Culture is done in pursuance of
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same
maintaining Ateneo’s university status and not in the course of an independent business of selling such research
being largely undisputed by the parties.
with profit in mind.—Furthermore, it is clear that the research activity of the Institute of Philippine
“Private respondent is a non-stock, non-profit educational institution with auxiliary units and
Culture is done in pursuance of maintaining Ateneo’s university status and not in the course of
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture
an independent business of selling such research with profit in mind. This is clear from a reading
(IPC), which has no legal personality separate and distinct from that of private respondent. The
of the regulations governing universities.
IPC is a Philippine unit engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from international organizations,
Administrative Law; Court of Tax Appeals; As a matter of principle, the Supreme Court will not set aside the private foundations and government agencies.
conclusion reached by the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively
to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless On July 8, 1983, private respondent received from petitioner Commissioner of Internal
there has been an abuse or improvident exercise of authority.—In addition, we reiterate that the “Court Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97
of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax for alleged deficiency contractor’s tax, and an assessment dated June 27, 1983 in the sum of
cases. Through its expertise, it is undeniably competent to determine the issue of whether P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
Ateneo de Manila University may be deemed a subject of the three percent contractor’s tax Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently
“through the evidence presented before it.” Consequently, “as a matter of principle, this Court filed with the latter a memorandum contesting the validity of the assessments.
will not set aside the conclusion reached by x x x the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for
has necessarily developed an expertise on the subject unless there has been an abuse or deficiency income tax but modifying the assessment for deficiency contractor’s tax by increasing
improvident exercise of authority x x x.” This point becomes more evident in the case before us the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration
where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals or reinvestigation of the modified assessment. At the same time, it filed in the respondent court
appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find a petition for review of the said letter-decision of the petitioner. While the petition was pending
the decision of the latter affirming that of the former free from any palpable error. before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge
PANGANIBAN, J.: and interest.

In conducting researches and studies of social organizations and cultural values thru its On July 12, 1993, the respondent court rendered the questioned decision which dispositively
Institute of Philippine Culture, is the Ateneo de Manila University performing the work reads:
of an independent contractor and thus taxable within the purview of then Section 205
‘WHEREFORE, in view of the foregoing, respondent’s decision is SET ASIDE. The deficiency
of the National Internal Revenue Code levying a three percent contractor’s tax? This contractor’s tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the
question is answered by the Court in the negative as it resolves this petition assailing fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost. SO ORDERED.’

5
Not in accord with said decision, petitioner has come to this Court via the present petition for coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific
review raising the following issues: Region (Section 205 of the Tax Code).’

1. ‘1)WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW Petitioner thus submits that since private respondent falls under the definition of an
OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX “independent contractor” and is not among the aforementioned exceptions, private respondent
CODE; and is therefore subject to the 3% contractor’s tax imposed under the same Code.” 4

2. 2)WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%

CONTRACTOR’S TAX UNDER SECTION 205 OF THE TAX CODE.’ The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue
and affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, asks us to reverse the CA through this petition for review.
provide:
The Issues
‘Sec. 205. Contractor, proprietors or operators of dockyards, and others.—A contractor’s tax of three per
centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx Petitioner submits before us the following issues:
(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and 1. “1)Whether or not private respondent falls under the purview of independent
contractors and except gross receipts of or from a pioneer industry registered with the Board of contractor pursuant to Section 205 of the Tax Code
Investments under Republic Act No. 5186: 2. 2)Whether or not private respondent is subject to 3% contractor’s tax under Section
xxx xxx xxx
205 of the Tax Code.” 5
The term ‘independent contractors’ include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through
not the performance of the service calls for the exercise or use of the physical or mental faculties of its auxiliary unit or branch—the Institute of Philippine Culture—performing the work
such contractors or their employees. of an independent contractor and, thus, subject to the three percent contractor’s tax
xxx xxx xxx
levied by then Section 205 of the National Internal Revenue Code?
Petitioner contends that the respondent court erred in holding that private respondent is
not an “independent contractor” within the purview of Section 205 of the Tax Code. To The Court’s Ruling
petitioner, the term “independent contractor,” as defined by the Code, encompasses all kinds of
services rendered for a fee and that the only exceptions are the following: The petition is unmeritorious.

1. ‘a.Persons, association and corporations under contract for embroidery and apparel for Interpretation of Tax Laws
export and gross receipts of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
The parts of then Section 205 of the National Internal Revenue Code germane to the
2. b.Individuals occupation tax under Section 12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and case before us read:
3. c.Regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not earn or “SEC. 205. Contractors, proprietors or operators of dockyards, and others.—A contractor’s tax of
derive income from the Philippines and which act as supervisory, communication and three per centum of the gross receipts is hereby imposed on the following:
6
 xxx xxx xxx in the interpretation of tax laws that “(a) statute will not be construed as imposing a
(16) Business agents and other independent contractors, except persons, associations tax unless it does so clearly, expressly, and unambiguously. x x x (A) tax cannot be imposed
and corporations under contract for embroidery and apparel for export, as well as their without clear and express words for that purpose. Accordingly, the general rule of
agents and contractors, and except gross receipts of or from a pioneer industry registered
with the Board of Investments under the provisions of Republic Act No. 5186; requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and
xxx xxx xxx the provisions of a taxing act are not to beextended by implication.” Parenthetically, in
8

The term ‘independent contractors’ include persons (juridical or natural) not answering the question of who is subject to tax statutes, it is basic that “in case of doubt,
enumerated above (but not including individuals subject to the occupation tax under such statutes are to be construed most strongly against the government and in favor of
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds the subjects or citizens because burdens are not to be imposed nor presumed to be
of services for a fee regardless of whether or not the performance of the service calls for the imposed beyond what statutes expressly and clearly import.” 9

exercise or use of the physical or mental faculties of such contractors or their employees.
The term ‘independent contractor’ shall not include regional or area headquarters To fall under its coverage, Section 205 of the National Internal Revenue Code
established in the Philippines by multinational corporations, including their alien
requires that the independent contractor be engaged in the business of selling its
executives, and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating centers for their affiliates,
services. Hence, to impose the three percent contractor’s tax on Ateneo’s Institute of
subsidiaries or branches in the Asia-Pacific Region. Philippine Culture, it should be sufficiently proven that the private respondent is indeed
The term ‘gross receipts’ means all amounts received by the prime or principal contractor selling its services for a fee in pursuit of an independent business. And it is only after
as the total contract price, undiminished by amount paid to the subcontractor, shall be private respondent has been found clearly to be subject to the provisions of Sec. 205 that
excluded from the taxable gross receipts of the subcontractor.” the question of exemption therefrom would arise. Only after such coverage is shown
does the rule of construction—that tax exemptions are to be strictly construed against
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo the taxpayer—come into play, contrary to petitioner’s position. This is the main line of
de Manila University “falls within the definition” of an independent contractor and “is reasoning of the Court of Tax Appeals in its decision, which was affirmed by the CA.
10

not one of those mentioned as excepted”; hence, it is properly a subject of the three
percent contractor’s tax levied by the foregoing provision of law. Petitioner states that
6
The Ateneo de Manila University Did Not Contract for the Sale of the Services of its Institute of
the “term ‘independent contractor’ is not specifically defined so as to delimit the scope Philippine Culture
thereof, so much so that any person who x x x renders physical and mental service for a
fee, is now indubitably considered an independent contractor liable to 3% contractor’s After reviewing the records of this case, we find no evidence that Ateneo’s Institute of
tax.” According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage
7
Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a
of the law. business apart from and independently of the academic purposes of the university.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the
principles of tax exemption without first applying the well-settled doctrine of strict Stressing that “it is not the Ateneo de Manila University per se which is being taxed,”
interpretation in the imposition of taxes. It is obviously both illogical and impractical to Petitioner Commissioner of Internal Revenue contends that “the tax is due on its activity of
determine who are exempted without first determining who are covered by the conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the
aforesaid provision. The Commissioner should have determined first if private contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is
respondent was covered by Section 205, applying the rule of strict interpretation of laws imposed on the exercise of a taxable activity. x x x [T]he sale of services of private
imposing taxes and other burdens on the populace, before asking Ateneo to prove its respondent is made under a contract and the various contracts entered into between
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine
7
private respondent and its clients are almost of the same terms, showing, among others, carried out by the IPC is focused not on business or profit but on social sciences studies of
the compensation and terms of payment.” (Italics supplied.)
11 Philippine society and culture. Since it can only finance a limited number of IPC’s research projects,
private respondent occasionally accepts sponsorship for unfunded IPC research projects from international
In theory, the Commissioner of Internal Revenue may be correct. However, the organizations, private foundations and governmental agencies. However, such sponsorships are subject to
records do not show that Ateneo’s IPC in fact contracted to sell its research services for private respon-dent’s terms and conditions, among which are, that the research is confined to topics consistent
a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, with the private respondent’s academic agenda; that no proprietary or commercial purpose research is done;
petitioner’s theory is inapplicable to the established factual milieu obtaining in the and that private respondent retains not only the absolute right to publish but also the ownership of the results
instant case. of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the
allegation that private respondent is a contractor or is engaged in business.
In the first place, the petitioner has presented no evidence to prove its bare
contention that, indeed, contracts for sale of services were ever entered into by the For another, it bears stressing that private respondent is a non-stock, non-profit
private respondent. As appropriately pointed out by the latter: educational corporation. The fact that it accepted sponsorship for IPC’s unfunded projects
is merely incidental. For, the main function of the IPC is to undertake research projects
“An examination of the Commissioner’s Written Formal Offer of Evidence in the Court of under the academic agenda of the private respondent. Moreover, the records do not show
Tax Appeals shows that only the following documentary evidence was presented: that in accepting sponsorship of research work, IPC realized profits from such work. On the
Exhibit 1 BIR letter of authority no. 331844 contrary, the evidence shows that for about 30 years, IPC had continuously operated at a
2 Examiner’s Field Audit Report loss, which means that sponsored funds are less than actual expenses for its research
3 Adjustments to Sales/Receipts projects. That IPC has been operating at a loss loudly bespeaks of the fact that education
4 Letter-decision of BIR Commissioner and not profit is the motive for undertaking the research projects.
Bienvenido A. Tan, Jr.
None of the foregoing evidence even comes close to purport to be contracts between Then, too, granting arguendo that IPC made profits from the sponsored research projects,
private respondent and third parties.”12
the fact still remains that there is no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none was so distributed because they
accrued to the benefit of the private respondent which is a non-profit educational
Moreover, the Court of Tax Appeals accurately and correctly declared that the “funds institution.” 14

received by the Ateneo de Manila University are technically not a fee. They may however fall as Therefore, it is clear that the funds received by Ateneo’s Institute of Philippine Culture
gifts or donations which are tax-exempt” as shown by private respondent’s compliance are not given in the concept of a fee or price in exchange for the performance of a service
with the requirement of Section 123 of the National Internal Revenue Code providing or delivery of an object. Rather, the amounts are in the nature of an endowment or
for the exemption of such gifts to an educational institution. 13
donation given by IPC’s benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals: subject to IPC’s terms and conditions. No proprietary or commercial research is done,
and IPC retains the ownership of the results of the research, including the absolute right
“To our mind, private respondent hardly fits into the definition of an ‘independent
contractor.’ to publish the same. The copyrights over the results of the research are owned by Ateneo
and, consequently, no portion thereof may be reproduced without its permission. The 15

For one, the established facts show that IPC, as a unit of the private respondent, is not amounts given to IPC, therefore, may not be deemed, it bears stressing, as fees or gross
engaged in business. Undisputedly, private respondent is mandated by law to undertake receipts that can be subjected to the three percent contractor’s tax.
research activities to maintain its university status. In fact, the research activities being
8
 It is also well to stress that the questioned transactions of Ateneo’s Institute of effective teaching, scholarly publications and research activities published in its school journal as well as
Philippine Culture cannot be deemed either as a contract of sale or a contract for a piece their leadership activities in the profession.
of work. “By the contract of sale, one of the contracting parties obligates himself to (f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of
transfer the ownership of and to deliver a determinate thing, and the other to pay which should be devoted to institutional development and research. (Italics supplied)
x x x x x x x x x’
therefor a price certain in money or its equivalent.” By its very nature, a contract of sale
16

‘32. University status may be withdrawn, after due notice and hearing, for failure to maintain
requires a transfer of ownership. Thus, Article 1458 of the Civil Code “expressly makes satisfactorily the standards and requirements therefor.” 20

the obligation to transfer ownership as an essential element of the contract of sale,

following modern codes, such as the German and the Swiss. Even in the absence of this Petitioner’s contention that it is the Institute of Philippine Culture that is being taxed
express requirement, however, most writers, including Sanchez Roman, Gayoso, and not the Ateneo is patently erroneous because the former is not an independent
Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as juridical entity that is separate and distinct from the latter.
the primary purpose of sale. Perez and Alguer follow the same view, stating that the
delivery of the thing does not mean a mere physical transfer, but is a means of Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals
transmitting ownership. Transfer of title or an agreement to transfer it for a price paid
Generally Conclusive
or promised to be paid is the essence of sale.” In the case of a contract for a piece of
17

work, “the contractor binds himself to execute a piece of work for the employer, in
In addition, we reiterate that the “Court of Tax Appeals is a highly specialized body
consideration of a certain price or compensation. x x x If the contractor agrees to
specifically created for the purpose of reviewing tax cases. Through its expertise, it is
produce the work from materials furnished by him, he shall deliver the thing produced
undeniably competent to determine the issue of whether” Ateneo de Manila University
21

to the employer and transfer dominion over the thing. x x x.” Ineludably, whether the
18

may be deemed a subject of the three percent contractor’s tax “through the evidence
contract be one of sale or one for a piece of work, a transfer of ownership is involved and
presented before it.” Consequently, “as a matter of principle, this Court will not set aside
a party necessarily walks away with an object. In the case at bench, it is clear from the
19

the conclusion reached by x x x the Court of Tax Appeals which is, by the very nature
evidence on record that there was no sale either of objects or services because, as
of its function, dedicated exclusively to the study and consideration of tax problems and
adverted to earlier, there was no transfer of ownership over the research data obtained
has necessarily developed an expertise on the subject unless there has been an abuse or
or the results of research projects undertaken by the Institute of Philippine Culture.
improvident exercise of authority x x x.” 22

Furthermore, it is clear that the research activity of the Institute of Philippine

This point becomes more evident in the case before us where the findings and
Culture is done in pursuance of maintaining Ateneo’s university status and not in the
conclusions of both the Court of Tax Appeals and the Court of Appeals appear
course of an independent business of selling such research with profit in mind. This is
untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find
clear from a reading of the regulations governing universities:
the decision of the latter affirming that of the former free from any palpable error.
‘31. In addition to the legal requisites an institution must meet, among others, the following Public Service, Not Profit, is the Motive
requirements before an application for university status shall be considered:
xxx xxx xxx The records show that the Institute of Philippine Culture conducted its research
(e) The institution must undertake research and operate with a competent qualified staff at least three activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and
graduate departments in accordance with the rules and standards for graduate education. One of the disbursements for the period 1972 to 1985. In fact, it was Ateneo de Manila University
23

departments shall be science and technology. The competence of the staff shall be judged by their itself that had funded the research projects of the institute, and it was only when Ateneo
could no longer produce the needed funds that the institute sought funding from
9
outside. The testimony of Ateneo’s Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit nature of the
institute’s research activities done in furtherance of the university’s purposes, as follows:

“Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual cost. Will you please tell
us in this case when the actual cost is a lot less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university
has to have its own research institute.”24

So, why is it that Ateneo continues to operate and conduct researches through its
Institute of Philippine Culture when it undisputedly loses not an insignificant amount
in the process? The plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic institution conducting these
researches pursuant to its commitments to education and, ultimately, to public service.
For the institute to have tenaciously continued operating for so long despite its
accumulation of significant losses, we can only agree with both the Court of Tax
Appeals and the Court of Appeals that “education and not profit is [IPC’s] motive for
undertaking the research projects.” 25

WHEREFORE, premises considered, the petition is DENIED and the assailed

Decision of the Court of Appeals is hereby AFFIRMED in full. SO ORDERED.

Note.—The Court of Tax Appeals is a highly specialized body specifically created for the
purpose of reviewing tax cases and, through its expertise, it is undeniably competent to
determine the issue of whether or not the debt is deductible through the evidence presented
before it. (Philippine Refining Company vs. Court of Appeals, 256 SCRA 667 [1996])

10
 No. L-67649. June 28, 1988. * himself the burden of showing the regularity of all proceedings leading up to the sale.” (Italics supplied). There
ENGRACIO FRANCIA vs. IACand HO FERNANDEZ 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
Taxation; Obligations; Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil Code; Case at Government, 19 Phil. 261). This is actually an exception to the rule that administrative
bar.—Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal proceedings are presumed to be regular. But even if the burden of proof lies with the purchaser
compensation. He claims that the government owed him P4,116.00 when a portion of his land to show that all legal prerequisites have been complied with, the petitioner can not, however,
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of deny that he did receive the notice for the auction sale. The records sustain the lower court’s
law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, finding that: “[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
obligations of persons, who in their own right are reciprocally debtors and creditors of each properly notified of the auction sale. Surprisingly, however, he admitted in his testimony that
other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the he received the letter dated November 21, 1977 (Exhibit “I”) as shown by his signature (Exhibit
requirements provided by Article 1279, to wit: “(1) that each one of the obligors be bound “I-A”) thereof. He claimed further that he was not present on December 5, 1977 the date of the
principally and that he be at the same time a principal creditor of the other; xxx xxx xxx “(3) auction sale because he went to Iligan City. As long as there was substantial compliance with
that the two debts be due. xxx xxx xxx. the requirements of the notice, the validity of the auction sale can not be assailed. x x x.”

Taxation; Same; Internal Revenue Taxes can not be subject of setoff or compensation.—This principal Same; Same; Same; Same; General Rule that gross inadequacy of price is not material.—Petitioner’s
contention of the petitioner has no merit. We have consistently ruled that there can be no off- third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price
setting of taxes against the claims that the taxpayer may have against the government. A person is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
cannot refuse to pay a tax on the ground that the government owes him an amount equal to or Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de
greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit Gordon v. Court of Appeals (109 SCRA 388) we held that “alleged gross inadequacy of price is not
against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court material when the law gives the owner the right to redeem as when a sale is made at public
ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated auction, upon the theory that the lesser the price, the easier it is for the owner to effect
that: “A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set- redemption.” In Velasquez v. Coronel, (5 SCRA 985), this Court held: “x x x [R]espondent treasurer
off under the statutes of set-off, which are construed uniformly, in the light of public policy, to now claims that the prices for which the lands were sold are unconscionable considering the
exclude the remedy in an action or any indebtedness of the state or municipality to one who is wide divergence between their assessed values and the amounts for which they had been
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment actually sold. However, while in ordinary sales for reasons of equity a transaction may be
since they do not arise out of the contract or transaction sued on. x x x (80 C.J.S., 73-74). ‘The invalidated on the ground of inadequacy of price, or when such inadequacy shocks one’s
general rule based on grounds of public policy is well-settled that no set-off is admissible against conscience as to justify the courts to interfere, such does not follow when the law gives to the
demands for taxes levied for general or local governmental purposes. The reason on which the owner the right to redeem, as when a sale is made at public auction, upon the theory that the
general rule is based, is that taxes are not in the nature of contracts between the party and party lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said:
but grow out of duty to, and are the positive acts of the government to the making and enforcing ‘When there is the right to redeem, inadequacy of price should not be material, because the
of which, the personal consent of individual taxpayer is not required. x x x’ ” 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.”
Same; Same; Same; Auction Sale; Purchaser has the burden of proof to show that all prescribed requisites
for tax sale were complied with.—We agree with the petitioner’s claim that Ho Fernandez, the GUTIERREZ, JR., J.:
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 petitioner invokes legal and equitable grounds to reverse the questioned decision of
the doctrine that: xxx xxx xxx “x x x [D]ue process of law to be followed in tax proceedings the Intermediate Appellate Court, to set aside the auction sale of his property which
must be established by proof and the general rule is that the purchaser of a tax title is bound to take upon
11
took place on December 5, 1977, and to allow him to recover a 203 square meter lot which “WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
was sold at public auction to Ho Fernandez and ordered titled in the latter’s name. amended complaint and ordering:

The antecedent facts are as follows: “(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,
Engracio Francia is the registered owner of a residential lot and a two-story house subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.
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
“(b)The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney’s fees.” (p.
Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City. 30, Record on Appeal)
On October 15, 1977, a 125 square meter portion of Francia’s property was
The Intermediate Appellate Court affirmed the decision of the lower court in toto. Hence,
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing
this petition for review.
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
Francia prefaced his arguments with the following assignments of grave errors of
5, 1977, his property was sold at public auction by the City Treasurer of Pasay City
law:
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 I. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR
bidder for the property. OF LAW IN NOT HOLDING THAT PETITIONER’S OBLIGATION TO PAY P2,400.00 FOR
SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH
Francia was not present during the auction sale since he was in Iligan City at that THE GOVERNMENT IS INDEBTED TO THE FORMER.
time helping his uncle ship bananas.
II. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P “In re: SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
Petition for Entry of New Certificate of Title” filed by Ho Fernandez, seeking the DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale III. RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE
The auction sale and the final bill of sale were both annotated at the back of TCT No. PRICE OF P2,400.00 PAID BY RESPONDENT HO FERNANDEZ WAS GROSSLY
4739 (37795) by the Register of Deeds. INADEQUATE AS TO SHOCK ONE’S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
amended his complaint on January 24, 1980.
We gave due course to the petition for a more thorough inquiry into the petitioner’s
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which allegations that his property was sold at public auction without notice to him and that
reads: the price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
12
 between the party and party but grow out of duty to, and are the positive acts of the
A careful review of the case, however, discloses that Mr. Francia brought the government to the making and enforcing of which, the personal consent of individual
problems raised in his petition upon himself. While we commiserate with him at the taxpayers is not required. x x x’ ”
loss of his property, the law and the facts militate against the grant of his petition. We
are constrained to dismiss it. We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
Francia contends that his tax delinquency of P2,400.00 has been extinguished by because he has a claim against the governmental body not included in the tax levy.
legal compensation. He claims that the government owed him P4,116.00 when a portion This rule was reiterated in the case of Cordero v. Gonda(18 SCRA 331) where we stated
of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set- that: “x x x internal revenue taxes can not be the subject of compensation: Reason:
off by operation of law as of October 15, 1977. 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
There is no legal basis for the contention. By legal compensation, obligations of or judgment as is allowed to be set-off.”
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 There are other factors which compel us to rule against the petitioner. The tax was
requirements provided by Article 1279, to wit: due to the city government while the expropriation was effected by the national
“(1) that each one of the obligors be bound principally and that he be at the same time a government. Moreover, the amount of P4,116.00 paid by the national government for the
principal creditor of the other; 125 square meter portion of his lot was deposited with the Philippine National Bank
xxx xxx xxx long before the sale at public auction of his remaining property. Notice of the deposit
“(3) that the two debts be due. dated September 28, 1977 was received by the petitioner on September 30, 1977. The
xxx xxx xxx petitioner admitted in his testimony that he knew about the P4,116.00 deposited with
This principal contention of the petitioner has no merit. We have consistently ruled that the bank but he did not withdraw it. It would have been an easy matter to withdraw
there can be no off-setting of taxes against the claims that the taxpayer may have against P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale
the government. A person cannot refuse to pay a tax on the ground that the government at public auction.
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. 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
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that it.
Internal Revenue Taxes cannot be the subject of set-off or compensation. We stated
that: 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
“A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set- otherwise, was presented that the procedure outlined by law on sales of property for tax
off under the statutes of set-off, which are construed uniformly, in the light of public policy, delinquency was followed. x x x Since defendant Ho Fernandez has the affirmative of this issue,
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 the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified x x x.”
recoupment since they do not arise out of the contract or transaction sued on. x x x. (80
C.J.S., 73-74). ‘The general rule based on grounds of public policy is well-settled that no set- We agree with the petitioner’s claim that Ho Fernandez, the purchaser at the auction
off admissible against demands for taxes levied for general or local governmental purposes. sale, has the burden of proof to show that there was compliance with all the prescribed
The reason on which the general rule is based, is that taxes are not in the nature of contracts requisites for a tax sale.
13
 The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that: 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
“x x x [D]ue process of law to be followed in tax proceedings must be established by now coming to court assailing the validity of the auction sale loses its force.
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.”(italics supplied) Petitioner’s third assignment of grave error likewise lacks merit. As a general rule,
There is no presumption of the regularity of any administrative action which results in gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil.
437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that
rule that administrative proceedings are presumed to be regular. “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
But even if the burden of proof lies with the purchaser to show that all legal price, the easier it is for the owner to effect redemption.” In Velasquez v. Coronel (5 SCRA
prerequisites have been complied with, the petitioner can not, however, deny that he 985), this Court held:
did receive the notice for the auction sale. The records sustain the lower court’s finding
that: “x x x [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
“[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly amounts for which they had been actually sold. However, while in ordinary sales for reasons
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he of equity a transaction may be invalidated on the ground of inadequacy of price, or when
received the letter dated November 21, 1977 (Exhibit “I”) as shown by his signature (Exhibit such inadequacy shocks one’s conscience as to justify the courts to interfere, such does not
“I-A”) thereof. He claimed further that he was not present on December 5, 1977 the date of follow when the law gives to the owner the right to redeem, as when a sale is made at public
the auction sale because he went to Iligan City. As long as there was substantial compliance auction, upon the theory that the lesser the price the easier it is for the owner to effect the
with the requirements of the notice, the validity of the auction sale can not be assailed. x x redemption. And so it was aptly said: ‘When there is the right to redeem, inadequacy of price
x.” 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
We quote the following testimony of the petitioner on cross-examination, to wit: obtained at the auction sale.”
“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 The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De
to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
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 “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
by mail carrier.
impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows:
“Q. So you admit that you received the original of Exhibit I and you signed ‘where land is sold for taxes, the inadequacy of the price given is not a valid objection to the
upon receipt thereof but you did not read the contents of it? sale.’ This rule arises from necessity, for, if a fair price for the land were essential to the sale,
“A. Yes, sir, as I was in a hurry. it would be useless to offer the property. Indeed, it is notorious that the prices habitually
“Q. After you received that original where did you place it? paid by purchasers at tax sales are grossly out of proportion to the value of the land.”
“A. I placed it in the usual place where I place my mails.” (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).
14
 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.

Notes.—Relinquishment of tax powers is strictly construed against taxpayer. (Phil.

Telegraph and Telephone Corporation vs. COA, 146 SCRA 190.)

Property initially classified as capital asset may later become an ordinary asset or
vice-versa. (Calasang vs. Comm. of Internal Revenue, 144 SCRA 664.)

15
 No. L-18994. June 29, 1963. It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-
MELECIO R. DOMINGO, as Commissioner of Internal Revenue vs. HON. 14674, January 30, 1960, this Court declared as final and executory the order for the
LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of payment by the estate of the estate and inheritance taxes, charges and penalties,
Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the amounting to P40,058.55, issued by the Court of First Instance of Leyte in special
late Walter Scott Price proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter
Scott Price." In order to enforce the claims against the estate the fiscal presented a
Taxation; Inheritance tax; Procedure in enforcement against estate of deceased person; Claim must be filed petition dated June 21, 1961, to the court below for the execution of the judgment. The
before probate court.—The ordinary procedure by which to settle claims or indebtedness against petition was, however, denied by the court which held that the execution is not
the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before justifiable as the Government is indebted to the estate under administration in the
the probate court sa that said court may order the administrator to pay the amount hereof amount of P262,200. The orders of the court below dated August 20, 1960 and
(Aldamiz vs. Judge of the Court of First Instance of Mindoro, L-2360, Dec. 29, 1949). September 28, 1960, respectively, are as follows:

Same; Same; Same; Same; Legal basis.—The legal basis for such a procedure is the fact that in "Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
the testate or intestate proceedings to settle the estate of a deceased person, the properties Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
belonging to the estate are under the jurisdiction of the court and such jurisdiction continues of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
until said properties havebeen distributed among the heirs entitled thereto. During the Salvador V. Esguerra, legal adviser in Malacañang to Executive Secretary De Leon dated
pendency of the proceedings all the estate is in custodia Iegis and the proper procedure is not to December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated
allow the sheriff. in case of a court judgment, to seize the properties but to ask the court for an August 2, 1958, directing the latter to pay to Mrs. Price the sum of P368,140.00, and an extract
order to require the administrator to pay the amount due from the estate and required to be paid. of page 765 of Republic Act No. 2700 appropriating the sum of P262. 200.00 for the payment to
the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed
Same; Same; Compensation between taxes and claims of intestate recognized and appropriated for by in the above note of the President. Considering these facts, the Court orders that the payment
law.—The fact that the court having jurisdiction of the estate had found that the claim of the of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered
estate against the Government has been appropriated for the purpose by a corresponding law paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court
(Rep. Act No. 2700) shows that both the claim of the Government for inheritance taxes and the promulgated July 30, 1960 in G.R. No. L-14674, be deducted from from the amount of
claim of the intestate for services rendered have already become overdue and demandable as well P262.200.00 due and payable to the administratrix Simeona K. Price, in this estate, the balance
as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with to be paid by the Government to her without further delay." (Order of August 20, 1960)
the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to
the concurrent amount. "The Court has nothing further to add to its order dated August 20. 1960 and it orders that
the payment of the claim of the Collector of Internal Revenue be deferred until the Government
LABRADOR, J.: shall have paid its accounts to the administratrix herein amounting to P262.200.00. It may not
be amiss to repeat that it is only fair for the Government. as a debtor, to pay its accounts to its
This is a petition for certiorari and mandamus against the Judge of the Court of First citizens-creditors before it can insist in the prompt payment of the 'latter's account to it,
Instance of Leyte, Hon. Lorenzo C. Garlitos, presiding, seeking to annul certain orders specially taking into consideration that the amount due the Government draws interests while
the credit due to the present estate does not accrue any interest." (Order of September 28. 1960)
of the court and for an order in this Court directing the respondent court below to
The petition to set aside the above orders of the court below and for the execution of the
execute the judgment in favor of the Government against the estate of Walter Scott
claim of the Government against the estate must be denied for lack of merit. The
Price for internal revenue taxes.
ordinary procedure by which to settle claims of indebtedness against the estate of a

16
deceased person, as an inheritance tax, is for the claimant to present a claim before the demandable as well as fully liquidated. Compensation, therefore, takes place by
probate court so that said court may order the administrator to pay the amount thereof. operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil
To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Code, and both debts are extinguished to the concurrent amount, thus:
Instance of Mindoro. G.R. R No L-2360. Dec. 20. 1919, thus:
"ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
"x x x a writ of execution is not the proper procedure allowed by the Rules of Court for the effect by operation of law, and extinguishes both debts to the concurrent amount, even though
payment of debts and expenses of administration. The proper procedure is for the court to order the creditors and debtors are not aware of the compensation."
the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or
expenses of administration should be paid out of the proceeds of the sale 01- mortgage The order It is clear, therefore, that the petitioner has no clear right to execute the judgment for
for the sale or mortgage should be issued upon motion of the administrator and with the taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition
written notice to all the heirs. legatees and devisees residing in the Philippines, according to Rule for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the
89, section 3, and Rule 90, section 2. And when sale ormortgage of real estate is to be made, the remedy.
regulations contained in Rule 90, section 7, should be complied with.
The petition is, therefore, dismissed, without costs.
"Execution may issue only where the devisees, legatees or heirs have entered into possession
of their respective portions in the estate prior to settlement and payment of the debts and
expenses of administration and it is later ascertained that there are such debts and expenses to
be paid, in which case 'the court having jurisdiction of the estate may, by order for that purpose,
after hearing, settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances require' (Rule 89,
section 6; see also Rule 74, section 4: Italics ours.) And this is not the instant case."

The legal basis for such a procedure is the fact that in the testate or intestate proceedings
to settle the estate of a deceased person, the properties belonging to the estate are under
the jurisdiction of the court and such. jurisdiction continues until said properties have
been distributed among the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia, legis and the proper procedure is not to allow the
sheriff, in case of a court judgment, to seize the properties but to ask the court for an
order to require the administrator to pay the amount due from the estate and required
to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the
court having jurisdiction of the estate had found that the claim of the estate against the
Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and
17
 G.R. No. 125704. August 28, 1998. * disregard of the basic principle in tax law that taxes are the lifeblood of the government and so
PHILEX MINING CORPORATION vs.COMMISSIONER OF INTERNAL should be collected without unnecessary hindrance. Evidently, to countenance Philex’s
REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no
support in law or in jurisprudence.
Taxation; Obligations; Compensation; Words and Phrases;Taxes cannot be subject to compensation for the
Same; A distinguishing feature of a tax is that it is compulsory rather than a matter of bargain.—To be
simple reason that the government and the taxpayer are not creditors and debtors of each other; Debts are due to
sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.—In
a pending tax claim for refund or credit against the government which has not yet been granted.
several instances prior to the instant case, we have already made the pronouncement that taxes
It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a
cannot be subject to compensation for the simple reason that the government and the taxpayer
matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any
are not creditors and debtors of each other. There is a material distinction between a tax and
taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim
debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
for refund or credit, this would adversely affect the government revenue system. A taxpayer
Government in its sovereign capacity. We find no cogent reason to deviate from the
cannot refuse to pay his taxes when they fall due simply because he has a claim against the
aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate government or that the collection of the tax is contingent on the result of the lawsuit it filed
Court, we categorically held that taxes cannot be subject to set-off or compensation, thus: “We against the government. Moreover, Philex’s theory that would automatically apply its VAT
have consistently ruled that there can be no off-setting of taxes against the claims that the input credit/refund against its tax liabilities can easily give rise to confusion and abuse,
taxpayer may have against the government. A person cannot refuse to pay a tax on the ground depriving the government of authority over the manner by which taxpayers credit and offset
that the government owes him an amount equal to or greater than the tax being collected. The their tax liabilities.
collection of a tax cannot await the results of a lawsuit against the government.”
Same; Surcharges; The payment of the surcharge is mandatory and the Bureau of Internal Revenue is not
Same; Same; Same; The holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., 28 SCRA vested with any authority to waive the collection thereof.—Corollarily, the fact that Philex has pending
867 (1969), that a pending refund may be set off against an existing tax liability even though the refund has not claims for VAT input claim/refund with the government is immaterial for the imposition of
yet been approved by the Commissioner, has no longer any support in statutory law.—Further, Philex’s charges and penalties prescribed under Sections 248 and 249 of the Tax Code of 1977. The
reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines, Inc., wherein we payment of the surcharge is mandatory and the BIR is not vested with any authority to waive
ruled that a pending refund may be set off against an existing tax liability even though the refund the collection thereof. The same cannot be condoned for flimsy reasons, similar to the one
has not yet been approved by the Commissioner, is no longer without any support in statutory advanced by Philex in justifying its non-payment of its tax liabilities.
law. It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National  Same; Tax Refunds and Credit; Speedy Disposition of Cases;Once the claimant has submitted all
Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon- the required documents, it is the function of the Bureau of Internal Revenue to assess these
Suyocpronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon- documents with purposeful dispatch—since taxpayers owe honesty to government, it is but just
Suyoc cannot be invoked by Philex. that government render fair service to the taxpayers; Fair dealing and nothing less, is expected by
the taxpayer from the Bureau of Internal Revenue in the latter’s discharge of its function.—
Same; Taxes are the lifeblood of the government and so should be collected without unnecessary Philex asserts that the BIR violated Section 106(e) of the National Internal
hindrance.—Despite the foregoing rulings clearly adverse to Philex’s position, it asserts that the Revenue Code of 1977, which requires the refund of input taxes within 60 days,
imposition of surcharge and interest for the non-payment of the excise taxes within the time when it took five years for the latter to grant its tax claim for VAT input
prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise credit/refund. In this regard, we agree with Philex. While there is no dispute that
tax liabilities within the prescribed period since, after all, it still has pending claims for VAT a claimant has the burden of proof to establish the factual basis of his or her claim
input credit/refund with BIR. We fail to see the logic of Philex’s claim for this is an outright for tax credit or refund, however, once the claimant has submitted all the required
18
 documents, it is the function of the BIR to assess these documents with purposeful ROMERO, J.:
dispatch. After all, since taxpayers owe honesty to government it is but just that
government render fair service to the taxpayers. In the instant case, the VAT input Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated
taxes were paid between 1989 to 1991 but the refund of these erroneously paid on April 8, 1996 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision
1

taxes was only granted in 1996. Obviously, had the BIR been more diligent and in CTA Case No. 4872 dated March 16, 1995 ordering it to pay the amount of
2

judicious with their duty, it could have granted the refund earlier. We need not
P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the
remind the BIR that simple justice requires the speedy refund of wrongly-held
taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid
the latter’s discharge of its function. pursuant to Sections 248 and 249 of the Tax Code of 1977.

Same; Same; Same; Estoppel; It is a settled rule that in the performance of governmental function, the State The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
is not bound by the neglect of its agents and officers, and nowhere is this more true than in the field of taxation.— settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd
Despite our concern with the lethargic manner by which the BIR handled Philex’s tax claim, it quarter of 1992 in the total amount of P123,821,982.52 computed as follows:
is a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of taxation. Again, PERIOD BASIC TAX 25% INTEREST TOTAL EXCISE
while we understand Philex’s predicament, it must be stressed that the same is not a valid reason COVERED SURCHARGE TAX DUE
for the non-payment of its tax liabilities. 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
Same; Same; Same; Public Officers; The taxpayer is not devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly.—To
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
be sure, this is not to state that the taxpayer is devoid of remedy against public servants or 47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
needlessly. First, if the BIR takes time in acting upon the taxpayer’s claim for refund, the latter 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
Second, if the inaction can be characterized as willful neglect of duty, then recourse under the 90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.523
Civil Code and the Tax Code can also be availed of.

Same; Same; Same; Same; Judicial Notice; Insolence and delay have no place in government service; The In a letter dated August 20, 1992, Philex protested the demand for payment of the tax
4

Court takes judicial notice of the taxpayer’s generally negative perception towards the Bureau of Internal liabilities stating that it has pending claims for VAT input credit/refund for the taxes it
Revenue.—Simply put, both provisions abhor official inaction, willful neglect and unreasonable paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore,
delay in the performance of official duties. In no uncertain terms must we stress that every public these claims for tax credit/refund should be applied against the tax liabilities, citing our
employee or servant must strive to render service to the people with utmost diligence and ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.
5

efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex’s
6

laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening position. Since these pending claims have not yet been established or determined with
the country’s development. We take judicial notice of the taxpayer’s generally negative certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated
perception towards the BIR; hence, it is up to the latter to prove its detractors wrong. its demand that Philex settle the amount plus interest within 30 days from the receipt
of the letter.
19
 Philex filed a motion for reconsideration which was, nevertheless, denied in a
In view of the BIR’s denial of the offsetting of Philex’s claim for VAT input Resolution dated July 11, 1996.13

credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax
Appeals on November 6, 1992. In the course of the proceedings, the BIR issued Tax
7
However, a few days after the denial of its motion for reconsideration, Philex was
Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but
tax liabilities of Philex of P123,821,982.52; effectively lowered the latter’s tax obligation also for 1992 and 1994, computed as follows: 14

to P110,677,688.52. Period Covered By Claims Tax Credit Date of Amount

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the For VAT refund/credit Certificate Issue
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit: Number
1994 (2nd Quarter) 007730 11 July P25,317,534.01
“Thus, for legal compensation to take place, both obligations must be liquidated and 1996
demandable. ‘Liquidated’ debts are those where the exact amount has already been
1994 (4th Quarter) 007731 11 July P21,791,020.61
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p.
259). In the instant case, the claims of the Petitioner for VAT refund is still pending 1996
litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, 1989 007732 11 July P37,322,799.19
the liquidated debtof the Petitioner to the government cannot, therefore, be set-off against 1996
the unliquidated claim which Petitioner conceived to exist in its favor (see Compañia 1990-1991 007751 16 July P84,662,787.46
General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34).” 1996
1992 (1st-3rd Quarter) 007755 23 July P36,501,147.95
Moreover, the Court of Tax Appeals ruled that “taxes cannot be subject to set-off on 1996
compensation since claim for taxes is not a debt or contract.” The dispositive portion of
the CTA decision provides:
10
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities since both had already become “due and
“In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
demandable, as well as fully liquidated”; hence, legal compensation can properly take
Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52
representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd
place.
quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code, as amended.” We see no merit in this contention.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals In several instances prior to the instant case, we have already made the
docketed as CA-G.R. CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals
11 pronouncement that taxes cannot be subject to compensation for the simple reason that
affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: the government and the taxpayer are not creditors and debtors of each other. There is a
17

material distinction between a tax and debt. Debts are due to the Government in its
“WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the corporate capacity, while taxes are due to the Government in its sovereign
decision dated March 16, 1995 is AFFIRMED.” capacity. We find no cogent reason to deviate from the aforementioned distinction.
18

20
 Prescinding from this premise, in Francia v. Intermediate Appellate Court, we 19 reason would render ineffective our tax collection system. Too simplistic, it finds no
categorically held that taxes cannot be subject to set-off or compensation, thus: support in law or in jurisprudence.

“We have consistently ruled that there can be no off-setting of taxes against the claims To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
that the taxpayer may have against the government. A person cannot refuse to pay a tax ground that it has a pending tax claim for refund or credit against the government which
on the ground that the government owes him an amount equal to or greater than the tax has not yet been granted. It must be noted that a distinguishing feature of a tax is that
being collected. The collection of a tax cannot await the results of a lawsuit against the it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
government.” consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. defense that it still has a pending claim for refund or credit, this would adversely affect
Commission on Audit, which reiterated that:
20
the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection of
“x x x a taxpayer may not offset taxes due from the claims that he may have against the the tax is contingent on the result of the lawsuit it filed against the government.
government. Taxes cannot be the subject of compensation because the government and
Moreover, Philex’s theory that would automatically apply its VAT input credit/refund
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be setoff.” against its tax liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit and offset their tax
Further, Philex’s reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc liabilities.
Mines, Inc., wherein we ruled that a pending refund may be set off against an existing tax
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with
liability even though the refund has not yet been approved by the Commissioner, is no 21

the government is immaterial for the imposition of charges and penalties prescribed
longer without any support in statutory law.
under Sections 248 and 249 of the Tax Code of 1977. The payment of the surcharge is
mandatory and the BIR is not vested with any authority to waive the collection thereof.
It is important to note that the premise of our ruling in the aforementioned case was
The same cannot be condoned for flimsy reasons, similar to the one advanced by Philex
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the
in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR
National Internal Revenue Code of 1977 was enacted, the same provision upon which
violated Section 106(e) of the National Internal Revenue Code of 1977, which requires
the Itogon-Suyocpronouncement was based was omitted. Accordingly, the doctrine the refund of input taxes within 60 days, when it took five years for the latter to grant
enunciated in ItogonSuyoc cannot be invoked by Philex. its tax claim for VAT input credit/refund.
Despite the foregoing rulings clearly adverse to Philex’s position, it asserts that the In this regard, we agree with Philex. While there is no dispute that a claimant has
imposition of surcharge and interest for the non-payment of the excise taxes within the the burden of proof to establish the factual basis of his or her claim for tax credit or
time prescribed was unjustified. Philex posits the theory that it had no obligation to pay refund, however, once the claimant has submitted all the required documents, it is the
the excise tax liabilities within the prescribed period since, after all, it still has pending function of the BIR to assess these documents with purposeful dispatch. After all, since
claims for VAT input credit/refund with BIR. .
taxpayers owe honesty to government it is but just that government render fair service
to the taxpayers.
We fail to see the logic of Philex’s claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
collected without unnecessary hindrance. Evidently, to countenance Philex’s whimsical refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR
21
been more diligent and judicious with their duty, it could have granted the refund Simply put, both provisions abhor official inaction, willful neglect and unreasonable
earlier. We need not remind the BIR that simple justice requires the speedy refund of delay in the performance of official duties. In no uncertain terms must we stress that
39

wrongly-held taxes. Fair dealing and nothing less, is expected by the taxpayer from the every public employee or servant must strive to render service to the people with utmost
BIR in the latter’s discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: 36 diligence and efficiency. Insolence and delay have no place in government service. The
BIR, being the government collecting arm, must and should do no less. It simply cannot
“The power of taxation is sometimes called also the power to destroy. Therefore it should be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It to its mission of hastening the country’s development. We take judicial notice of the
must be exercised fairly, equally and uniformly, lest the tax collector kill the ‘hen that lays taxpayer’s generally negative perception towards the BIR; hence, it is up to the latter to
the golden egg.’ And, in order to maintain the general public’s trust and confidence in the prove its detractors wrong.
Government this power must be used justly and not treacherously.”
In sum, while we can never condone the BIR’s apparent callousness in performing its
Despite our concern with the lethargic manner by which the BIR handled Philex’s tax duties, still, the same cannot justify Philex’s non-payment of its tax liabilities. The adage
claim, it is a settled rule that in the performance of governmental function, the State is “no one should take the law into his own hands” should have guided Philex’s action.
not bound by the neglect of its agents and officers. Nowhere is this more true than in
the field of taxation. Again, while we understand Philex’s predicament, it must be
37
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED.
stressed that the same is not a valid reason for the non-payment of its tax liabilities. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
To be sure, this is not to state that the taxpayer is devoid of remedy against public
servants or employees, especially BIR examiners who, in investigating tax claims are
Notes.—Uniformity of taxation merely requires that all subjects or objects of
seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer’s claim for refund, the latter can seek judicial remedy before the Court of Tax taxation, similarly situated, are to be treated alike both in privileges and liabilities. (Tan
Appeals in the manner prescribed by law. Second, if the inaction can be characterized
38
vs. Del Rosario, Jr., 237 SCRA 324 [1994])
as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also
be availed of. The two-year prescriptive period to claim refunds commences to run only from the
time the refund is ascertained, which can only be determined after a final adjustment
Article 27 of the Civil Code provides: return is accomplished. (Commissioner of Internal Revenue vs. Philippine American Life Insurance
Co., 244 SCRA 446 [1995])
“Art. 27. Any person suffering material or moral loss because a public servant or employee
refuses or neglects, without just cause, to perform his official duty may file an action for ——o0o——
damages and other relief against the latter, without prejudice to any disciplinary action
that may be taken.”

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

(c) wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoined by law.”

22
 No. L-52306. October 12, 1981. * Same; Penalty; Interest and surcharge not imposable where taxpayer religiously complies with his duty
ABS-CBN BROADCASTING CORPORATION vs. COURT OF TAX APPEALS and under the BIR circular.—We have also noted that in its Decision, the Court of Tax Appeals further
THE COMMISSIONER OF INTERNAL REVENUE required the petitioner to pay interest and surcharge as provided for in Sec. 51 (e) of the Tax
Code in addition to the deficiency withholding tax of P525,897.06. This additional requirement
Taxation; Statutory Construction, Retroactivity; BIR circulars or rulings have no retroactive effect where is much less called for because the petitioner relied in good faith and religiously complied with
their application would be prejudicial to taxpayers.—It is clear from the foregoing that rulings or no less than a Circular issued “to all internal revenue of-ficials” by the highest official of the
circulars promulgated by the Commissioner of Internal Revenue have no retroactive application Bureau of Internal Revenue and approved by the then Secretary of Finance.
where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only MELENCIO-HERRERA, J.:
in 1971, or three years after 1968, the last year that petitioner had withheld taxes under General
Circular No. V-334. The assessment and demand on petitioner to pay deficiency withholding This is a Petition for Review on Certiorari of the Decision of the Court of Tax Appeals
income tax was also made three years after 1968 for a period of time commencing in 1965. in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed the assessment by
Petitioner was no longer in a position to withhold taxes due from foreign corporations because the Commissioner of Internal Revenue, dated April 16, 1971, of a deficiency withholding
it had already remitted all film rentals and no longer had any control over them when the new income tax against petitioner, ABS-CBN Broadcasting Corporation, for the years 1965,
Circular was issued. And in so far as the enumerated exceptions are concerned, admittedly, 1966, 1967 and 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and
petitioner does not fall under any of them. P222,260.64, or a total of P525,897.06.

Same; Same; Principle of legislative approval of administrative interpretation by re-enactment; Case at During the period pertinent to this case, petitioner corporation was engaged in the
bar.—The principle of legislative approval of administrative interpretation by re-enactment business of telecasting local as well as foreign films acquired from foreign corporations
clearly obtains in this case. It provides that “the re-enactment of a statute substantially not engaged in trade or business within the Philippines, for which petitioner paid
unchanged is persuasive indication of the adoption by Congress of a prior executive rentals after withholding income tax of 30% of one-half of the film rentals.
construction.” Note should be taken of the fact that this case involves not a mere opinion of the
Commissioner or ruling rendered on a mere query, but a Circular formally issued to “all internal
revenue officials” by the then Commissioner of Internal Revenue. In so far as the income tax on non-resident corporations is concerned, section 24 (b)
of the National Internal Revenue Code, as amended by Republic Act No. 2343 dated
Same; Estoppel; Principle that Government never estopped from collecting taxes because of mistakes or June 20, 1959, used to provide:
errors of its agents; Exception; Interest of justice and fair play.—This Court is not unaware of the well-
entrenched principle that the Government is never estopped from collecting taxes because of “(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be levied,
mistakes or errors on the part of its agents. In fact, utmost caution should be taken in this regard. collected, and paid for each taxable year, in lieu of the tax imposed by the preceding
But, like other principles of law, this also admits of exceptions in the interest of justice and paragraph, upon the amount received by every foreign corporation not engaged in trade or
fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code, as held in the case business within the Philippines, from all sources within the Philippines, as interest,
of Tuason, Jr. vs. Lingad, is indicative of legislative intention to support the principle of good dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
faith. In fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that emoluments, or other fixed or determinable annual or periodical gains, profits, and income,
the Commissioner or Collector is precluded from adopting a position inconsistent with one a tax equal to thirty per centum of such amount.” (Italics supplied)
previously taken where injustice would result therefrom or where there has been a
misrepresentation to the taxpayer. On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of
Internal Revenue issued General Circular No. V-334 reading thus:

23
 “In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic annuities, compensations, remunerations for technical services or otherwise, emoluments
Act No. 2343, under which an income tax equal to 30% is levied upon the amount received or other fixed or determinable annual, periodical or casual gains, profits, and income, and
by every foreign corporation not engaged in trade or business within the Philippines from capital gains, Provided, however, That premiums shall not include reinsurance premiums.”
all sources within this country as interest, dividends, rents, salaries, wages, premiums, (Italics supplied)
annuities, compensations, remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income, it has been determined that the tax is still On February 8, 1971, the Commissioner of Internal Revenue issued Revenue
imposed on income derived from capital, or labor, or both combined, in accordance with Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding that
the basic principle of income taxation (Sec. 39, Income Tax Regulations), and that a mere the latter was “erroneous for lack of legal basis,” because “the tax therein prescribed
return of capital or investment is not income (Par. 5.06, 1 Mertens Law of federal
should be based on gross income without deduction whatever,” thus:
Taxation). Since according to the findings of the Special Team who inquired into business
of the non-resident foreign film distributors, the distribution or exhibition right on a film
“After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code, as
is invariably acquired for a consideration, either for a lump sum or a percentage of the film
amended by Republic Act No. 5431, and guided by the interpretation given by tax
rentals, whether from a parent company or an independent outside producer, a part of the
authorities to a similar provision in the Internal Revenue Code of the United States, on
receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of which the aforementioned provision of our Tax Code was patterned, this Office has come
investment. to the conclusion that the tax therein prescribed should be based on gross income without
deduction whatever. Consequently, the ruling in General Circular No. V-334, dated April 12,
xxx xxx xxx
1961, allowing the deduction of the proportionate cost of production or exhibition of
motion picture films from the rental income of non-resident foreign corporations, is
“4. The local distributor should withhold 30% of one-half of the film rentals paid to the non-
erroneous for lack of legal basis.
resident foreign film distributor, and pay the same to this office in accordance with law
unless the non-resident foreign film distributor makes a prior settlement of its income tax
“In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked and
liability.” (Italics ours).
henceforth, local films distributors and exhibitors shall deduct and withhold 35% of the
entire amountpayable by them to non-resident foreign corporations, as film rental or royalty,
Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau or whatever such payment may be denominated, without any deduction whatever,
of Internal Revenue the amount of 30% of one-half of the film rentals paid by it to foreign pursuant to Section 24 (b), and pay the withheld taxes in accordance with Section 54 of
corporations not engaged in trade or business within the Philippines. The last year that the Tax Code, as amended.
petitioner withheld taxes pursuant to the foregoing Circular was in 1968.
“All rulings inconsistent with this Circular is likewise revoked.” (Italics ours)
On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code
increasing the tax rate from 30% to 35% and revising the tax basis from “such amount” On the basis of this new Circular, respondent Commissioner of Internal Revenue issued
referring to rents, etc. to “gross income,” as follows: against petitioner a letter of assessment and demand dated April 15, 1971, but allegedly
released by it and received by petitioner on April 12, 1971, requiring them to pay
“(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign corporation not deficiency withholding income tax on the remitted film rentals for the years 1965
engaged in trade or business in the Philippines including a foreign life insurance company through 1968 and film royalty as of the end of 1968 in the total amount of P525,897.06
not engaged in the life insurance business in the Philippines shall pay a tax equal to thirty- computed as follows:
five per cent of the gross income received during each taxable year from all sources within
the Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, “1965

24
Total amount remitted .............................................................. P511,059.48 Add: 1/2% mo. int. fr.
Withholding tax due thereon .................................................... 153,318.00 4-16-69 to 4-29-71 ............................................................ 23,813.64
Less: Amount already assessed ................................................ 89,000.00 Total amount due & collectible .................................................... P222,260.64 1

Balance .................................................................................... P64,318.00

Add: 1/2% mo. int. fr. On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the
4-16-66 to 4-16-69 ........................................................ 11,577.24 assessment. However, without acting thereon, respondent, on April 6, 1976, issued a
Total amount due & collectible ................................................ P75,895.24 warrant of distraint and levy over petitioner’s personal as well as real properties. The
petitioner then filed its Petition for Review with the Court of Tax Appeals whose
1966 Decision, dated November 29, 1979, is, in turn, the subject of this review. The Tax Court
held:
Total amount remitted .............................................................. P373,492.24
Withholding tax due thereon .................................................... 112,048.00 “For the reasons given, the Court finds the assessment issued by respondent on April 16,
Less: Amount already assessed ................................................ 27,947.00 1971 against petitioner in the amounts of P75,895.24, P99,239.18, P128,502.00 and
Balance .................................................................................... 84,101.00 P222,260.64 or a total of P525,897.06 as deficiency withholding income tax for the years
Add: 1/2% mo. int. fr. 1965, 1966, 1967 and 1968, respectively, in accordance with law. As prayed for, the petition
4-16-67 to 4-16-70 ........................................................ 15,138.18 for review filed in this case is dismissed, and petitioner ABS-CBN Broadcasting
Corporation is hereby ordered to pay the sum of P525,897.06 to respondent Commissioner
Total amount due & collectible ................................................ P99,239.18
of Internal Revenue as deficiency withholding income tax for the taxable years 1965 thru
1968, plus the surcharge and interest which have accrued thereon incident to delinquency,
1967
pursuant to Section 51 (e) of the National Internal Revenue Code, as amended.
“WHEREFORE, the decision appealed from is hereby affirmed at petitioner’s cost. “SO
Total amount remitted .................................................................. P601,160.65 ORDERED.” 2

Withholding tax due thereon ........................................................ 180,348.00

Less: Amount already assessed .................................................... 71,448.00 The issues raised are twofold:
Balance ........................................................................................ 108,900.00
Add: 1/2% mo. int. fr. 1. “I.Whether or not respondent can apply General Circular No. 4-71 retroactively and issue
4-16-68 to 4-16-71 ............................................................ 19,602.00 a deficiency assessment against petitioner in the amount of P525,897.06 as deficiency
Total amount due & collectible .................................................... P128,502.00 withholding income tax for the years 1965, 1966, 1967 and 1968.
2. II.Whether or not the right of the Commissioner of Internal Revenue to assess the
1968 deficiency withholding income tax for the year 1965 has prescribed.” 3

Total amount remitted .................................................................. P881,816.92 Upon the facts and circumstances of the case, review is warranted.
Withholding tax due thereon ........................................................ 291,283.00
Less: Amount already assessed .................................................... 92,886.00 In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act
No. 6110 on August 9, 1969, it provides:
Balance ........................................................................................ P198,447.00

25
 “Sec. 338-A. Non-retroactivity of rulings.—Any revocation, modification, or reversal of any of taxation x x x and that a mere return of capital or investment is not income x x x.” “A
the rules and regulations promulgated in accordance with the preceding section or any of part of the receipts of a non-resident foreign film distributor derived from said film
the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be represents, therefore, a return of investment.” The Circular thus fixed the return of
given retroactive application if the revocation, modification, or reversal will be prejudicial to the capital at 50% to simplify the administrative chore of determining the portion of the
taxpayers, except in the following cases: (a) where the taxpayer deliberately mis-states or rentals covering the return of capital. 5

omits material facts from his return or any document required of him by the Bureau of Were the “gross income” base clear from Sec. 24 (b), perhaps, the ratiocination of the
Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Tax Court could be upheld. It should be noted, however, that said Section was not too
Revenue are materially different from the facts on which the ruling is based; or (c) where plain and simple to understand. The fact that the issuance of the General Circular in
the taxpayer acted in bad faith.” (Italics for emphasis) question was rendered necessary leads to no other conclusion than that it was not easy
of comprehension and could be subjected to different interpretations.
It is clear from the foregoing that rulings or circulars promulgated by the Commissioner
of Internal Revenue have no retroactive application where to so apply them would be In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of
prejudicial to taxpayers. The prejudice to petitioner of the retroactive application of General Circular No. V-334, was just one in a series of enactments regarding Sec. 24 (b)
Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without changing
years after 1968, the last year that petitioner had withheld taxes under General Circular the basis but merely adding a proviso (in bold letters).
No. V-334. The assessment and demand on petitioner to pay deficiency withholding
income tax was also made three years after 1968 for a period of time commencing in 1965. “(b) Tax on foreign corporation.—(1) Non-resident corporations.—There shall be levied, collected
Petitioner was no longer in a position to withhold taxes due from foreign corporations and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon
because it had already remitted all film rentals and no longer had any control over them the amount received by every foreign corporation not engaged in trade or business within
when the new Circular was issued. And in so far as the enumerated exceptions are the Philippines, from all sources within the Philippines, as interest, dividends, rents,
concerned, admittedly, petitioner does not fall under any of them. salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income, a tax equal to
Respondent claims, however, that the provision on nonretroactivity is inapplicable thirty per centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT
in the present case in that General Circular No. V-334 is a nullity because in effect, it INCLUDE REINSURANCE PREMIUMS.” (double emphasis ours).
changed the law on the matter. The Court of Tax Appeals sustained this position
holding that: “Deductions are wholly and exclusively within the power of Congress or Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the
the law-making body to grant, condition or deny; and where the statute imposes a tax proviso and inserting some words (also in bold letters).
equal to a specified rate or percentage of the gross or entire amount received by the
taxpayer, the authority of some administrative officials to modify or change, much less “(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be levied,
reduce, the basis or measure of the tax should not be read into law.” Therefore, the Tax
4
collected and paid for each taxable year, in lieu of the tax imposed by the preceding
Court concluded, petitioner did not acquire any vested right thereunder as the same was paragraph, upon the amount received by every foreign corporation not engaged in trade or
business within the Philippines, from all sources within the Philippines, as interest,
a nullity.
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical OR CASUAL gains,
The rationale behind General Circular No. V-334 was clearly stated therein, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such
however: “It ha(d) been determined that the tax is still imposed on income derived from amount.” (double emphasis supplied)
6

capital, or labor, or both combined, in accordance with the basic principle of income
26
The principle of legislative approval of administrative interpretation by re-enactment WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and
clearly obtains in this case. It provides that “the re-enactment of a statute substantially the questioned assessment set aside. No costs. SO ORDERED.
unchanged is persuasive indication of the adoption by Congress of a prior executive
construction.” Note should be taken of the fact that this case involves not a mere opinion
7
Notes.—Taxes being the chief source of revenue for the Government to keep it
of the Commissioner or ruling rendered on a mere query, but a Circular formally issued running must be paid immediately and without delay. (Collector of Internal Revenue vs.
to “all internal revenue officials” by the then Commissioner of Internal Revenue. Yuseco, 3 SCRA 313).

It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the Exceptions from taxation are construed in strictissimi juris against the taxpayer and
basis of Revenue Memorandum Circular No. 4-71, that Sec. 24 (b) was amended to refer liberally in favor of the taxing authority. (Esso Standard Eastern, Inc. vs. Acting Commissioner
specifically to 35% of the “gross income.” of Customs, 18 SCRA 488).
This Court is not unaware of the well-entrenched principle that the Government is Taxes are the lifeblood of government and their prompt and certain availability is an
never estopped from collecting taxes because of mistakes or errors on the part of its imperious need. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105; Collector of Internal
agents. In fact, utmost caution should be taken in this regard. But, like other principles
8 9

Revenue vs. Goodrich International Rubber Co., 22 SCRA 1256).

of law, this also admits of exceptions in the interest of justice and fairplay. The insertion
of Sec. 338-A into the National Internal Revenue Code, as held in the case of Tuason, Jr.
The power of taxation should be exercised with caution to minimize injury to the
vs. Lingad, is indicative of legislative intention to support the principle of good faith. In
10

fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that proprietary rights of a taxpayer. (Roxas vs. Courts of Tax Appeals, 23 SCRA 276).
the Commissioner of Collector is precluded from adopting a position into oversight as
the purpose of the amendment was to include capital gains in gross income of foreign Taxability of a foreign corporation’s income depends upon the loans of the activity,
non-resident corporations. See footnote 13, Filipinas Life Assurance Co. vs. Court of Tax property or service giving rise thereto. (British Traders Insurance Co., Ltd. vs. Commissioner of
Appeals, 21 SCRA 622 (1967). consistent with one previously taken where injustice Internal Revenue, 13 SCRA 719).
would result therefrom, or where there has been a misrepresentation to the taxpayer.
11 12

Enforcement of Section 169 of the Tax Code against manufacturers of filled milk only
We have also noted that in its Decision, the Court of Tax Appeals further required and not against manufacturers of skimmed milk constitutes denial of equal protection
the petitioner to pay interest and surcharge as provided for in Sec. 51 (e) of the Tax Code of the law. (Vera vs. Cuevas, 90 SCRA 379).
in addition to the deficiency withholding tax of P525,897.06. This additional
requirement is much less called for because the petitioner relied in good faith and The Supreme Court is generally bound by the findings of fact of the Court of Tax
religiously complied with no less than a Circular issued “to all internal revenue officials” Appeals. (Nilsen vs. Commissioner of Customs, 89 SCRA 43).
by the highest official of the Bureau of Internal Revenue and approved by the then
Secretary of Finance. 13 The “appeal” from the decision of the Sec. of Justice mentioned in Section 47 of the
Local Tax Code (P.D. 231) cannot be construed as to deprive the courts of jurisdiction
With the foregoing conclusions arrived at, resolution of the issue of prescription to pass upon the validity of a city tax ordinance. (San Miguel Corp. vs. Avelino, 89 SCRA 69).
becomes unnecessary.

27
 Protest is not a requirement in order that a taxpayer who paid under a mistaken over paid taxes, is completely meritorious. The real party in interest being the mother
belief that it is required by law, may claim for a refund. (Ramie Textile, Inc. vs. Mathay, Sr., 89 corporation in the United States, it follows that American entity is the real party in interest, and
SCRA 586). should have been the claimant in this case.

A tax imposed by a municipality on soap and other similar products of petitioner PARAS, J.:
company is different from the tax imposed on the privileged of storing copra in a bodega
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of
within the municipality. (Southeast Asia Mftg. Corp. vs. Mun. Council of Tagbilaran, 94 SCRA Internal Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated
894). January 31, 1984 in CTA Case No. 2883 entitled Trocter and Gamble Philippine
Manufacturing Corporation vs, Bureau of Internal Revenue,” which declared petitioner
——o0o——
therein, Procter and Gamble Philippine Manufacturing Corporation to be entitled to the
sought refund or tax credit in the amount of P4,832,989.00 representing the alleged
overpaid withholding tax at source and ordering payment thereof.
No. L-66838. April 15, 1988. *

COMMISSIONER OF INTERNAL REVENU vs. PROCTER & GAMBLE The antecedent facts that precipitated the instant petition are as follows:
PHILIPPINE MANUFACTURING CORPORATION & CTA
Private respondent, Procter and Gamble Philippine Manufacturing Corporation
Appeals; Rule that issues not raised in the lower court cannot generally be raised for the first time on (hereinafter referred to as PMOPhiL), a corporation duly organized and existing under
appeal.—It will be observed at the outset that petitioner raised this issue for the first time in the and by virtue of the Philippine laws, is engaged in business in the Philippines and is a
Supreme Court. He did not raise it at the administrative level, nor at the Court of Tax Appeals. wholly owned subsidiary of Procter and Gamble, U.S.A. (hereinafter referred to as PMC-
As clearly ruled by Us To allow a litigant to assume a different posture when he comes before USA), a non-resident foreign corporation in the Philippines, not engaged in trade and
the court and challenges the position he had accepted at the administrative level,” would be to business therein, As such PMC-U.S.A. is the sole shareholder or stockholder of PMC-
sanction a procedure whereby the Court—which is supposed to review administrative PhiL, as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC-Phil. and is
determinationfl—would not review, but determine and decide for the first time, a question not
entitled to receive income from PMC-Phil. in the form of dividends, if not rents or
raised at the adminiBtrative forum.” Thus it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised
royalties. In addition, PMC-Phil. has a legal personality separate and distinct from
in the lower court cannot generally be raised for the first time on appeal. PMC-U.S.A. (Rollo, pp, 122–123).

Taxation; Estoppel; State can never be in estoppel especially in matters involving taxation.— For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of
Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent
in matters involving taxation. The errors of certain administrative officers should never be to P25%35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax
allowed to jeopardize the government’s financial position. Code, the pertinent portion of which reads:

Same; Withholding Agent; PMC-PhiL being a withholding agent of the government cannot claim “SEC. 24. Rates of tax on corporation.—(a) Tax on domestic corporations.—A tax is
reimbursement of the over-paid taxes, the real party in interest being the mother corporation in the United hereby imposed upon the taxable net income received during each taxable year from all
States.—The submission of the Commissioner of Internal Revenue that PMCrPhil. is but a sources by every corporation organized in, or existing under the laws of the Philippines,
withholding agent of the government and therefore cannot claim reimbursement of the alleged
28
 and partnerships, no matter how created or organized, but not including general 1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35%
professional partnerships, in accordance with the following: or P6,457,485.00.
Twenty-five per cent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b)
Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred as aforequoted, as the withholding agent of the Philippine government, with respect to
thousand pesos.” the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner,
Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of
After taxation its net profit was P36,735,216.00. Out of said amount it declared a the 35 percentage-point whole tax paid, arising allegedly from the alleged “overpaid
dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00,"
in the total sum of P17,707,460.00 which latter amount was subjected to Philippine computed as follows:
taxation of 35% or P6,l97,611.23 as provided for in Section 24(b) of the Philippine Tax Dividend Income Tax withheld 15% tax under Alleged
Code which reads in full: of PMC-U.S.A. at source at “tax sparing over
35% proviso” payment
“SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau
Pl 7,707,460 P6,l 96,611 P2,656,119 P3,541,492
Internal Revenue Code, as amended, is hereby further amended to read as follows:
'(b) Tax on foreign corporations.—(1) Nonresident corporation.—A foreign corporation not 6,457,485 2,260,119 968,622 1,291,497
engaged in trade or business in the Philippines, including a foreign life insurance company not P24,l 64,946 P8,457,731 P3,624,941 P4,832,989
engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross
income received during its taxable year from all sources within the Philippines, as interest (except There being no immediate action by the BIR on PMC-Phils’ letter-claim the latter
interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties, salaries,
wages?premiums, annuities, compensations, remunerations for technical services or otherwise, sought the intervention of the CTA when on July 13,1977 it filed with herein respondent
emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, court a petition for review docketed as CTA No. 2883 entitled “Proeter and Gamble
and capital gains: Provided, however, That premiums shall not include re-insurance premiums: Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue,”
Provided, further, That cinematographic film owners, lessors, or distributors, shall pay a tax of 15% praying that it be declared entitled to the refund or tax credit claimed and ordering
on their gross income from sources within the Philippines: Provided, still further That on dividends respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in
received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided in Section 53(d) of this Code, its favor in lieu of tax refund. (Rollo, p. 41)
subject to the condition that the country in which the nonresident foreign corporation is domiciled
shall allow a credit against the tax due from the nonresident foreign corporation, taxes deemed to On the other hand therein respondent, Commissioner of Internal Revenue, in his
have been paid in the Philippines equivalent to 20% which represents the difference between the answer, prayed for the dismissal of said petition and for the denial of the claim for
regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section: refund. (Rollo, p. 48)
Provided, finally, That regional or area headquarters established in the Philippines by multinational
corporations and which headquarters do not earn or derive income from the Philippines and which
act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor
branches in the Asia-Pacific Region shall not be subject to tax.” of the herein petitioner, the dispositive portion of the same reading as follows:

For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income “Accordingly, petitioner is entitled to the sought refund or tax credit of the amount
ofP8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or representing the overpaid withholding tax at source and the payment therefor by the
P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of respondent hereby ordered. No costs. “SO ORDERED."

29
 refund and (2) Whether or not the U.S. allows as tax credit the “deemed paid” 20%
Hence this petition. Philippine Tax on such dividends?

The Second Division of this Court without giving due course to said petition resolved The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil.
to require the respondents to comment (Rollo, p. 74). Said comment was filed on the remitter or payor of the dividend income, and a mere withholding agent for and in
November 8, 1984 (Rollo, pp. 83–90). Thereupon this Court by resolution dated behalf of the Philippine Government, which should be legally entitled to receive the
December 17, 1984 resolved to give due course to the petition and to consider refund if any. (Rollo, p. 129)
respondents’ comment on the petition as Answer. (Rollo, p. 93)
It will be observed at the outset that petitioner raised this issue for the first time in
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed the Supreme Court. He did not raise it at the administrative level, nor at the Court of
his brief on May 13,1985 (Rollo, p. 107), while private respondent PMC-Phil. filed its Tax Appeals. As clearly ruled by Us “To allow a litigant to assume a different posture
brief on August 22,1985. when he comes before the court and challenges the position he had accepted at the
administrative level,” would be to sanction a procedure whereby the Court—which is
Petitioner raised the following assignments of errors: supposed to review administrative determinations—would not review, but determine
and decide for the first time, a question not raised at the administrative forum.” Thus it
I. THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT is well settled that under the same underlying principle of prior exhaustion of
AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE administrative remedies, on the judicial level, issues not raised in the lower court cannot
MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT) ‘IS ENTITLED TO generally be raised for the first time on appeaL (Pampanga Sugar Dev. Co., Inc. v.
THE SOUGHT REFUND OR TAX CREDIT' OF P4,832,989.00, REPRESENTING CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v.
ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON
Servidad, 107 SCRA 726 [1981]).
REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF P24,l 64,946.00 TO
PROCTER & GAMBLE, USA (PMC-USA, FOR SHORT).
Nonetheless it is axiomatic that the State can never be in estoppel, and this is
II. THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT particularly true in matters involving taxation. The errors of certain administrative
AND IN LAW, THAT PMC-USA, A NONRESIDENT FOREIGN CORPORATION UNDER officers should never be allowed to jeopardize the government’s financial position.
SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC
CORPORATION DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a
U.S. TAX CODE AGAINST ITS U.S, FEDERAL TAXES TO A UNITED STATES FOREIGN withholding agent of the government and therefore cannot claim reimbursement of the
TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION alleged over paid taxes, is completely meritorious. The real party in interest being the
(OF THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE mother corporation in the United States, it follows that American entity is the real party
CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT. in interest, and should have been the claimant in this case.
The sole issue in this case is whether or not private respondent is entitled to the
Closely intertwined with the first assignment of error is the issue of whether or not
preferential 15% tax rate on dividends declared and remitted to its parent corporation.
PMC-U.S.A.—a non-resident foreign corporation under Section 24(b)(l) of the Tax
Code (the subsidiary of an American) a domestic corporation domiciled in the United
From this issue two questions are posed by the petitioner Commissioner of Internal
States, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit
Revenue, and they are (1) Whether or not PMC-Phil is the proper party to claim the
equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared
30
or waived as otherwise considered or deemed paid by the government. The law To Our mind there is nothing in the aforecited provision that would justify tax return
pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by of the disputed 15% to the private respondent. Purthermore, as ably argued by the
Public Law 87–834, the law governing tax credits granted to U.S. corporations on petitioner, the private respondent failed to meet certain conditions necessary in order
dividends received from foreign corporations, which to the extent applicable reads: that the dividends received by the non-resident parent company in the United States
may be subject to the preferential 15% tax instead of 35%. Among other things, the
“SEC. 902—CREDITFOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION. private respondent failed: (1) to show the actual amount credited by the U.S.
(a) Treatment of Taxes Paid by Foreign Corporation—For purposes of this subject, a domestic government against the income tax due from PMC-U.S.A. on the dividends received
corporation which owns at least 10 percent of the voting stock of a foreign corporation from from private respondent; (2) to present the income tax return of its mother company for
which it receives dividends in any taxable year shall— 1975 when the dividends were received; and (3) to submit any duly authenticated
document showing that the U.S. government credited the 20% tax deemed paid in the
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed Phiiippines.
country corporation, be deemed to have paid the same proportion of any income, war profits, or
excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country PREMISES CONSIDERED, the petition is GRANTED and the decision appealed
or to any possession of the United States on or with respect to such accumulated profits, which the from, is REVERSED and SET ASIDE. SO ORDERED.
amount of such dividends (determined without regard to Section 78) bears to the amount of such
accumulated profits in excess of such income, war profits, and excess profits taxes (other than those
deemed paid); and Note.—An issue not raised in the court below may be raised and resolved on appeal
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits if necessary for a just decision. (Zambales vs. Court of Appeals, 120 SCRA 897.)
[as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed
country corporation, be deemed to have paid the same proportion of any income, war profits, or ——o0o——
excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country
or to any possession of the United States on or with respect to such accumulated profits, which the
amount of such dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rnles
(1) Accumulated profits deflned.—For purposes of this section, the term ‘accumulated
profits’ means with respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income
computed without reduction. by the amount of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income by any foreign country. x x x; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, was profits, and excess profits taxes imposed on or with respect to such
profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits
of what year or years such dividends were paid, treating dividends paid in the first 20 days of any
year as having been paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shows otherwise), and in other respects treating dividends as having been paid from
the most recently accumulated gains, profits, or earnings. x x x x x x.” (Rollo, pp. 55–56)

31
 No. L-21609. September 29, 1966. Commissioner's right to assess the tax. (Republic of the Philippines vs. Albert, L-12996,
REPUBLIC OF THE PHILIPPINES vs. KER & COMPANY, LTD December 28, 1961; Republic of the Philippines vs. Lim Tian Teng Sons ,& Co., Inc., L-21731,
March 31, 1966). However, defendant raised the defense of prescription in the proceedings
Summons; Service upon counsel of a domestic corporation is valid.—Section 13, Rule 7, (now Section below, and the Republic of the Philippines, instead of questioning the right of the defendant to
13, Rule 14) of the. Rules of Court provides that service of summons upon a domestic corporation raise such defense, litigated on it and submitted the issue for resolution of the court. By its
may be made on its agent. In the case at bar, when defendant corporation's counsel in the actuation, the government should be considered to have waived its right to object to the setting
administrative stage of the present tax case received the summons, they were still acting for and up of such defense.
in behalf of defendant in connection with its tax liability involved in the case. Perforce, they
were the taxpayer's agent, and under the aforecited rule service upon them is sufficient. Same; Suspension of prescriptive period; Effect of pendency of appeal.—Under Section 333 of the Tax
Code the running of the prescriptive period to collect deficiency taxes shall be suspended for
Same; Pleading and practice; Jurisdiction; Effect of voluntary submission to jurisdiction of court.—In the period during which the Commissioner of Internal Revenue is prohibited from beginning a
interposing, in its motion to dismiss, prescription of plaintiff's cause of action, defendant availed distraint and levy or instituting a proceeding in court, and for sixty days thereafter. In the case
of an affirmative defense on the basis of which it prayed the court to resolve the controversy in at bar, the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme
its favor. For the court to validly decide the said plea, it necessarily had to acquire jurisdiction Court had the effect of temporarily staying the hands of the said Commissioner. If the taxpayer's
upon the latter's person, which, being the proponent of the affirmative defense, should be stand that the pendency of the appeal did not stop the running of the period because the Court
deemed to have abandoned its special appearance and voluntarily submitted itself to the of Tax Appeals did not have jurisdiction over the case is upheld, taxpayers would be encouraged
jurisdiction of the court. (Flores vs. Zurbito, 37 Phil. 746; Menghra vs. Tarachand and to delay the payment of taxes in the hope of ultimately avoiding the same. Under the
Rewachand, 67 Phil. 286). circumstances, the running of the prescriptive period was suspended.

Same: When defects of summons were cured by filing of answer.—Defects of summons are cured by Same; Accrual of delinquency interest.—Where the letter of assessment shows that the
deficiency income tax for 1948 and 1949 became due on March 15, 1953 and that for 1950 accrued
voluntary appearance and by the filing of an answer to the complaint. (Ramos vs.Mañalac, 89
on February 15, 1954 and the tax in question remained unpaid, the delinquency interest accrued
Phil. 270). A defendant can not be permitted to speculate upon the judgment of the court by
and became due starting from said due dates.
objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding
to jurisdiction over its person if and when the judgment sustains its defenses.
BENGZON, J.P., J.:
Taxation; Deficiency income tax; Prescription of actions;Degree of proof required to establish fraud.—
Ker ,& Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947,
Fraud is a question of fact (Gutierrez vs. Court of Tax Appeals, 101 Phil. 713) which must be
alleged and proved (Section 12, Rule 15 [now Section 5, Rule 8], Rules of Court). It is a serious 1948, 1949 and 1950 on the following dates:
charge and, to be sustained, it must be supported by clear and convincing proof (Collector of Year Date Filed
Internal Revenue vs. Benipayo, L-13656, January 31, 1962). In the instant case the filing by the 1947 April 12, 1948
taxpayer of a false return was neither alleged in the complaint nor proved in court. Hence, the 1948 April 30, 1949
lower court correctly resolved the issue of prescription without touching upon fraudulence of 1949 May 15, 1950
the return. 1950 May 9, 1951

Same; Failure to object to the setting up of defense of prescription.—The assessment for deficiency It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950,
income tax for 1947 has become final and executory, and, therefore, defendant may not anymore respectively.
raise defenses which go into the merits of the assessment, i.e., prescription of the

32
 In 1953 the Bureau of Internal Revenue examined and audited Ker ,& Co., Ltd.'s Summons was served not on the defendant taxpayer but upon Messrs. Leido and.
returns and books of accounts and subsequently issued the following assessments for Associates, its counsel in the proceedings before the Bureau of Internal Revenue and the
deficiency income tax: Court of Tax Appeals.
Year Amount Date Assessed
1947 P42,342.30 July 25, 1953 On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez ,&
1948 18,651.87 Feb. 16, 1953 Associates, moved for thedismissal of the complaint on the ground that the court did not
1949 139.67 Feb. 16, 1953 acquire jurisdiction over the person of the defendant and that plaintiff's cause of action
1950 12,813.00 Feb. 16, 1953 has prescribed. This motion was denied and defendant filed a motion for
reconsideration. Resolution on said motion, however, was deferred until trial of the case
due and. payable on dates indicated in the accompanying notices of assessment. The on the merits.
assessments for 1948 and 1950 carried the surcharge of 50% authorized under Section
72 of the Tax Code for the filing of fraudulent returns, On May 18, 1962, Ker ,& Co., Ltd. filed its answer to the complaint interposing
therein the defense set up in its motion to dismiss of April 14, 1962,
Upon request of Ker vs Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of
Internal Revenue reduced the assessments for the year 1947 from P42,342.30 to On September 18, 1962 the Republic of the Philippines amended its' complaint, in
P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00, imposed the 50% answer to which Ker ,& Co., Ltd. adopted the same answer which it had filed on May
surcharge for the year 1947 and eliminated the same surcharge from the assessment for 18, 1962.
the year 1950. The assessments 'for years 1948 and 1949 remained the same.
On January 30, 1963 the Court of First Instance rendered judgment, the dispositive
On March 1, 1956 Ker ,& Co., Ltd. filed with the Court of Tax Appeals a petition for portion of which states:
review with preliminary injunction. No preliminary injunction was issued, for said court
dismissed the appeal for having been instituted beyond the 30-day period provided for "WHEREFORE, this Court dismisses the claim for the collection of deficiency income
taxes for 1947, but orders defendant taxpayer to pay the deficiency income taxes for 1948,
in Section 11 of Republic Act 1125. We affirmed the order of dismissal in L-12396. 1

1949 and 1950, in the amounts of P18,651.87, P139.67 and P8,542.00, respectively, plus 5%
surcharge thereon on each amount and interest of 1% a month computed from March 27,
On March 15, 1962, the Bureau of Internal Revenue demanded payment of the 1962 and until full payment thereof is made, plus the costs of suit"
aforesaid assessments together with a surcharge of 5% for late payment 'and interest at
the rate of 1% monthly. Ker ,& Co., Ltd. refused to pay, instead in its letters dated March On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration
28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's contending that the right of the Commissioner of Internal Revenue to collect the
right to collect the tax. Subsequently, the Republic of the Philippines 'f iled on March deficiency assessment for 1947 has not prescribed by a lapse of merely five years and
27, 1962 a complaint with the Court of First Instance of Manila seeking collection of the three months, because the taxpayer's income tax return was fraudulent in which case
aforesaid deficiency income tax for the years 1947, 1948, 1949 and 1950. The complaint prescription sets in ten years from October 31, 1951, the date of discovery of the fraud,
did not allege fraud in the filing of any of the income tax returns for the years involved, pursuant to Section 332 (a) of the Tax Code; and that the payment of delinquency
nor did it pray for the payment of the corresponding 50% surcharge, but it prayed for interest of 1% per month should commence from the date it fell due as indicated in the
the payment of 5% surcharge for late payment and interest of 1% per month without assessment notices instead of on the date the complaint was filed.
however specifying from what date interest started to accrue.
33
 On March 6, 1963 Ker ,& Co., Ltd. also filed a motion for reconsideration reiterating Messrs, Leido and Associates acted as counsel for Ker & Co., Ltd. when this tax case
its assertion that the Court of First Instance did not acquire jurisdiction over its person, was in its administrative stage. The same counsel represented Ker ,& Co., Ltd., when it
and maintaining that since the complaint was filed nine years, one month and eleven appealed said case to the Court of Tax Appeals and later to this Court. Subsequently,
days after the deficiency assessments for 1948, 1949 and 1950 were made and since the when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962,
filing of its petition for review in the Court of Tax Appeals did not stop the running of demanded the payment of the deficiency income tax in question, it was Messrs. Leido,
the period of limitations, the right of the Commissioner of Internal Revenue to collect Andrada, Perez ,& Associates who replied in behalf of Ker ,& Co., Ltd. in two letters,
the tax in question has prescribed. dated March 28, 1962 and April 10, 1962, both after the complaint in this case was filed.
At least therefore on April 2. 1962 when Messrs. Leido and Associates received the
The two motions for reconsideration having been denied, both parties appealed summons, they were still acting for and in behalf of Ker ,& Co., Ltd. in connection with
directly to this Court. Its tax liability involved in this case. Perforce, they were the taxpayer's agent when
summons was served. Under Section 13 of Rule 7, aforequoted, service upon the agent of
The issues in this case are: a corporation is sufficient.

1. 1.Did the Court of First Instance acquire jurisdiction over the person of defendant Ker We observe that the motion to dismiss filed on April 14, 1962, aside from disputing
,& Co., Ltd.? the lower court's juris-diction over defendant's person, prayed for dismissal of the
2. 2.Did the right of the Commissioner of Internal Revenue to assess deficiency income tax complaint on the ground that plaintiff's cause of action has prescribed. By interposing
for the year 1947 prescribe? such second ground in its motion to dismiss. Ker ,& Co., Ltd. availed of an affirmative
3. 3.Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals defense on the basis of which it prayed the court to resolve controversy in its favor. For
suspend the running of the statute of limitations to collect the deficiency income for
the court to validly decide the said plea of defendant Ker ,& Co., Ltd., it necessarily had
the years 1948, 1949 and 1950?
4. 4.When did the delinquency interest on the deficiency income tax for the years 1948, to acquire jurisdiction upon the latter's person, who, being the proponent of the
1949 and 1950 accrue? affirmative defense, should be deemed to have abandoned its special appearance and
voluntarily submitted itself to the jurisdiction of the court.
3

First Issue
Voluntary appearance cures defects of summons, if any. Such defect, if any, was
4

further cured when defendant filed its answer to the complaint. A defendant can not be
5

Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person permitted to speculate upon the judgment of the court by objecting to the court's
inasmuch as summons was not served upon it but upon Messrs. Leido and Associates jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction
who do not come under any of the class of persons upon whom summons should be over its person if and when the judgment sustains its defenses.
served as enumerated in Section 13, Rule 7, of the Rules of Court, which reads:
2

Second Issue
"SEC. 13. Service upon private domestic corporation or partnership.—If the defendant is a
corporation formed under the laws of the Philippines or a partnership duly registered, Ker 22 Co., Ltd. contends that under Section 331 of the Tax Code the right of the
service may be made on the president, manager, secretary, cashier, agent, or any of its Commissioner of Internal Revenue to assess against it a deficiency income tax for the
directors." year 1947 has prescribed because the assessment was issued on July 25, 1953 after a lapse
of five years, three months and thirteen days from the date (April 12, 1948) it filed Its

34
income tax return. On the other hand, the Republic of the Philippines Insists that the been alleged and proved in the lower court. On these premises We therefore sustain the
taxpayer's, income tax return was fraudulent, therefore the Commissioner of Internal ruling of the lower court upon the point of prescription.
Revenue may assess the tax within ten years from discovery of the fraud on October 31,
1951 pursuant to Section 322(a) of the Tax Code. It would be worth mentioning that since the assessment for deficiency income tax
for 1947 has become 'f inal and executory, Ker & Co., Ltd. may not anymore raise
The stand of the Republic of the Philippines hinges on whether or not taxpayer's defenses which go into the merits of the assessment, i.e., prescription of the
income tax return for 1947 was fraudulent Commissioner's right to assess the tax. Such was our ruling in previous cases. In this
9

case however, Ker ,& Co., Ltd. raised the defense of prescription in the proceedings
The court a quo, conf ining itself to determining whether or not the assessment of the below and the Republic of the Philippines, instead of questioning the right of the
tax for 1947 was issued within the five-year period provided for in Section 331 of the Tax defendant to raise such defense, litigated on it and submitted the issue for resolution of
Code, ruled that the right of the Commissioner of Internal Revenue to assess the tax has the court. By its actuation, the Republic of the Philippines should be considered to have
prescribed. Said the lower court: waived its right to object to the setting up of such defense.

"The Court resolves the second issue in the negative, because Section 331 of the Revenue Third Issue
Code explicitly provides, in mandatory terms, that 'lnternal Revenue taxes shall be
assessed within 5, years after the return was filed, and no proceedings in court without Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the
assessment, for the collection of such taxes, shall be begun after expiration of such period. complaint for the collection of the deficiency income tax for the years 1948, 1949 and
The attempt by the Commissioner of Internal Revenue to make an assessment on July 25, 1950 only on March 27, 1962, or nine years, one month and eleven days from February 16,
1953, on the basis of a return filed on April 12, 1948, is an exercise of authority against the 1953, the date the tax was assessed, the right to collect the same has prescribed pursuant
afore-quoted explicit and mandatory limitations of statutory law. Settled in our system is
the rule that acts committed against the provisions of mandatory or prohibitory laws shall
to Section 332(c) of the Tax Code. The Republic of the Philippines however contends
be void (Art. 5, New Civil Code). x x x" that the running ,of the prescriptive period was interrupted by the filing of the
taxpayer's petition for review in the Court of Tax Appeals on March 1, 1956,
Said court resolved the issue without touching upon fraudulence of the return. The
reason is that the complaint alleged no fraud, nor did the plaintiff present evidence to If the period during which the case was pending in the Court of Tax Appeals and in
prove fraud. the Supreme Court were not counted in reckoning the prescriptive period, less than five
years would have elapsed, hence, the right to collect the tax has not prescribed.
In reply to the lower court's conclusion, the Republic of the Philippines maintains in
its brief that Ker ,& Co., Ltd. filed a false return and since the fraud penalty of 50% The taxpayer counters that the filing of the petition for review in the Court of Tax
surcharge was imposed in the deficiency income tax assessment, which has become final Appeals could not have stopped the running of the prescriptive period to collect because
and executory, the finding of the Commissioner of Internal Revenue as to the existence said court did not have jurisdiction over the case, the appeal having been interposed
of the fraud has also become final and need not be proved. This contention suffers from beyond the 30-day .period set forth in Section 11 of Republic Act 1125. Precisely, it adds,
a flaw in that it fails to consider the well-settled principle that fraud is a question of the Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was
fact which must be alleged and proved. Fraud is a serious charge and, to be sustained,
6 7 affirmed by the Supreme Court in L-12396 aforementioned.
it must be supported by clear and convincing proof. Accordingly, fraud should have
8

Under Section 333 of the Tax Code, quoted hereunder:

35
 Revenue had but one remedy left to collect the tax, that is, by judicial action. However,
12

"SEC. 333. Suspension of running of statute.—The running of the statute of limitations provided as stated, an independent ordinary action in the Court of First Instance was not
in Section 331 or three hundred thirty-two on the making of assessments and the beginning available to the Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax
of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall Appeals, supra, in view of the pendency of the taxpayer's petition for review in the Court
be suspended for the period during which the Collector of Internal Revenue is prohibited of Tax Appeals. Precisely he urgently filed a motion to dismiss the taxpayer's petition
from making the assessment or beginning distraint or levy or a proceeding in court, and
for sixty days thereafter."
for review with a view to terminating therein the proceedings in the shortest possible
time in order that he could file a collection case in the Court of First Instance before his
the running of the prescriptive period to collect the tax shall be suspended 'f or the right to do so is cut off by the passage of time. As moved, the Tax Court dismissed the
period during which the Commissioner of Internal .Revenue is prohibited from case and Ker & Co., Ltd. appealed to the Supreme Court. By the time the Supreme Court
beginning a distraint and levy or instituting a proceeding in court, and for. sixty days affirmed the order of dismissal of the Court of Tax Appeals in L-12396 on January 31,
thereafter. 1962 more than five years had elapsed since the final assessments were made on January
5, 1954. Thereafter, the. Commissioner of Internal Revenue demanded extra-judicially
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the the payment of the deficiency tax in question and in reply the taxpayer, by its letter
Supreme Court have the effect of legally preventing the Commissioner of Internal dated March 28, 1962, advised the Commissioner of Internal Revenue \that the right to
Revenue from instituting an action in the Court of First Instance for the collection of collect the tax has prescribed pursuant to Section 332 (c) of the Tax Code.
the tax? Our view is that it did.
Thus, did the taxpayer produce the effect of temporarily staying the hands of the
From March 1, 1956 when Ker ,& Co., Ltd. filed a petition for review in the Court of Commissioner of Internal Revenue simply through a choice of remedy, And, if We were
Tax Appeals contesting the legality of the assessments in question, until the termination to sustain the taxpayer's stand, We would be encouraging taxpayers to delay the
of its appeal in the Supreme Court, the Commissioner of Internal Revenue was payment of taxes in the hope of ultimately avoiding the same,
prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax
Appeals, from filing an ordinary action in the Court of First Instance to collect the tax.
10
Under the circumstances, the Commissioner of Internal Revenue was in effect
Besides, to do so would be to violate the judicial policy of avoiding multiplicity of suits prohibited from collecting the tax in question. This being so, the provisions of Section
333 of the Tax Code will apply.
and the rule on lis pendens. 11

It would be interesting to note that when the Commissioner of Internal Revenue Fourth Issue
issued the final deficiency assessments on January 5, 1954, he had already lost, by
prescription, the right to collect the tax (except that for 1950) by the summary method The Republic of the Philippines maintains"that 'the delinquency interest on the
of warrant of distraint and levy. Ker ,& Co., Ltd. immediately thereafter requested deficiency income tax for 1948, 1949 and 1950 accrued and should commence from the
suspension of the collection of the tax without penalty incident to late payment pending date of the assessments as shown in the assessment notices, pursuant to Section 51 (e)
the filing of a memorandum in support of its views. As requested, no tax was collected. of the Tax Code, instead of from the date the complaint was filed as determined in the
On May 22, 1954 the projected memorandum was filed, but as of that date the decision appealed from.
Commissioner's right to collect by warrant of distraint and levy the deficiency tax for
1950 had already prescribed. So much so, that on March 1, 1956 when Ker ,& Co., Ltd. Section 51 (e) of the Tax Code states:
filed a petition for review in the Court of Tax Appeals, the Commissioner of Internal
36
 "SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or ,sums due and unpaid
after the dates prescribed in subsections (b), (c) and (d) for the payment of the same,. there
shall be added the sum of five per centum on the amount of tax unpaid and interest at the
rate of one per centum a month upon said tax 'f rom the time the same became due, except
from the estates of insane, deceased, or insolvent persons." (italics supplied)

Exhibit "F"—the letter of assessment—shows that the deficiency income tax for 1948
and 1949 became due 011 March 15, 1953 and that for 1950 accrued on February 15, 1954
in accordance with Section 51 (d) of the Tax Code. Since the tax in question remained
unpaid, delinquency interest accrued and became due starting from said due dates. The
decision appealed from should therefore be modified accordingly.

WHEREFORE, the decision appealed from is affirmed with the modification that
the delinquency interest at the rate of 1% per month shall be computed from March 15,
1953; for the deficiency income tax for 1948 and 1949 and from February 15, 1954 for the
deficiency income tax for 1950. With costs against Ker ,& Co., Ltd. So ordered,

37
 G.R. No. 165109. December 14, 2009.* to the detriment of the public.—Another point to consider is that local government units now possess
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO more powers, authority and resources at their disposal, which in the hands of unscrupulous
vs. EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, officials may be abused and misused to the detriment of the public. To protect the interest of the
ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P. people and to prevent taxes from being squandered or wasted under the guise of government
FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE projects, a liberal approach must therefore be adopted in determining locus standi in public suits.
T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL
COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and Same; Words and Phrases; Political Questions; “Political Question,” Defined.—A political question is
LAND BANK OF THE PHILIPPINES a question of policy, which is to be decided by the people in their sovereign capacity or by the
legislative or the executive branch of the government to which full discretionary authority has
been delegated.
Actions; Parties; Locus Standi; Taxpayer’s Suits; Requisites; As long as taxes are involved, people have a
right to question contracts entered into by the government.—A taxpayer is allowed to sue where there is Same; Parties; The provincial government, if included as a petitioner, would in effect be suing itself
a claim that public funds are illegally disbursed, or that the public money is being deflected to considering that public respondents—the elective provincial officials—are being sued in their official
any improper purpose, or that there is wastage of public funds through the enforcement of an
capacity.—As to the denial of petitioners’ Motion to Admit Amended Petition, we find no reason
invalid or unconstitutional law. A person suing as a taxpayer, however, must show that the act
to reverse the same. The inclusion of the province of Cagayan as a petitioner would not only
complained of directly involves the illegal disbursement of public funds derived from taxation.
change the theory of the case but would also result in an absurd situation. The provincial
He must also prove that he has sufficient interest in preventing the illegal expenditure of money
government, if included as a petitioner, would in effect be suing itself considering that public
raised by taxation and that he will sustain a direct injury because of the enforcement of the
respondents are being sued in their official capacity.
questioned statute or contract. In other words, for a taxpayer’s suit to prosper, two requisites
must be met: (1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the Same; Pleadings and Practice; Procedural Rules and Technicalities; Notice of Hearing; The fact that the
petitioner is directly affected by the alleged act. In light of the foregoing, it is apparent that notice of hearing in the Motion for Reconsideration was addressed only to the Clerk of Court in violation of
contrary to the view of the RTC, a taxpayer need not be a party to the contract to challenge its Section 5, Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all parties
validity. As long as taxes are involved, people have a right to question contracts entered into by concerned, did not make the motion a mere scrap of paper—the rule on notice of hearing is not a ritual to be
the government. followed blindly.—A perusal of the Motion for Reconsideration filed by petitioners would show
that the notice of hearing was addressed only to the Clerk of Court in violation of Section 5,
Same; Same; Same; Same; The Court, in recent cases, has relaxed the stringent “direct injury test” bearing Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all parties
in mind that locus standi is a procedural technicality—by invoking “transcendental importance,” “paramount concerned. This defect, however, did not make the motion a mere scrap of paper. The rule is not
public interest,” or “far-reaching implications,” ordinary citizens and taxpayers were allowed to sue even if they a ritual to be followed blindly. The purpose of a notice of hearing is simply to afford the adverse
failed to show direct injury.—As to the second requisite, the court, in recent cases, has relaxed the parties a chance to be heard before a motion is resolved by the court. In this case, respondents
stringent “direct injury test” bearing in mind that locus standi is a procedural technicality. By were furnished copies of the motion, and consequently, notified of the scheduled hearing.
invoking “transcendental importance,” “paramount public interest,” or “far-reaching Counsel for public respondents in fact moved for the postponement of the hearing, which the
implications,” ordinary citizens and taxpayers were allowed to sue even if they failed to show court granted. Moreover, respondents were afforded procedural due process as they were given
direct injury. In cases where serious legal issues were raised or where public expenditures of sufficient time to file their respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all parties was substantially complied with.
millions of pesos were involved, the court did not hesitate to give standing to taxpayers.
In effect, the defect in the Motion for Reconsideration was cured.
Same; Same; Same; Same; Municipal Corporations; Local government units now possess more powers,
authority and resources at their disposal, which in the hands of unscrupulous officials may be abused and misused
38
 Same; Same; Same; Procedural defects or lapses, if negligible, should be excused in the higher interest of
justice as technicalities should not override the merits of the case.—We cannot overemphasize that On November 19, 2001, the Sangguniang Panlalawigan,through Resolution No. 290-
procedural rules are mere tools to aid the courts in the speedy, just and inexpensive resolution 2001, ratified the Memorandum of Agreement (MOA)6 entered into by Gov. Lara and
of cases. Procedural defects or lapses, if negligible, should be excused in the higher interest of Preferred Ventures Corporation. The MOA provided that the provincial government of
justice as technicalities should not override the merits of the case. Dismissal of cases due to Cagayan shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount
technicalities should also be avoided to afford the parties the opportunity to present their case. of bonds floated.
Courts must be reminded that the swift unclogging of the dockets although a laudable objective
must not be done at the expense of substantial justice.
On February 15, 2002, the Sangguniang Panlalawiganapproved Resolution No. 2002-
DEL CASTILLO, J.: 061-A authorizing Gov. Lara to negotiate, sign and execute contracts or agreements
pertinent to the flotation of the bonds of the provincial government in an amount not to
The decision to entertain a taxpayer’s suit is discretionary upon the Court. It can exceed P500 million for the construction and improvement of priority projects to be
choose to strictly apply the rule or take a liberal stance depending on the controversy approved by the Sangguniang Panlalawigan.
involved. Advocates for a strict application of the rule believe that leniency would open
floodgates to numerous suits, which could hamper the government from performing its On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of
job. Such possibility, however, is not only remote but also negligible compared to what Cagayan approved Ordinance No. 19-2002, authorizing the bond flotation of the
is at stake—“the lifeblood of the State.” For this reason, when the issue hinges on the provincial government in an amount not to exceed P500 million to fund the construction
illegal disbursement of public funds, a liberal approach should be preferred as it is more and development of the new Cagayan Town Center. The Resolution likewise granted
in keeping with truth and justice. authority to Gov. Lara to negotiate, sign and execute contracts and agreements
necessary and related to the bond flotation subject to the approval and ratification by
This Petition for Review on Certiorari with prayer for a Temporary Restraining the Sangguniang Panlalawigan.
Order/Writ of Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to set
aside the April 27, 2004 Order of the Regional Trial Court (RTC), Branch 5, Tuguegarao On October 20, 2003, the Sangguniang Panlalawiganapproved Resolution No. 350-
City, dismissing the Petition for Annulment of Contracts and Injunction with prayer for 2003 ratifying the Cagayan Provincial Bond Agreements entered into by the provincial
the issuance of a Temporary Restraining Order/ Writ of Preliminary government, represented by Gov. Lara, to wit:
Injunction, docketed as Civil Case No. 6283. Likewise assailed in this Petition is the
August 20, 2004 Resolution3 of RTC, Branch 1, Tuguegarao City denying the Motion for a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC)—Trust and
Reconsideration of the dismissal. Investment Division and Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC and the Land Bank of the
Philippines (LBP).
Factual Antecedents c. Transfer and Paying Agency Agreement with the RCBC – Trust and Investment
Division.
On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No. d. Guarantee Agreement with the RCBC—Trust and Investment Division and MICO.
2001-272 authorizing Governor Edgar R. Lara (Gov. Lara) to engage the services of and e. Underwriting Agreement with RCBC Capital Corporation.
appoint Preferred Ventures Corporation as financial advisor or consultant for the
issuance and flotation of bonds to fund the priority projects of the governor without On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-
cost and commitment. 2003, ratifying the Agreement for the Planning, Design, Construction, and Site
39
Development of the New Cagayan Town Center entered into by the provincial
government, represented by Gov. Lara and Asset Builders Corporation, represented by In response to the petition, public respondents filed an Answer with Motion to
its President, Mr. Rogelio P. Centeno. Dismiss, raising the following defenses: a) petitioners are not the proper parties or they
On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, lack locus standi in court; b) the action is barred by the rule on state immunity from suit
giving to the latter the planning, design, construction and site development of the town and c) the issues raised are not justiciable questions but purely political.
center project for a fee of P213,795,732.39.
For its part, respondent Preferred Ventures Corporation filed a Motion to Dismisson
Proceedings before the Regional Trial Court the following grounds: a) petitioners have no cause of action for injunction; b) failure to
join an indispensable party; c) lack of personality to sue and d) lack of locus standi.
On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Respondent MICO likewise filed a Motion to Dismiss raising the grounds of lack of
Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with cause of action and legal standing. Respondent RCBC similarly argued in its Motion to
prayer for a Temporary Restraining Order/Writ of Preliminary Injunction against Edgar Dismiss that: a) petitioners are not the real parties-in-interest or have no legal standing
R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman to institute the petition; b) petitioners have no cause of action as the flotation of the
A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. bonds are within the right and power of both respondent RCBC and the province of
Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and Cagayan and c) the viability of the construction of a town center is not a justiciable
LBP. question but a political question.

At the time of the filing of the petition, Manuel N. Mamba was the Representative of Respondent Asset Builders Corporation, on the other hand, filed an
the 3rd Congressional District of the province of Cagayan while Raymund P. Guzman Answer interposing special and affirmative defenses of lack of legal standing and cause
and Leonides N. Fausto were members of the Sangguniang Panlalawigan of Cagayan. of action. Respondent LBP also filed an Answer alleging in the main that petitioners
have no cause of action against it as it is not an indispensable party or a necessary party
Edgar R. Lara was sued in his capacity as governor of Cagayan, while Jenerwin C. to the case.
Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.
Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued Two days after the filing of respondents’ respective memoranda on the issues raised
as members of the Sangguniang Panlalawigan of Cagayan. Respondents Preferred Ventures during the hearing of the special and/or affirmative defenses, petitioners filed a Motion
Corporation, Asset Builders Corporation, RCBC, MICO and LBP were all impleaded as to Admit Amended Petition attaching thereto the amended petition. Public respondents
indispensable or necessary parties. opposed the motion for the following reasons: 1) the motion was belatedly filed; 2) the
Amended Petition is not sufficient in form and in substance; 3) the motion is patently
Respondent Preferred Ventures Corporation is the financial advisor of the province dilatory and 4) the Amended Petition was filed to cure the defect in the original petition.
of Cagayan regarding the bond flotation undertaken by the province. Respondent Asset
Builders Corporation was awarded the right to plan, design, construct and develop the Petitioners also filed a Consolidated Opposition to the Motion to Dismiss followed
proposed town center. Respondent RCBC, through its Trust and Investment Division, by supplemental pleadings in support of their prayer for a writ of preliminary injunction.
is the trustee of the seven-year bond flotation undertaken by the province for the
construction of the town center, while respondent MICO is the guarantor. Lastly, On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit
respondent LBP is the official depositary bank of the province. Amended Petition and dismissing the petition for lack of cause of action. It ruled that:

40
 “The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on the The citation made by the provincial government[, to] which this Court is inclined to agree,
filing of an amended pleading is quite clear. As such, the Court rules that the motion was is that the matter falls under the discretion of another department, hence the decision reached
belatedly filed. The granting of leave to file amended pleadings is a matter peculiarly within the is in the category of a political question and consequently may not be the subject of judicial
sound discretion of the trial court. But the rule allowing amendments to pleadings is subject to jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.
the general but inflexible limitation that the cause of action or defense shall not be substantially It is [a] well-recognized principle that purely administrative and discretionary functions
changed or the theory of the case altered to the prejudice of the other party (Avecilla vs. Yatco, 103 may not be interfered with by the courts (Adm. Law Test & Cases, 2001 Ed., De Leon, De Leon,
Phil. 666). Jr.).

On the assumption that the controversy presents justiciable issues which this Court may The case therefore calls for the doctrine of ripeness for judicial review. This determines the
take cognizance of, petitioners in the present case who presumably presented legitimate point at which courts may review administrative action. The basic principle of ripeness is that
interests in the controversy are not parties to the questioned contract. Contracts produce effect the judicial machinery should be conserved for problems which are real and present or imminent
as between the parties who execute them. Only a party to the contract can maintain an action and should not be squandered on problems which are future, imaginary or remote. This case is
to enforce the obligations arising under said contract (Young vs. CA, 169 SCRA 213). Since a not ripe for judicial determination since there is no imminently x x x substantial injury to the
contract is binding only upon the parties thereto, a third person cannot ask for its rescission if petitioners.
it is in fraud of his rights. One who is not a party to a contract has no rights under such contract
and even if the contrary may be voidable, its nullity can be asserted only by one who is a party In other words, the putting up of the New Cagayan Town Center by the province over the
thereto; a third person would have absolutely no personality to ask for the annulment (Wolfson land fully owned by it and the concomitant contracts entered into by the same is within the
vs. Estate of Martinez, 20 Phil. 340; Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. bounds of its corporate power, an undertaking which falls within the ambit of its discretion and
Nos. L-6501 & 6599, May 21, 1955). therefore a purely political issue which is beyond the province of the court x x x. [Consequently,
the court cannot,] in any manner, take judicial cognizance over it. The act of the provincial
It was, however, held that a person who is not a party obliged principally or subsidiarily in government was in pursuance of the mandate of the Local Government Code of 1991. 160
a contract may exercise an action for nullity of the contract if he is prejudiced in his rights with xxxx
respect to one of the contracting parties and can show the detriment which would positively Indeed, adjudication of the procedural issues presented for resolution by the present action
result to him from the contract in which he had no intervention (Bañez vs. CA, 59 SCRA 15; Anyong would be a futile exercise in exegesis.
Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners
What defeats the plea of the petitioners for the issuance of a writ of preliminary injunction
failed to show that they were prejudiced in their rights [or that a] detriment x x x would
is the fact that their averments are merely speculative and founded on conjectures. An injunction
positively result to them. Hence, they lack locus standi in court. is not intended to protect contingent or future rights nor is it a remedy to enforce an abstract
xxxx
right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An injunction, whether
To the mind of the Court, procedural matters in the present controversy may be dispensed
with, stressing that the instant case is a political question, a question which the court cannot, preliminary or final, will not issue to protect a right not in in esse and which may never arise, or
in any manner, take judicial cognizance. Courts will not interfere with purely political questions to restrain an act which does not give rise to a cause of action. The complainant’s right on title,
moreover, must be clear and unquestioned [since] equity, as a rule, will not take cognizance of
because of the principle of separation of powers (Tañada vs. Cuenco, 103 Phil. 1051). Political
suits to establish title and will not lend its preventive aid by injunction where the complainant’s
questions are those questions which, under the Constitution, are to be decided by the people in
title or right is doubtful or disputed. The possibility of irreparable damage, without proof of
their sovereign capacity or in regard to which full discretionary authority has been delegated to
violation of an actual existing right, is no ground for injunction being a mere damnum, absque
the legislative or [to the] executive branch of the government (Nuclear Free Phils. Coalition vs. NPC,
injuria(Talisay-Silay Milling Company, Inc. vs. CFI of Negros Occidental, et al., 42 SCRA 577, 582).
141 SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272 (1987); Citizen’s Alliance for Consumer
xxxx
Protection vs. Energy Regulatory Board, G.R. No. 78888-90, June 23, 1988, 162 SCRA 521).
41
 For lack of cause of action, the case should be dismissed. IV. [It] found a defect of substance in the petitioners’ Motion for Reconsideration.38

The facts and allegations [necessarily] suggest also that this court may dismiss the case for Our Ruling
want of jurisdiction.
The petition is partially meritorious.
The rule has to be so because it can motu proprio dismiss it as its only jurisdiction is to dismiss Petitioners have legal standing to sue as taxpayers
it if it has no jurisdiction. This is in line with the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R.
No. 104033, Dec. 27, 1993 where the court may dismiss a complaint even without a motion to A taxpayer is allowed to sue where there is a claim that public funds are illegally
dismiss or answer.
disbursed, or that the public money is being deflected to any improper purpose, or that
Upon the foregoing considerations, the case is hereby dismissed without costs. SO
there is wastage of public funds through the enforcement of an invalid or
ORDERED.” unconstitutional law. A person suing as a taxpayer, however, must show that the act
complained of directly involves the illegal disbursement of public funds derived from
Petitioners filed a Motion for Reconsideration to which respondents filed their taxation. He must also prove that he has sufficient interest in preventing the illegal
respective Oppositions. Petitioners then filed a Motion to Inhibit, which the court expenditure of money raised by taxation and that he will sustain a direct injury because
granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao City. of the enforcement of the questioned statute or contract. In other words, for a taxpayer’s
suit to prosper, two requisites must be met: (1) public funds derived from taxation are
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution disbursed by a political subdivision or instrumentality and in doing so, a law is violated
denying petitioners’ plea for reconsideration. The court found the motion to be a mere or some irregularity is committed and (2) the petitioner is directly affected by the
scrap of paper as the notice of hearing was addressed only to the Clerk of Court in alleged act.
violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained
In light of the foregoing, it is apparent that contrary to the view of the RTC, a
the findings of Branch 5 that petitioners lack legal standing to sue and that the issue
taxpayer need not be a party to the contract to challenge its validity.43 As long as taxes
involved is political.
are involved, people have a right to question contracts entered into by the government.
Issues
In this case, although the construction of the town center would be primarily
Hence, the present recourse where petitioners argue that: sourced from the proceeds of the bonds, which respondents insist are not taxpayer’s
money, a government support in the amount of P187 million would still be spent for
A. The lower court decided a question of substance in a way not in accord with law paying the interest of the bonds. In fact, a Deed of Assignment was executed by the
and with the applicable decision of the Supreme Court, and governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA) and
B. The lower court has so far departed from the accepted and usual course of other revenues of the provincial government as payment and/or security for the
judicial proceedings as to call for an exercise of the power of supervision in that: obligations of the provincial government under the Trust Indenture Agreement dated
September 17, 2003. Records also show that on March 4, 2004, the governor requested
I. It denied locus standi to petitioners; the Sangguniang Panlalawigan to appropriate an amount of P25 million for the interest of
II. [It] determined that the matter of contract entered into by the provincial the bond. Clearly, the first requisite has been met.
government is in the nature of a political question;
III. [It] denied the admission of Amended Petition; and
42
 As to the second requisite, the court, in recent cases, has relaxed the stringent “direct government projects, a liberal approach must therefore be adopted in determining locus
injury test” bearing in mind that locus standi is a procedural technicality. By invoking standi in public suits.
“transcendental importance,” “paramount public interest,” or “far-reaching
implications,” ordinary citizens and taxpayers were allowed to sue even if they failed to In view of the foregoing, we are convinced that petitioners have sufficient standing
show direct injury. In cases where serious legal issues were raised or where public to file the present suit. Accordingly, they should be given the opportunity to present
expenditures of millions of pesos were involved, the court did not hesitate to give their case before the RTC.
standing to taxpayers.
We find no reason to deviate from the jurisprudential trend. Having resolved the core issue, we shall now proceed to the remaining issues.

To begin with, the amount involved in this case is substantial. Under the various The controversy involved is justiciable
agreements entered into by the governor, which were ratified by the Sangguniang
Panlalawigan, the provincial government of Cagayan would incur the following costs:50 A political question is a question of policy, which is to be decided by the people in
Compensation to Preferred Ventures — P 6,150,000.00 their sovereign capacity or by the legislative or the executive branch of the government
(3% of P205M) Resolution No. 290-2001
51 to which full discretionary authority has been delegated.
Management and Underwriting Fees — 3,075,000.00
(1.5% of P205M)52 In filing the instant case before the RTC, petitioners seek to restrain public
Documentary Tax — 1,537,500.00
respondents from implementing the bond flotation and to declare null and void all
contracts related to the bond flotation and construction of the town center. In the
(0.75% of P205M)53
petition before the RTC, they alleged grave abuse of discretion and clear violations of
Guarantee Fee54 — 7,350,000.00
law by public respondents. They put in issue the overpriced construction of the town
Construction and Design of town center55 — 213,795,732.39 center; the grossly disadvantageous bond flotation; the irrevocable assignment of the
provincial government’s annual regular income, including the IRA, to respondent RCBC
Total Cost — P231,908,232.39 to cover and secure the payment of the bonds floated; and the lack of consultation and
discussion with the community regarding the proposed project, as well as a proper and
legitimate bidding for the construction of the town center.
What is more, the provincial government would be shelling out a total amount of
P187 million for the period of seven years by way of subsidy for the interest of the bonds.
Obviously, the issues raised in the petition do not refer to the wisdom but to the
Without a doubt, the resolution of the present petition is of paramount importance to
legality of the acts complained of. Thus, we find the instant controversy within the
the people of Cagayan who at the end of the day would bear the brunt of these
ambit of judicial review. Besides, even if the issues were political in nature, it would still
agreements.
come within our powers of review under the expanded jurisdiction conferred upon us
by Section 1, Article VIII of the Constitution, which includes the authority to determine
Another point to consider is that local government units now possess more powers,
whether grave abuse of discretion amounting to excess or lack of jurisdiction has been
authority and resources at their disposal, which in the hands of unscrupulous officials
committed by any branch or instrumentality of the government.58
may be abused and misused to the detriment of the public. To protect the interest of the
people and to prevent taxes from being squandered or wasted under the guise of
The Motion to Admit Amended Petition was properly denied
43
 WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004
However, as to the denial of petitioners’ Motion to Admit Amended Petition, we find Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial
no reason to reverse the same. The inclusion of the province of Cagayan as a petitioner Court of Tuguegarao City are hereby REVERSEDand SET ASIDE insofar as the
would not only change the theory of the case but would also result in an absurd dismissal of the petition is concerned. Accordingly, the case is hereby REMANDED to
situation. The provincial government, if included as a petitioner, would in effect be suing the court a quo for further proceedings.
itself considering that public respondents are being sued in their official capacity.
SO ORDERED.
In any case, there is no need to amend the petition because petitioners, as we have
said, have legal standing to sue as taxpayers. Notes.—Taxpayers may question contracts entered into by the national government
or government-owned or controlled corporations alleged to be in contravention of the
Section 5, Rule 15 of the Rules of Court was substantially complied with law. (Bagatsing vs. Committee on Privatization, 246 SCRA 334 [1995])
This brings us to the fourth and final issue. Standing is a peculiar concept in constitutional law because in some cases, suits are
not brought by parties who have been personally injured by the operation of a law or
A perusal of the Motion for Reconsideration filed by petitioners would show that the any other government act but by concerned citizens, taxpayers or voters who actually
notice of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule sue in the public interest. (Agan, Jr. vs. Philippine International Air Terminal Co., Inc., 402 SCRA
15 of the Rules of Court, which requires the notice of hearing to be addressed to all 612 [2003])
parties concerned. This defect, however, did not make the motion a mere scrap of paper. ——o0o——
The rule is not a ritual to be followed blindly. The purpose of a notice of hearing is simply
to afford the adverse parties a chance to be heard before a motion is resolved by the
court. In this case, respondents were furnished copies of the motion, and consequently,
notified of the scheduled hearing. Counsel for public respondents in fact moved for the
postponement of the hearing, which the court granted. Moreover, respondents were
afforded procedural due process as they were given sufficient time to file their respective
comments or oppositions to the motion. From the foregoing, it is clear that the rule
requiring notice to all parties was substantially complied with. In effect, the defect in
the Motion for Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid the courts in
the speedy, just and inexpensive resolution of cases. Procedural defects or lapses, if
negligible, should be excused in the higher interest of justice as technicalities should not
override the merits of the case. Dismissal of cases due to technicalities should also be
avoided to afford the parties the opportunity to present their case. Courts must be
reminded that the swift unclogging of the dockets although a laudable objective must
not be done at the expense of substantial justice.

44
 G.R. No. 191667. April 17, 2013.* private owner. In this light, Cacayuran had a direct interest in ensuring that the Agoo Plaza
LAND BANK OF THE PHILIPPINES vs. EDUARDO M. CACAYURAN would not be exploited for commercial purposes through the APC’s construction. Moreover,
Cacayuran need not be privy to the Subject Loans in order to proffer his objections thereto.
Remedial Law; Civil Procedure; Taxpayer’s Suits; For a taxpayer’s suit to prosper, two requisites must be In Mamba v. Lara, 608 SCRA 149 (2009), it has been held that a taxpayer need not be a party to
met namely, (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and the contract to challenge its validity; as long as taxes are involved, people have a right to question
contracts entered into by the government.
in doing so, a law is violated or some irregularity is committed; and (2) the petitioner is directly affected by the
alleged act.—It is hornbook principle that a taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that public money is being deflected to any improper Local Government Units; Ultra Vires Acts; An act which is outside of the municipality’s jurisdiction is
purpose, or that there is wastage of public funds through the enforcement of an invalid or considered as a void ultra vires act, while an act attended only by an irregularity but remains within the
unconstitutional law. A person suing as a taxpayer, however, must show that the act complained municipality’s power is considered as an ultra vires act subject to ratification and/or validation.—Generally,
of directly involves the illegal disbursement of public funds derived from taxation. In other an ultra vires act is one committed outside the object for which a corporation is created as
words, for a taxpayer’s suit to prosper, two requisites must be met namely, (1) public funds defined by the law of its organization and therefore beyond the powers conferred upon it by law.
derived from taxation are disbursed by a political subdivision or instrumentality and in doing There are two (2) types of ultra vires acts. As held in Middletown Policemen’s Benevolent Association
so, a law is violated or some irregularity is committed; and (2) the petitioner is directly affected v. Township of Middletown, 162 N.J. 361, 368 (2000): There is a distinction between an act utterly
by the alleged act. beyond the jurisdiction of a municipal corporation and the irregular exercise of a basic
power under the legislative grant in matters not in themselves jurisdictional. The former
Local Government Units; Internal Revenue Allotments (IRA); The Municipality’s Internal Revenue are ultra vires in the primary sense and void; the latter, ultra vires only in a secondary sense
Allotment, which serves as the local government unit’s just share in the national taxes, is in the nature of public which does not preclude ratification or the application of the doctrine of estoppel in the
funds derived from taxation.—Although the construction of the APC would be primarily sourced interest of equity and essential justice. (Emphasis and underscoring supplied) In other words,
from the proceeds of the Subject Loans, which Land Bank insists are not taxpayer’s money, there an act which is outside of the municipality’s jurisdiction is considered as a void ultra viresact,
is no denying that public funds derived from taxation are bound to be expended as the while an act attended only by an irregularity but remains within the municipality’s power is
Municipality assigned a portion of its IRA as a security for the foregoing loans. Needless to state, considered as an ultra vires act subject to ratification and/or validation. To the former belongs
the Municipality’s IRA, which serves as the local government unit’s just share in the national municipal contracts which (a) are entered into beyond the express, implied or inherent powers
taxes, is in the nature of public funds derived from taxation. The Court believes, however, that of the local government unit; and (b) do not comply with the substantive requirements of law e.g.,
although these funds may be posted as a security, its collateralization should only be deemed when expenditure of public funds is to be made, there must be an actual appropriation and
effective during the incumbency of the public officers who approved the same, else those who certificate of availability of funds; while to the latter belongs those which (a) are entered into by
succeed them be effectively deprived of its use. In any event, it is observed that the proceeds the improper department, board, officer of agent; and (b) do not comply with the formal
from the Subject Loans had already been converted into public funds by the Municipality’s requirements of a written contract e.g., the Statute of Frauds.
receipt thereof. Funds coming from private sources become impressed with the characteristics
of public funds when they are under official custody.
Civil Law; Contracts; Article 1409(1) of the Civil Code provides that purpose is contrary to law, morals,
good customs, public order or public policy is considered void and as such, creates no rights or obligations or any
Remedial Law; Civil Procedure; Taxpayer’s Suits; A taxpayer need not be a party to the contract to
juridical relations.—Article 1409(1) of the Civil Code provides that a contract whose purpose is
challenge its validity; as long as taxes are involved, people have a right to question contracts entered into by the contrary to law, morals, good customs, public order or public policy is considered void and as
government.—As a resident-taxpayer of the Municipality, Cacayuran is directly affected by the such, creates no rights or obligations or any juridical relations. Consequently, given the unlawful
conversion of the Agoo Plaza which was funded by the proceeds of the Subject Loans. It is well- purpose behind the Subject Loans which is to fund the commercialization of the Agoo Plaza
settled that public plazas are properties for public use and therefore, belongs to the public
pursuant to the Redevelopment Plan, they are considered as ultra vires in the primary sense thus,
dominion. As such, it can be used by anybody and no one can exercise over it the rights of a
rendering them void and in effect, non-binding on the Municipality. At this juncture, it is equally
45
observed that the land on which the Agoo Plaza is situated cannot be converted into Land Bank. The foregoing terms were confirmed, approved and ratified on October 4,
patrimonial property―as the SB tried to when it passed Municipal Ordinance No. 02- 2005 through Resolution No. 139-2005. Consequently, on November 21, 2005, Land
2007―absent any express grant by the national government. As public land used for public Bank extended a P4,000,000.00 loan in favor of the Municipality (First Loan), the
use, the foregoing lot rightfully belongs to and is subject to the administration and control of proceeds of which were used to construct ten (10) kiosks at the northern and southern
the Republic of the Philippines. Hence, without the said grant, the Municipality has no right to portions of the Imelda Garden. After completion, these kiosks were rented out.
claim it as patrimonial property.
On March 7, 2006, the SB passed Resolution No. 58-2006, approving the
Local Government Units; Ultra Vires Acts; Case law states that public officials can be held personally construction of a commercial center on the Plaza Lot as part of phase II of the
accountable for acts claimed to have been performed in connection with official duties where they have acted ultra Redevelopment Plan. To finance the project, Mayor Eriguel was again authorized to
vires.—Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra vires, obtain a loan from Land Bank, posting as well the same securities as that of the First
the officers who authorized the passage of the Subject Resolutions are personally liable. Case
law states that public officials can be held personally accountable for acts claimed to have been
Loan. All previous representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan were ratified on September 5, 2006 through
performed in connection with official duties where they have acted ultra vires, as in this case.
Resolution No. 128-2006. In consequence, Land Bank granted a second loan in favor of
the Municipality on October 20, 2006 in the principal amount of P28,000,000.00
PERLAS-BERNABE, J.:
(Second Loan).
Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision of Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center
the Court of Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification at the Agoo Plaza was vehemently objected to by some residents of the Municipality.
the April 10, 2007 Decision3 of the Regional Trial Court (RTC) of Agoo, La Union, Led by respondent Eduardo Cacayuran (Cacayuran), these residents claimed that the
Branch 31, declaring inter aliathe nullity of the loan agreements entered into by petitioner conversion of the Agoo Plaza into a commercial center, as funded by the proceeds from
Land Bank of the Philippines (Land Bank) and the Municipality of Agoo, La Union the First and Second Loans (Subject Loans), were “highly irregular, violative of the law,
(Municipality). and detrimental to public interests, and will result to wanton desecration of the said
historical and public park.” The foregoing was embodied in a Manifesto, launched
The Facts through a signature campaign conducted by the residents and Cacayuran.

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain In addition, Cacayuran wrote a letter dated December 8, 2006 addressed to Mayor
resolutions to implement a multi-phased plan (Redevelopment Plan) to redevelop the Eriguel, Vice Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB
Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal Monument namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono
were situated. Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo Villanueva, and
Gerard Mamuyac (Implicated Officers), expressing the growing public clamor against
To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-2005 on the conversion of the Agoo Plaza into a commercial center. He then requested the
April 19, 2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel) to obtain a foregoing officers to furnish him certified copies of various documents related to the
loan from Land Bank and incidental thereto, mortgage a 2,323.75 square meter lot aforementioned conversion including, among others, the resolutions approving the
situated at the southeastern portion of the Agoo Plaza (Plaza Lot) as collateral. To serve Redevelopment Plan as well as the loan agreements for the sake of public information
as additional security, it further authorized the assignment of a portion of its internal and transparency.
revenue allotment (IRA) and the monthly income from the proposed project in favor of
46
 Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a In its Decision dated March 26, 2010, the CA affirmed with modification the RTC’s
Complaint against the Implicated Officers and Land Bank, assailing, among others, the ruling, excluding Vice Mayor Eslao from any personal liability arising from the Subject
validity of the Subject Loans on the ground that the Plaza Lot used as collateral thereof Loans.
is property of public dominion and therefore, beyond the commerce of man.
It held, among others, that: (1) Cacayuran had locus standi to file his complaint,
Upon denial of the Motion to Dismiss dated December 27, 2006, the Implicated considering that (a) he was born, raised and a bona fide resident of the Municipality; and
Officers and Land Bank filed their respective Answers. (b) the issue at hand involved public interest of transcendental importance; (2)
Resolution Nos. 68-2005, 139-2005, 58-2006, 128-2006 and all other related resolutions
For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of (Subject Resolutions) were invalidly passed due to the SB’s non-compliance with
destroying the Agoo Plaza. It further asserted that Cacayuran did not have a cause of certain sections of Republic Act No. 7160, otherwise known as the “Local Government
action against it since he was not privy to any of the Subject Loans. Code of 1991” (LGC); (3) the Plaza Lot, which served as collateral for the Subject Loans,
is property of public dominion and thus, cannot be appropriated either by the State or
During the pendency of the proceedings, the construction of the commercial center by private persons; and (4) the Subject Loans are ultra vires because they were transacted
was completed and the said structure later became known as the Agoo’s People Center without proper authority and their collateralization constituted improper
(APC). disbursement of public funds.
On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007, declaring the area Dissatisfied, Land Bank filed the instant petition.
where the APC stood as patrimonial property of the Municipality.
Issues Before the Court
The Ruling of the RTC The following issues have been raised for the Court’s resolution: (1) whether
Cacayuran has standing to sue; (2) whether the Subject Resolutions were validly passed;
In its Decision dated April 10, 2007, the RTC ruled in favor of Cacayuran, declaring and (3) whether the Subject Loans are ultra vires.
the nullity of the Subject Loans. It found that the resolutions approving the said loans
were passed in a highly irregular manner and thus, ultra vires; as such, the Municipality The Court’s Ruling
is not bound by the same. Moreover, it found that the Plaza Lot is proscribed from
collateralization given its nature as property for public use. The petition lacks merit.
Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007. On the other hand, A. Cacayuran’s standing to sue
the Implicated Officers’ appeal was deemed abandoned and dismissed for their failure
to file an appellants’ brief despite due notice. In this regard, only Land Bank’s appeal was Land Bank claims that Cacayuran did not have any standing to contest the
given due course by the CA. construction of the APC as it was funded through the proceeds coming from the Subject
Loans and not from public funds. Besides, Cacayuran was not even a party to any of the
Ruling of the CA Subject Loans and is thus, precluded from questioning the same.

The argument is untenable.

47
 exercise over it the rights of a private owner. In this light, Cacayuran had a direct
It is hornbook principle that a taxpayer is allowed to sue where there is a claim that interest in ensuring that the Agoo Plaza would not be exploited for commercial
public funds are illegally disbursed, or that public money is being deflected to any purposes through the APC’s construction. Moreover, Cacayuran need not be privy to
improper purpose, or that there is wastage of public funds through the enforcement of the Subject Loans in order to proffer his objections thereto. In Mamba v. Lara, it has been
an invalid or unconstitutional law. A person suing as a taxpayer, however, must show held that a taxpayer need not be a party to the contract to challenge its validity; as long
that the act complained of directly involves the illegal disbursement of public funds as taxes are involved, people have a right to question contracts entered into by the
derived from taxation. In other words, for a taxpayer’s suit to prosper, two requisites government.
must be met namely, (1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or some irregularity is Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing
committed; and (2) the petitioner is directly affected by the alleged act. to file the instant suit.

Records reveal that the foregoing requisites are present in the instant case. B. Validity of the Subject Resolutions

First, although the construction of the APC would be primarily sourced from the Land Bank avers that the Subject Resolutions provided ample authority for Mayor
proceeds of the Subject Loans, which Land Bank insists are not taxpayer’s money, there Eriguel to contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC
is no denying that public funds derived from taxation are bound to be expended as the merely requires that the municipal mayor be authorized by the SB concerned and that
Municipality assigned a portion of its IRA as a security for the foregoing loans. Needless such authorization need not be embodied in an ordinance.
to state, the Municipality’s IRA, which serves as the local government unit’s just share
in the national taxes, is in the nature of public funds derived from taxation. The Court A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the
believes, however, that although these funds may be posted as a security, its authorization of the municipal mayor need not be in the form of an ordinance, the
collateralization should only be deemed effective during the incumbency of the public obligation which the said local executive is authorized to enter into must be made
officers who approved the same, else those who succeed them be effectively deprived of pursuant to a law or ordinance, viz.:
its use.
Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation.―
In any event, it is observed that the proceeds from the Subject Loans had already been xxxx
converted into public funds by the Municipality’s receipt thereof. Funds coming from (b) For efficient, effective and economical governance the purpose of which is the general
private sources become impressed with the characteristics of public funds when they welfare of the municipality and its inhabitants pursuant to Section 16 of this Code, the
are under official custody. municipal mayor shall:
xxxx
(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its
Accordingly, the first requisite has been clearly met.
business transactions and sign on its behalf all bonds, contracts, and obligations, and
such other documents made pursuant to law or ordinance; (Emphasis and
Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by underscoring supplied)
the conversion of the Agoo Plaza which was funded by the proceeds of the Subject
Loans. It is well-settled that public plazas are properties for public use and therefore, In the present case, while Mayor Eriguel’s authorization to contract the Subject
belongs to the public dominion. As such, it can be used by anybody and no one can Loans was not contained―as it need not be contained―in the form of an ordinance, the
48
said loans and even the Redevelopment Plan itself were not approved pursuant to any In other words, an act which is outside of the municipality’s jurisdiction is
law or ordinance but through mere resolutions. The distinction between ordinances and considered as a void ultra vires act, while an act attended only by an irregularity but
resolutions is wellperceived. While ordinances are laws and possess a general and remains within the municipality’s power is considered as an ultra vires act subject to
permanent character, resolutions are merely declarations of the sentiment or opinion of ratification and/or validation. To the former belongs municipal contracts which (a) are
a lawmaking body on a specific matter and are temporary in nature.39 As opposed to entered into beyond the express, implied or inherent powers of the local government
ordinances, “no rights can be conferred by and be inferred from a resolution.” 40 In this unit; and (b) do not comply with the substantive requirements of law e.g., when
accord, it cannot be denied that the SB violated Section 444(b)(1)(vi) of the LGC expenditure of public funds is to be made, there must be an actual appropriation and
altogether. certificate of availability of funds; while to the latter belongs those which (a) are entered
into by the improper department, board, officer of agent; and (b) do not comply with
Noticeably, the passage of the Subject Resolutions was also tainted with other the formal requirements of a written contract e.g., the Statute of Frauds.
irregularities, such as (1) the SB’s failure to submit the Subject Resolutions to
the Sangguniang Panlalawigan of La Union for its review contrary to Section 56 of the LGC; Applying these principles to the case at bar, it is clear that the Subject Loans belong
and (2) the lack of publication and posting in contravention of Section 59 of the LGC. to the first class of ultra vires acts deemed as void.
In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the Records disclose that the said loans were executed by the Municipality for the
Subject Loans. purpose of funding the conversion of the Agoo Plaza into a commercial center pursuant
to the Redevelopment Plan. However, the conversion of the said plaza is beyond the
C. Ultra vires nature of the Subject Loans Municipality’s jurisdiction considering the property’s nature as one for public use and
thereby, forming part of the public dominion. Accordingly, it cannot be the object of
Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts appropriation either by the State or by private persons. Nor can it be the subject of lease
of the officers who approved the same. or any other contractual undertaking. In Villanueva v. Castañeda, Jr., citing Espiritu v.
Municipal Council of Pozorrubio, the Court pronounced that:
Generally, an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the x x x Town plazas are properties of public dominion, to be devoted to public use and to be
powers conferred upon it by law. There are two (2) types of ultra vires acts. As held made available to the public in general. They are outside the commerce of man and cannot
in Middletown Policemen’s Benevolent Association v. Township of Middletown: be disposed of or even leased by the municipality to private parties.

There is a distinction between an act utterly beyond the jurisdiction of a municipal In this relation, Article 1409(1) of the Civil Code provides that a contract whose
corporation an1d the irregular exercise of a basic power under the legislative grant in purpose is contrary to law, morals, good customs, public order or public policy is
matters not in themselves jurisdictional. The former are ultra vires in the primary sense considered void and as such, creates no rights or obligations or any juridical relations.
and void; the latter, ultra viresonly in a secondary sense which does not preclude Consequently, given the unlawful purpose behind the Subject Loans which is to fund
ratification or the application of the doctrine of estoppel in the interest of equity and the commercialization of the Agoo Plaza pursuant to the Redevelopment Plan, they are
essential justice. (Emphasis and underscoring supplied) considered as ultra viresin the primary sense thus, rendering them void and in effect, non-
binding on the Municipality.

49
 At this juncture, it is equally observed that the land on which the Agoo Plaza is
situated cannot be converted into patrimonial property―as the SB tried to when it
passed Municipal Ordinance No. 02-2007―absent any express grant by the national
government. As public land used for public use, the foregoing lot rightfully belongs to
and is subject to the administration and control of the Republic of the Philippines.
Hence, without the said grant, the Municipality has no right to claim it as patrimonial
property.

Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra
vires, the officers who authorized the passage of the Subject Resolutions are personally
liable. Case law states that public officials can be held personally accountable for acts
claimed to have been performed in connection with official duties where they have
acted ultra vires, as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision
of the Court of Appeals in CA-G.R. CV. No. 89732 is hereby AFFIRMED. SO
ORDERED.

Notes.―A taxpayer is deemed to have the standing to raise a constitutional issue

when it is established that public funds from taxation have been disbursed in alleged
contravention of the law or the Constitution. (Dela Llana vs. The Chairperson, Commission on
Audit, 665 SCRA 176 [2012])

Taxpayer’s suit is based on the theory that expenditure of public funds for the
purpose of executing an unconstitutional act is a misapplication of such funds.
(Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyugan [PKSMMN] vs.
Executive Secretary, 669 SCRA 49 [2012])
――o0o――
_______________
54 Id.
55 See Chavez v. Sandiganbayan, G.R. No. 91391, January 24, 1991, 193 SCRA 282, 289.

50
 G.R. No. 196596. November 9, 2016.* stock, nonprofit educational institutions used actually, directly and exclusively for educational purpose.—Thus,
CIR vs. DE LA SALLE UNIVERSITY, INC., we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock,
Taxation; Tax Exemptions; When a non-stock, nonprofit educational institution proves that it uses its revenues nonprofit educational institutions used actually, directly and exclusively for educational
actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, value-added tax purpose. We make this declaration in the exercise of and consistent with our duty to uphold
the primacy of the Constitution.
(VAT), and local business tax. On the other hand, when it also shows that it uses its assets in the form of real
property for educational purposes, it shall be exempted from real property tax.—Thus, when a non-stock, Same; The requirement to specify the taxable period covered by the Letter of Authority (LOA) is simply to
nonprofit educational institution proves that it uses its revenues actually, directly, and inform the taxpayer of the extent of the audit and the scope of the revenue officer’s authority.—Read in this
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On light, the requirement to specify the taxable period covered by the LOA is simply to inform the
the other hand, when it also shows that it uses its assets in the form of real property for taxpayer of the extent of the audit and the scope of the revenue officer’s authority. Without this
educational purposes, it shall be exempted from RPT. rule, a revenue officer can unduly burden the taxpayer by demanding random accounting
records from random unverified years, which may include documents from as far back as ten years
Same; Same; Income and revenues of non-stock, nonprofit educational institution not used actually, in cases of fraud audit.
directly and exclusively for educational purposes are not exempt from duties and taxes.—Parenthetically,
income and revenues of non-stock, nonprofit educational institution not used actually, directly Civil Procedure; If a party desires the court to reject the evidence offered, it must so state in the form of a
and exclusively for educational purposes are not exempt from duties and taxes. To avail of the timely objection and it cannot raise the objection to the evidence for the first time on appeal.—The Court has
exemption, the taxpayer must factually prove that it used actually, directly and exclusively for held that if a party desires the court to reject the evidence offered, it must so state in the form of
educational purposes the revenues or income sought to be exempted. a timely objection and it cannot raise the objection to the evidence for the first time on
appeal. Because of a party’s failure to timely object, the evidence offered becomes part of the
Same; Same; While a non-stock, nonprofit educational institution is classified as a tax-exempt entity under evidence in the case. As a consequence, all the parties are considered bound by any outcome
Section 30 (Exemptions from Tax on Corporations) of the National Internal Revenue Code (NIRC), a arising from the offer of evidence properly presented.
proprietary educational institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations).—
While a non-stock, nonprofit educational institution is classified as a tax-exempt entity under
Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational Same; Jurisdiction; Court of Tax Appeals; The Court will not lightly set aside the conclusions reached by
institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations). the Court of Tax Appeals (CTA) which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has developed an expertise on the subject, unless there has been an abuse or improvident
Same; A proprietary educational institution is entitled only to the reduced rate of ten percent (10%) exercise of authority.—It is doctrinal that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its function of being dedicated exclusively to
corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational institution is
the resolution of tax problems, has developed an expertise on the subject, unless there has been
nonprofit and (2) its gross income from unrelated trade, business or activity does not exceed fifty percent (50%)
an abuse or improvident exercise of authority. We thus accord the findings of fact by the CTA
of its total gross income.—By the Tax Code’s clear terms, a proprietary educational institution is
with the highest respect.
entitled only to the reduced rate of 10% corporate income tax. The reduced rate is applicable
only if: (1) the proprietary educational institution is nonprofit and (2) its gross income from Taxation; Equality and uniformity of taxation means that all taxable articles or kinds of property of the
unrelated trade, business or activity does not exceed 50% of its total gross income. same class shall be taxed at the same rate.—Equality and uniformity of taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. A tax is uniform
when it operates with the same force and effect in every place where the subject of it is found.
Same; The last paragraph of Section 30 of the National Internal Revenue Code (NIRC) is declared without
force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non- BRION, J.:
51
 DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
Before the Court are consolidated petitions for review on certiorari:
1 DLSU filed on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, nonprofit educational institution, principally anchored its petition
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to on Article XIV, Section 4(3) of the Constitution, which reads:
assail the December 10, 2010 decision and March 29, 2011 resolution of the Court
of Tax Appeals (CTA) in En Banc Case No. 622;2 (3) All revenues and assets of non-stock, nonprofit educational institutions used
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, actually, directly, and exclusively for educational purposes shall be exempt from taxes
2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and and duties. x x x
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and
October 4, 2011 resolution in CTA En Banc Case No. 671.4 On January 5, 2010, the CTA Division partially granted DLSU’s petition for review.
The dispositive portion of the decision reads:
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division
(CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No.
622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. Nos. 198841 and WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge assessment on the loan transactions of [DLSU] in the amount of P1,681,774.00 is
CTA Case No. 7303. hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002 and
2003 in the total amount of P18,421,363.53. . . x x x
The Factual Antecedents
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of amount due computed from September 30, 2004 until full payment thereof pursuant to
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter’s books Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner] were excluded, there being no compromise
of accounts and other accounting records for all internal revenue taxes for the agreement between the parties. SO ORDERED.9
period Fiscal Year Ending 2003 and Unverified Prior Years.

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6 Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner’s motion
Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed for reconsideration while it held in abeyance the resolution on DLSU’s motion for
DLSU the following deficiency taxes: (1) income tax on rental earnings from reconsideration.11
restaurants/canteens and bookstores operating within the campus; (2) value-added
tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge, No. 622) arguing that DLSU’s use of its revenues and assets for noneducational or
interest and penalty for taxable years 2001, 2002 and 2003.7 commercial purposes removed these items from the exemption coverage under the
Constitution.12

52
 On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of The CTA En Banc’s Rulings
documentary evidence to prove that its rental income was used actually, directly and
exclusively for educational purposes.13 The Commissioner did not promptly object to the formal CTA En Banc Case No. 622
offer of supplemental evidence despite notice.14 The CTA En Banc dismissed the Commissioner’s petition for review and sustained
the findings of the CTA Division.19
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
reduced the amount of DLSU’s tax deficiencies. The dispositive portion of the amended Tax on rental income
decision reads:
Relying on the findings of the court-commissioned Independent Certified Public
WHEREFORE, [DLSU]’s Motion for Partial Reconsideration is hereby PARTIALLY Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove that
GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and a portion of the assessed rental income was used actually, directly and exclusively for
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted educational purposes; hence, exempt from tax.20 The CTA En Banc was satisfied with
amount of P5,506,456.71. . . x x x DLSU’s supporting evidence confirming that part of its rental income had indeed been
used to pay the loan it obtained to build the university’s Physical Education — Sports
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on
the . . . basic deficiency taxes . . . until full payment thereof pursuant to Section 249(B) of Complex.21
the [National Internal Revenue Code]. . . x x x
Parenthetically, DLSU’s unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually, directly
Further, [DLSU] is hereby held liable to pay 20% per annumdelinquency interest on the and exclusively used for educational purposes, must be subjected to income tax and
deficiency taxes, surcharge and deficiency interest which have accrued . . . from September
VAT.22
30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En DST on loan and mortgage transactions
Banc and argued that the CTA Division erred in admitting DLSU’s additional evidence.16
Contrary to the Commissioner’s contention, DLSU proved its remittance of the DST due
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed on its loan and mortgage documents.23 The CTA En Banc found that DLSU’s DST payments had
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on the been remitted to the BIR, evidenced by the stamp on the documents made by a DST
following grounds: (1) the entire assessment should have been cancelled because it was imprinting machine, which is allowed under Section 200(D) of the National Internal
based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25
have cancelled the entire assessment because DLSU submitted evidence similar to those
submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA Admissibility of DLSU’s supplemental evidence
cancelled Ateneo’s tax assessment;17 and (3) the CTA Division erred in finding that
a portion of DLSU’s rental income was not proved to have been used actually, directly The CTA En Banc held that the supplemental pieces of documentary evidence were
and exclusively for educational purposes.18 admissible even if DLSU formally offered them only when it moved for reconsideration
of the CTA Division’s original decision. Notably, the law creating the CTA provides that
proceedings before it shall not be governed strictly by the technical rules of evidence.26
53
 Complex, the rental income from other sources were not shown to have been actually,
The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc’s directly and exclusively used for educational purposes.34
December 10, 2010 decision.27 Thus, she came to this court for relief through a petition
for review on certiorari (G.R. No. 196596). Not pleased with the CTA En Banc’s ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.
CTA En Banc Case No. 671
The Consolidated Petitions
The CTA En Banc partially granted DLSU’s petition for review and further reduced
its tax liabilities to P2,554,825.47 inclusive of surcharge.28 G.R. No. 196596

On the validity of the Letter of Authority The Commissioner submits the following arguments:

The issue of the LOA’s validity was raised during trial;29hence, the issue was deemed First, DLSU’s rental income is taxable regardless of how such income is derived, used
properly submitted for decision and reviewable on appeal. or disposed of. DLSU’s operations of canteens and bookstores within its campus even
though exclusively serving the university community do not negate income tax liability.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
period and that the practice of issuing a LOA covering audit of unverified prior years is The Commissioner contends that Article XIV, Section 4(3) of the Constitution must
prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) be harmonized with Section 30(H) of the Tax Code, which states among others, that
No. 43-90, which provides that if the audit includes more than one taxable period, the the income of whatever kind and character of [a non-stock and nonprofit educational
other periods or years shall be specifically indicated in the LOA.31 institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified imposed by this Code.37
Prior Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable
years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32 The Commissioner argues that the CTA En Bancmisread and misapplied the case
of Commissioner of Internal Revenue v. YMCA to support its conclusion that
On the applicability of the Ateneo case revenues however generated are covered by the constitutional exemption, provided that,
the revenues will be used for educational purposes or will be held in reserve for such
The CTA En Banc held that the Ateneo case is not a valid precedent because it involved purposes.
different parties, factual settings, bases of assessments, sets of evidence, and defenses.33
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU
On the CTA Division’s appreciation of the evidence is exempt only from property tax but not from income tax on the rentals earned from
property. Thus, DLSU’s income from the leases of its real properties is not exempt from
The CTA En Banc affirmed the CTA Division’s appreciation of DLSU’s evidence. It taxation even if the income would be used for educational purposes.41
held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the Sports
54
 Second, the Commissioner insists that DLSU did not prove the fact of DST G.R. No. 198941
payment42 and that it is not qualified to use the Online Electronic DST Imprinting Machine,
which is available only to certain classes of taxpayers under RR No. 9-2000.43 The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
are exactly the same as those she raised in her: (1) petition docketed as G.R. No. 196596;
Finally, the Commissioner objects to the admission of DLSU’s supplemental offer of and (2) comment on DLSU’s petition docketed as G.R. No. 198841.51
evidence. The belated submission of supplemental evidence reopened the case for trial,
and worse, DLSU offered the supplemental evidence only after it received the Counter-Arguments
unfavorable CTA Division’s original decision.44 In any case, DLSU’s submission of
supplemental documentary evidence was unnecessary since its rental income was DLSU’s Comment on G.R. No. 196596
taxable regardless of its disposition.45
First, DLSU questions the defective verification attached to the petition.52
G.R. No. 198841
Second, DLSU stresses that Article XIV, Section 4(3) of the Constitution is clear
DLSU argues as that: that all assets and revenues of non-stock, nonprofit educational institutions used actually,
directly and exclusively for educational purposes are exempt from taxes and duties.53
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an On this point, DLSU explains that: (1) the tax exemption of non-stock, nonprofit
assessment issued based on such defective LOA must also be void.46 educational institutions is novel to the 1987 Constitution and that Section 30(H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code — with the
Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed addition of non-stock, nonprofit educational institutions to the list of tax-exempt
DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and entities; and (3) that the 1977 Tax Code was promulgated when the 1973
2003.47 DLSU objects to the CTA En Banc’s conclusion that the LOA is valid for taxable Constitution was still in place.
year 2003. According to DLSU, when RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of ‘unverified prior years’ is hereby prohibited. DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special tax
it refers to the LOA which has the format “Base Year + Unverified Prior Years.” Since the treatment on income of private educational institutions only emanates from statute, i.e.,
LOA issued to DLSU follows this format, then any assessment arising from it must the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of all
be entirely voided.48 the assets and revenues of non-stock, nonprofit educational institutions used actually,
directly and exclusively for educational purposes, was expressly and categorically
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for enshrined.55
similarly situated parties, the same set of evidence should be appreciated and weighed in
the same manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU’s DLSU thus invokes the doctrine of constitutional supremacy, which renders any
evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, subsequent law that is contrary to the Constitution void and without any force and
nonprofit educational institution.50 effect.56 Section 30(H) of the 1997 Tax Code insofar as it subjects to tax the income of
55
whatever kind and character of a non-stock and nonprofit educational institution from The Commissioner submits that DLSU is estopped from questioning the LOA’s
any of its properties, real or personal, or from any of its activities conducted for validity because it failed to raise this issue in both the administrative and judicial
profit regardless of the disposition made of such income, should be declared without force and proceedings.64 That it was asked on cross-examination during the trial does not make it
effect in view of the constitutionally granted tax exemption on “all revenues and assets an issue that the CTA could resolve.65 The Commissioner also maintains that DLSU’s
of non-stock, nonprofit educational institutions used actually, directly, and exclusively rental income is not tax-exempt because an educational institution is only exempt from
for educational purposes.”57 property tax but not from tax on the income earned from the property.66

DLSU further submits that it complies with the requirements enunciated in DLSU’s Comment on G.R. No. 198941
the YMCA case, that for an exemption to be granted under Article XIV, Section 4(3) of
the Constitution, the taxpayer must prove that: (1) it falls under the classification non- DLSU puts forward the same counter-arguments discussed above.67 In addition,
stock, nonprofit educational institution; and (2) the income it seeks to be exempted DLSU prays that the Court award attorney’s fees in its favor because it was constrained
from taxation is used actually, directly and exclusively for educational to unnecessarily retain the services of counsel in this separate petition.68
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is
undisputedly a non-stock, nonprofit educational institution. It had also submitted Issues
evidence to prove that it actually, directly and exclusively used its income for
educational purposes.59 Although the parties raised a number of issues, the Court shall decide only the pivotal
issues, which we summarize as follows:
DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted “to incentivize private educational I. Whether DLSU’s income and revenues proved to have been used actually, directly
institutions to share with the State the responsibility of educating the youth.”60 and exclusively for educational purposes are exempt from duties and taxes;
II. Whether the entire assessment should be voided because of the defective LOA;
III. Whether the CTA correctly admitted DLSU’s supplemental pieces of evidence;
Third, DLSU highlights that both the CTA En Banc and Division found that the bank
and
that handled DLSU’s loan and mortgage transactions had remitted to the BIR the DST
IV. Whether the CTA’s appreciation of the sufficiency of DLSU’s evidence may be
through an imprinting machine, a method allowed under RR No. 15-2001.61 In any case,
disturbed by the Court.
DLSU argues that it cannot be held liable for DST owing to the exemption granted under
the Constitution.62
Our Ruling
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the As we explain in full below, we rule that:
formal offer of supplemental evidence. Because of the Commissioner’s failure to timely
object, she became bound by the results of the submission of such supplemental I. The income, revenues and assets of non-stock, nonprofit educational institutions
evidence.63 proved to have been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes.
The CIR’s Comment on G.R. No. 198841 II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003
is valid.

56
 III. The CTA correctly admitted DLSU’s formal offer of supplemental evidence; and
IV. The CTA’s appreciation of evidence is conclusive unless the CTA is shown to have Third, while DLSU’s claim for tax exemption arises from and is based on the
manifestly overlooked certain relevant facts not disputed by the parties and Constitution, the Constitution, in the same provision, also imposes certain conditions
which, if properly considered, would justify a different conclusion. to avail of the exemption. We discuss below the import of the constitutional text vis-à-
The parties failed to convince the Court that the CTA overlooked or failed to vis the Commissioner’s counter-arguments.
consider relevant facts. We thus sustain the CTA En Banc’s findings that:
a. DLSU proved that a portion of its rental income was used actually, directly Fourth, there is a marked distinction between the treatment of non-stock, nonprofit
and exclusively for educational purposes; and educational institutions and proprietary educational institutions. The tax exemption
b. DLSU proved the payment of the DST through its bank’s online imprinting granted to non-stock, nonprofit educational institutions is conditioned only on the
machine. actual, direct and exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational institutions, these
I. The revenues and assets of non-stock, nonprofit educational institutions proved exemptions may be subject to limitations imposed by Congress.
to have been used actually, directly, and exclusively for educational purposes are
exempt from duties and taxes. As we explain below, the marked distinction between a non-stock, nonprofit and a
proprietary educational institution is crucial in determining the nature and extent of
DLSU rests it case on Article XIV, Section 4(3) of the 1987 Constitution, which reads: the tax exemption granted to non-stock, nonprofit educational institutions.
(3) All revenues and assets of non-stock, nonprofit educational institutions used
The Commissioner opposes DLSU’s claim for tax exemption on the basis of Section
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of such 30(H) of the Tax Code. The relevant text reads:
institutions, their assets shall be disposed of in the manner provided by law.
The following organizations shall not be taxed under this Title [Tax on Income] in respect
Proprietary educational institutions, including those cooperatively owned, may to income received by them as such:
likewise be entitled to such exemptions subject to xxxx
the limitations provided by lawincluding restrictions on dividends and provisions for (H) A non-stock and nonprofit educational institution
reinvestment. [underscoring and emphasis supplied] xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or personal,
Before fully discussing the merits of the case, we observe that: orfrom any of their activities conducted for profit regardless of the disposition made
of such income shall be subject to tax imposed under this Code. [underscoring and
First, the constitutional provision refers to two kinds of educational institutions: (1) emphasis supplied]
non-stock, nonprofit educational institutions and (2) proprietary educational
institutions.69 The Commissioner posits that the 1997 Tax Code qualified the tax exemption
granted to non-stock, nonprofit educational institutions such that the revenues and
Second, DLSU falls under the first category. Even the Commissioner admits the status income they derived from their assets, or from any of their activities conducted for profit,
of DLSU as a non-stock, nonprofit educational institution.70 are taxable even if these revenues and income are used for educational purposes.

57
 Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, nonprofit structured and chronologically graded learnings organized and provided by the formal
educational institutions? school system.76

We answer in the negative. The Court then significantly laid down the requisites for availing the tax exemption
While the present petition appears to be a case of first impression,71 the Court in under Article XIV, Section 4(3), namely: (1) the taxpayer falls under the
the YMCA case had in fact already analyzed and explained the meaning of Article XIV, classification non-stock, nonprofit educational institution; and (2) the income it
Section 4(3) of the Constitution. The Court in that case made doctrinal seeks to be exempted from taxation is used actually, directly and exclusively for
pronouncements that are relevant to the present case. educational purposes.77

The issue in YMCA was whether the income derived from rentals of real property We now adopt YMCA as precedent and hold that:
owned by the YMCA, established as a “welfare, educational and charitable nonprofit
corporation,” was subject to income tax under the Tax Code and the Constitution.72 1. The last paragraph of Section 30 of the Tax Code is without force and effect with
respect to non-stock, nonprofit educational institutions, provided, that the non-
The Court denied YMCA’s claim for exemption on the ground that as a charitable stock, nonprofit educational institutions prove that its assets and revenues are
institution falling under Article VI, Section 28(3) of the Constitution,73 the YMCA is not used actually, directly and exclusively for educational purposes.
tax-exempt per se; “what is exempted is not the institution itself. . . those exempted from 2. The tax-exemption constitutionally-granted to non-stock, nonprofit educational
institutions, is not subject to limitations imposed by law.
real estate taxesare lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes.”74
The tax exemption granted by the Constitution to non-stock, non- profit
educational institutions is conditioned only on the actual, direct and exclusive use
The Court held that the exemption claimed by the YMCA is expressly disallowed by
of their assets, revenues and income78 for educational purposes.
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates
that the income of exempt organizations from any of their properties, real or personal,
We find that unlike Article VI, Section 28(3) of the Constitution (pertaining to
are subject to the same tax imposed by the Tax Code, regardless of how that income is used. charitable institutions, churches, parsonages or convents, mosques, and nonprofit
The Court ruled that the last paragraph of Section 27 unequivocally subjects to tax the
cemeteries), which exempts from tax only the assets, i.e., “all lands, buildings, and
rent income of the YMCA from its property.75
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes. . .” Article XIV, Section 4(3)categorically states that
In short, the YMCA is exempt only from property tax but not from income tax.
“[a]ll revenues and assets . . . used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.”
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA
invoked the tax privilege granted under Article XIV, Section 4(3) of the Constitution.
The addition and express use of the word revenues in Article XIV, Section 4(3) of the
The Court denied YMCA’s claim that it falls under Article XIV, Section 4(3) of the Constitution is not without significance.
Constitution holding that the term educational institution, when used in laws granting tax
We find that the text demonstrates the policy of the 1987 Constitution, discernible
exemptions, refers to the school system (synonymous with formal education); it
from the records of the 1986 Constitutional Commission79 to provide broader tax
includes a college or an educational establishment; it refers to the hierarchically
58
privilege to non-stock, nonprofit educational institutions as recognition of their role in To be clear, proving the actual use of the taxable item will result in an exemption,
assisting the State provide a public good. The tax exemption was seen as beneficial to but the specific tax from which the entity shall be exempted from shall depend on
students who may otherwise be charged unreasonable tuition fees if not for the tax whether the item is an item of revenue or asset.
exemption extended to all revenues and assets of non-stock, nonprofit educational
institutions.80 To illustrate, if a university leases a portion of its school building to a bookstore or
Further, a plain reading of the Constitution would show that Article XIV, Section cafeteria, the leased portion is not actually, directly and exclusively used for educational
4(3) does not require that the revenues and income must have also been sourced from purposes, even if the bookstore or canteen caters only to university students, faculty and
educational activities or activities related to the purposes of an educational institution. staff.
The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so
long as the revenues and income are used actually, directly and exclusively for The leased portion of the building may be subject to real property tax, as held
educational purposes, then said revenues and income shall be exempt from taxes and in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from
duties. taxation is the use of the property for purposes mentioned in the Constitution. We also
held that the exemption extends to facilities which are incidental to and reasonably
We find it helpful to discuss at this point the taxation of revenues versus the taxation necessary for the accomplishment of the main purposes.
of assets.
In concrete terms, the lease of a portion of a school building for commercial purposes,
Revenues consist of the amounts earned by a person or entity from the conduct of removes such asset from the property tax exemption granted under the
business operations.82 It may refer to the sale of goods, rendition of services, or the return Constitution.91 There is no exemption because the asset is not used actually, directly and
of an investment. Revenue is a component of the tax base in income tax,83 VAT,84 and exclusively for educational purposes. The commercial use of the property is also not incidental
local business tax (LBT).85 to and reasonably necessary for the accomplishment of the main purpose of a university,
which is to educate its students.
Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in the However, if the university actually, directly and exclusively uses for educational
stocks of a corporation, inventory of goods, or any property from which the person or purposes the revenuesearned from the lease of its school building, such revenues shall be
entity may derive income or use to generate the same. In Philippine taxation, the fair exempt from taxes and duties. The tax exemption no longer hinges on the use of the
market value of real property is a component of the tax base in real property tax asset from which the revenues were earned, but on the actual, direct and exclusive use of the
(RPT).87 Also, the landed cost of imported goods is a component of the tax base in VAT revenues for educational purposes.
on importation88 and tariff duties.89
Parenthetically, income and revenues of non-stock, nonprofit educational
Thus, when a non-stock, nonprofit educational institution proves that it uses institution not used actually, directly and exclusively for educational purposes are not
its revenues actually, directly, and exclusively for educational purposes, it shall be exempt from duties and taxes. To avail of the exemption, the taxpayer must factually
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that prove that it used actually, directly and exclusively for educational purposes the
it uses its assets in the form of real property for educational purposes, it shall be revenues or income sought to be exempted.
exempted from RPT.

59
 The crucial point of inquiry then is on the use of the assets or on the use of the By the Tax Code’s clear terms, a proprietary educational institution is entitled only
revenues. These are two things that must be viewed and treated separately. But so long to the reduced rate of 10% corporate income tax. The reduced rate is applicable only if:
as the assets or revenues are used actually, directly and exclusively for educational purposes, they (1) the proprietary educational institution is nonprofit and (2) its gross income from
are exempt from duties and taxes. unrelated trade, business or activity does not exceed 50% of its total gross income.

The tax exemption granted by the Constitution to non-stock, non-profit Consistent with Article XIV, Section 4(3) of the Constitution, these limitations do
educational institutions, unlike the exemption that may be availed of by not apply to non-stock, nonprofit educational institutions.
proprietary educational institutions, is not subject to limitations imposed by law.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and
That the Constitution treats non-stock, nonprofit educational institutions effect for being contrary to the Constitution insofar as it subjects to tax the income and
differently from proprietary educational institutions cannot be doubted. As discussed, revenues of non-stock, nonprofit educational institutions used actually, directly and
the privilege granted to the former is conditioned only on the actual, direct and exclusive exclusively for educational purpose. We make this declaration in the exercise of and
use of their revenues and assets for educational purposes. In clear contrast, the tax consistent with our duty93 to uphold the primacy of the Constitution.94
privilege granted to the latter may be subject to limitations imposed by law.
Finally, we stress that our holding here pertains only to non-stock, nonprofit
We spell out below the difference in treatment if only to highlight the privileged educational institutions and does not cover the other exempt organizations under
status of non-stock, nonprofit educational institutions compared with their proprietary Section 30 of the Tax Code.
counterparts.
For all these reasons, we hold that the income and revenues of DLSU proven to have
While a non-stock, nonprofit educational institution is classified as a tax-exempt been used actually, directly and exclusively for educational purposes are exempt from
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a duties and taxes.
proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations). II. The LOA issued to DLSU is not entirely void. The assessment for taxable year
2003 is valid.
To be specific, Section 30 provides that exempt organizations like non-stock,
nonprofit educational institutions shall not be taxed on income received by them as DLSU objects to the CTA En Banc’s conclusion that the LOA is valid for taxable year
such. 2003 and insists that the entire LOA should be voided for being contrary to RMO No.
43-90, which provides that if tax audit includes more than one taxable period, the other
Section 27(B), on the other hand, states that “[p]roprietary educational institutions periods or years shall be specifically indicated in the LOA.
. . . which are nonprofit shall pay a tax of ten percent (10%) on their taxable income . .
. Provided, that if the gross income from unrelated trade, business or other activity A LOA is the authority given to the appropriate revenue officer to examine the books
exceeds fifty percent (50%) of the total gross income derived by such educational of account and other accounting records of the taxpayer in order to determine the
institutions . . . [the regular corporate income tax of 30%] shall be imposed on the entire taxpayer’s correct internal revenue liabilities95 and for the purpose of collecting the
taxable income. . .”92 correct amount of tax,96 in accordance with Section 5 of the Tax Code, which gives the
CIR the power to obtain information, to summon/examine, and take testimony of

60
persons. The LOA commences the audit process97 and informs the taxpayer that it is audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and
under audit for possible deficiency tax assessment. 2002 are void for having been unspecified on separate LOAs as required under RMO No.
43-90.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA’s findings of tax deficiency for Lastly, the Commissioner’s claim that DLSU failed to raise the issue of the LOA’s
taxable year 2003? validity at the CTA Division, and thus, should not have been entertained on appeal, is
We answer in the negative. not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA’s validity came up
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of during the trial.100 DLSU then raised the issue in its memorandum and motion for partial
which reads: reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc.
Thus, the CTA En Banc could, as it did, pass upon the validity of the LOA.101 Besides, the
3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable Commissioner had the opportunity to argue for the validity of the LOA at the CTA En
year. The practice of issuing [LOAs] covering audit of unverified prior years is hereby Banc but she chose not to file her comment and memorandum despite notice.102
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the [LOA].98
III. The CTA correctly admitted the supplemental evidence formally offered by
What this provision clearly prohibits is the practice of issuing LOAs covering audit DLSU.
of unverified prior years. RMO 43-90 does not say that a LOA which contains unverified
prior years is void. It merely prescribes that if the audit includes more than one taxable The Commissioner objects to the CTA Division’s admission of DLSU’s supplemental
period, the other periods or years must be specified. The provision read as a whole pieces of documentary evidence.
requires that if a taxpayer is audited for more than one taxable year, the BIR must specify
each taxable year or taxable period on separate LOAs. To recall, DLSU formally offered its supplemental evidence upon filing its motion for
reconsideration with the CTA Division.103 The CTA Division admitted the supplemental
Read in this light, the requirement to specify the taxable period covered by the LOA evidence, which proved that a portion of DLSU’s rental income was used actually,
is simply to inform the taxpayer of the extent of the audit and the scope of the revenue directly and exclusively for educational purposes. Consequently, the CTA Division
officer’s authority. Without this rule, a revenue officer can unduly burden the taxpayer reduced DLSU’s tax liabilities.
by demanding random accounting records from random unverified years, which may
include documents from as far back as ten years in cases of fraud audit.99 We uphold the CTA Division’s admission of the supplemental evidence on distinct
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the technical rules
Prior Years. The LOA does not strictly comply with RMO No. 43-90 because it includes of evidence.
unverified prior years. This does not mean, however, that the entire LOA is void.
First, the failure to object to the offered evidence renders it admissible, and the court
As the CTA correctly held, the assessment for taxable year 2003 is valid because this cannot, on its own, disregard such evidence.104
taxable period is specified in the LOA. DLSU was fully apprised that it was being

61
 The Court has held that if a party desires the court to reject the evidence offered, it We ruled that procedural rules should not bar courts from considering undisputed facts to
must so state in the form of a timely objection and it cannot raise the objection to the arrive at a just determination of a controversy.112
evidence for the first time on appeal.105 Because of a party’s failure to timely object, the
evidence offered becomes part of the evidence in the case. As a consequence, all the We applied the same reasoning in the subsequent cases of Filinvest Development
parties are considered bound by any outcome arising from the offer of evidence properly Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal Revenue v. PERF
presented.106 Realty Corporation,114 where the taxpayers also submitted the supplemental supporting
document only upon filing their motions for reconsideration.
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal Although the cited cases involved claims for tax refunds, we also dispense with the
offer of evidence despite notice.107The Commissioner objected to the admission of the
strict application of the technical rules of evidence in the present tax assessment case. If
supplemental evidence only when the case was on appeal to the CTA En Banc. By the
anything, the liberal application of the rules assumes greater force and significance in
time the Commissioner raised her objection, it was too late; the formal the case of a taxpayer who claims a constitutionally granted tax exemption. While the
offer, admissionand evaluation of the supplemental evidence were all fait accompli. taxpayers in the cited cases claimed refund of excess tax payments based on the Tax
Code,115 DLSU is claiming taxexemption based on the Constitution. If liberality is afforded
We clarify that while the Commissioner’s failure to promptly object had no bearing
to taxpayers who paid more than they should have under a statute, then with more
on the materiality or sufficiency of the supplemental evidence admitted, she was bound
reason that we should allow a taxpayer to prove its exemption from tax based on the
by the outcome of the CTA Division’s assessment of the evidence.108
Constitution.
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Hence, we sustain the CTA’s admission of DLSU’s supplemental offer of evidence not
Division’s admission of the formal offer of supplemental evidence, without prompt only because the Commissioner failed to promptly object, but more so because the strict
objection from the Commissioner, was thus justified. application of the technical rules of evidence may defeat the intent of the Constitution.

Notably, this Court had in the past admitted and considered evidence attached to IV. The CTA’s appreciation of evidence is generally binding on the Court unless
the taxpayers’ motion for reconsideration. compelling reasons justify otherwise.

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant It is doctrinal that the Court will not lightly set aside the conclusions reached by the
attached to its motion for reconsideration with the CTA its Final Adjustment Return. The CTA which, by the very nature of its function of being dedicated exclusively to the
Commissioner, as in the present case, did not oppose the taxpayer’s motion for resolution of tax problems, has developed an expertise on the subject, unless there has
reconsideration and the admission of the Final Adjustment Return.110 We thus admitted and been an abuse or improvident exercise of authority.116 We thus accord the findings of
gave weight to the Final Adjustment Returnalthough it was only submitted upon motion factby the CTA with the highest respect. These findings of facts can only be disturbed
for reconsideration. on appeal if they are not supported by substantial evidence or there is a showing of gross
error or abuse on the part of the CTA. In the absence of any clear and convincing proof
We held that while it is true that strict procedural rules generally frown upon the to the contrary, this Court must presume that the CTA rendered a decision which is
submission of documents after the trial, the law creating the CTA specifically provides valid in every respect.117
that proceedings before it shall not be governed strictly by the technical rules of
evidence111 and that the paramount consideration remains the ascertainment of truth. We sustain the factual findings of the CTA.
62
 Under the CTA Revised Rules, an Independent CPA’s functions include: (a)
The parties failed to raise credible basis for us to disturb the CTA’s findings that examination and verification of receipts, invoices, vouchers and other long accounts; (b)
DLSU had used actually, directly and exclusively for educational purposes a portion of reproduction of, and comparison of such reproduction with, and certification that the
its assessed income and that it had remitted the DST payments though an online same are faithful copies of original documents, and pre-marking of documentary
imprinting machine. exhibits consisting of voluminous documents; (c) preparation of schedules or
summaries containing a chronological listing of the numbers, dates and amounts
a. DLSU used actually, directly, and exclusively for educational purposes covered by receipts or invoices or other relevant documents and the amount(s) of taxes
a portion of its assessed income. paid; (d) making findings as to compliance with substantiation requirements under
pertinent tax laws, regulations and jurisprudence; (e) submission of a formal report
To see how the CTA arrived at its factual findings, we review the process with certification of authenticity and veracity of findings and conclusions in the
undertaken, from which it deduced that DLSU successfully proved that it used actually, performance of the audit; (f) testifying on such formal report; and (g) performing such
directly and exclusively for educational purposes a portion of its rental income. other functions as the CTA may direct.122

The CTA reduced DLSU’s deficiency income tax and VAT liabilities in view of the Based on the Independent CPA’s report and on its own appreciation of the evidence,
submission of the supplemental evidence, which consisted of statement of receipts, statement the CTA held that only the portion of the rental income pertaining to the substantiated
of disbursement and fund balance and statement of fund changes.118 disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was
considered as used actually, directly and exclusively for educational purposes.
These documents showed that DLSU borrowed P93.86 Million,119 which was used to Consequently, the unaccounted and unsubstantiated disbursements must be subjected
build the university’s Sports Complex. Based on these pieces of evidence, the CTA found to income tax and VAT.123
that DLSU’s rental income from its concessionaires were indeed transmitted and used
for the payment of this loan. The CTA held that the degree of preponderance of evidence The CTA then further reduced DLSU’s tax liabilities by cancelling the assessments for
was sufficiently met to prove actual, direct and exclusive use for educational purposes. taxable years 2001 and 2002 due to the defective LOA.124

The CTA also found that DLSU’s rental income from other concessionaires, which The Court finds that the above fact-finding process undertaken by the CTA shows
were allegedly deposited to a fund (CF-CPA Account),120 intended for the university’s that it based its ruling on the evidence on record, which we reiterate, were examined
capital projects, was not proved to have been used actually, directly and exclusively and verified by the Independent CPA. Thus, we see no persuasive reason to deviate from
for educational purposes. The CTA observed that “[DLSU] . . . failed to fully account these factual findings.
for and substantiate all the disbursements from the [fund].” Thus, the CTA “cannot
ascertain whether rental income from the [other] concessionaires was indeed used for However, while we generally respect the factual findingsof the CTA, it does not mean
educational purposes.”121 that we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU’s unsubstantiated rental income (i.e.,
To stress, the CTA’s factual findings were based on and supported by the report of income not proved to have been actually, directly and exclusively used for educational
the Independent CPA who reviewed, audited and examined the voluminous documents purposes).
submitted by DLSU.

63
 To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in amounts to P23,463,543.02 (Exhibit “LL-29-C”), the ratio of substantiated
taxable year 2003.125 DLSU earned this income from leasing a portion of its premises to: disbursements for fiscal year 2003 is 26.68% (P6,259,078.30/P23,463,543.02).
1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived
and 6) MTO Bookstore.126 at by multiplying the ratio of 26.68% with the total rent income added to and used in the
CF-CPA Account in the amount of P6,602,655.00 is P1,761,588.35.131(emphasis supplied)
To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was expended, viz.: 1) P4,007,724.00127 used to
pay the loan obtained by DLSU to build the Sports Complex; and For better understanding, we summarize the CTA’s computation as follows:
2) P6,602,655.00 transferred to the CF-CPA Account.128 1. The CTA subtracted the rent income used in the construction of the Sports
Complex (P4,007,724.00) from the rental income (P10,610,379.00) earned from
the above mentioned concessionaries. The difference (P6,602,655.00) was the
DLSU also submitted documents to the Independent CPA to prove that the
portion claimed to have been deposited to the CF-CPA Account.
P6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA’ findings, 2. The CTA then subtracted the supposed substantiated portion of CF-CPA
DLSU was able to substantiate disbursements from the CF-CPA Account amounting disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at the supposed
to P6,259,078.30. unsubstantiated portion of the rental income (P4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived
Contradicting the findings of the Independent CPA, the CTA concluded that out of by multiplying the rental income claimed to have been added to the CF-CPA
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus, subject Account (P6,602,655.00) by 26.68% or the ratio of substantiated disbursements
to income tax and VAT.129 to total disbursements(P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements
The CTA then concluded that the ratio of substantiated disbursements to the total from the CF-CPA Account as found by the Independent CPA (P6,259,078.30) by
disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%.130 The the total disbursements (P23,463,543.02) from the same account.
CTA held as follows:
We find that this system of calculation is incorrect and does not truly give effect to
However, as regards petitioner’s rental income from Alarey, Inc., Zaide Food Corp., Capri the constitutional grant of tax exemption to non-stock, nonprofit educational
International and MTO Bookstore, which were transmitted to the CF-CPA Account, institutions. The CTA’s reasoning is flawed because it required DLSU to substantiate
petitioner again failed to fully account for and substantiate all the disbursements from an amounT that is greater than the rental income deposited in the CF-CPA Account in
the CF-CPA Account; thus failing to prove that the rental income derived therein were 2003.
actually, directly and exclusively used for educational purposes. Likewise, the findings
of the Court-Commissioned Independent CPA show that the disbursements from the
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
CF-CPA Account for fiscal year 2003 amounts to P6,259,078.30 only. Hence, this portion
of the rental income, being the substantiated disbursements of the CF-CPA Account, proceeds of its rental income (which amounted to a total of P10.61 million)135 were used
was considered by the Special First Division as used actually, directly and exclusively for for educational purposes. This amount was divided into two parts: (a) the P4.01 million,
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is which was used to pay the loan obtained for the construction of the Sports Complex;
P6,259,078.3 (Exhibit “LL-25-C”), and the total disbursements per subsidiary ledger and (b) the P6.60 million,136 which was transferred to the CF-CPA account.

64
 For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 from the fact that the deposited funds were DLSU revenue funds that had been
million.137 These figures, read in light of the constitutional exemption, raises the confirmed and proven to have been actually and directly used for educational
question: does DLSU claim that the whole total CF-CPA disbursement of P23.46 purposes via the CF-CPA. That the CF-CPA might have had other sources of funding is
million is tax-exempt so that it is required to prove that all these disbursements irrelevant because the assessment in the present case pertains only to the rental income
had been made for educational purposes? which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA funds
used for educational purposes should not be prorated as part of its total CF-CPA
We answer in the negative. disbursements for purposes of crediting to DLSU is also logical because no claim
whatsoever had been made that the totality of the CF-CPA disbursements had been for
The records show that DLSU never claimed that the total CF-CPA disbursements of educational purposes. No prorating is necessary; to state the obvious, exemption is
P23.46 million had been for educational purposes and should thus be tax-exempt; DLSU based on actual and direct use and this DLSU has indisputably proven.
only claimed P10.61 million for tax-exemption and should thus be required to prove that
this amount had been used as claimed. Based on these considerations, DLSU should therefore be liable only for the
Of this amount, P4.01 had been proven to have been used for educational purposes, difference between what it claimed and what it has proven. In more concrete terms,
as confirmed by the Independent CPA. The amount in issue is therefore the balance of DLSU onlyhad to prove that its rental income for taxable year 2003 (P10,610,379.00) was
P6.60 million which was transferred to the CF-CPA which in turn made disbursements used for educational purposes. Hence, while the total disbursements from the CF-CPA
of P23.46 million for various general purposes, among them the P6.60 million transferred Account amounted to P23,463,543.02, DLSU only had to substantiate its P10.6 million
by DLSU. rental income, part of which was the P6,602,655.00 transferred to the CF-CPA account.
Of this latter amount, P6.259 million was substantiated to have been used for
Significantly, the Independent CPA confirmed that the CF-CPA made educational purposes.
disbursements for educational purposes in year 2003 in the amount P6.26 million. Based
on these given figures, the CTA concluded that the expenses for educational purposes To summarize, we thus revise the tax base for deficiency income tax and VAT for
that had been coursed through the CF-CPA should be prorated so that only the portion taxable year 2003 as follows:
that P6.26 million bears to the total CF-CPA disbursements should be credited to DLSU
for tax exemption. On DLSU’s argument that the CTA should have appreciated its evidence in the same
way as it did with the evidence submitted by Ateneo in another separate case, the CTA
explained that the issue in the Ateneo case was not the same as the issue in the present
This approach, in our view, is flawed given the constitutional requirement that case.
revenues actually and directly used for educational purposes should be tax-exempt. As
already mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
disbursement had been used for educational purposes; it only claims that P6.60 million income taxes and VAT under certain BIR and Department of Finance issuances 139 that
transferred to CF-CPA had been used for educational purposes. This was what DLSU required the educational institution to own and operate the canteens, or other commercial
needed to prove to have actually and directly used for educational purposes. enterprises within its campus, as condition for tax exemption. The CTA held that the
Constitution does not require the educational institution to own or operate these
That this fund had been first deposited into a separate fund (the CF-CPA established commercial establishments to avail of the exemption.
to fund capital projects) lends peculiarity to the facts of this case, but does not detract

65
 Given the lack of complete identity of the issues involved, the CTA held that it had
to evaluate the separate sets of evidence differently. The CTA likewise stressed that The final nail on the question of evidence is DLSU’s own admission that the original
DLSU and Ateneo gave distinct defenses and that its wisdom “cannot be equated on its of these documents had not in fact been produced before the CTA although it claimed that there
decision on two different cases with two different issues.” was no bad faith on its part.145 To our mind, this admission is a good indicator of how
the Ateneo and the DLSU cases varied, resulting in DLSU’s failure to substantiate a
DLSU disagrees with the CTA and argues that the entire assessment must be portion of its claimed exemption.
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo. We
reject DLSU’s argument for being non sequitur. Its reliance on the concept of uniformity Further, DLSU’s invocation of Section 5, Rule 130 of the Revised Rules on Evidence,
of taxation is also incorrect. that the contents of the missing supporting documents were proven by its recital in
some other authentic documents on record,146 can no longer be entertained at this late stage
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency of the proceeding. The CTA did not rule on this particular claim. The CTA also made no
and materiality of the evidence supporting their respective claims for tax exemption finding on DLSU’s assertion of lack of bad faith. Besides, it is not our duty to go over
would necessarily differ because their attendant issues and facts differ. these documents to test the truthfulness of their contents, this Court not being a trier
To state the obvious, the amount of income received by DLSU and by Ateneo during of facts.
the taxable years they were assessed varied. The amount of tax assessment also varied. Second, DLSU misunderstands the concept of uniformity of taxation.
The amount of income proven to have been used for educational purposes
also varied because the amount substantiated varied.142 Thus, the amount of tax assessment Equality and uniformity of taxation means that all taxable articles or kinds of
cancelled by the CTA varied. property of the same class shall be taxed at the same rate.147 A tax is uniform when it
operates with the same force and effect in every place where the subject of it is
On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for found.148 The concept requires that all subjects of taxation similarly situated should
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total be treated alike and placed in equal footing.149
deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was assessed
deficiency DST, while Ateneo was not. In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
them alike because their income proved to have been used actually, directly and
Thus, although both Ateneo and DLSU claimed that they used their rental income exclusively for educational purposes were exempted from taxes. The CTA equally
actually, directly and exclusively for educational purposes by submitting similar applied the requirements in the YMCA case to test if they indeed used their revenues for
evidence, e.g., the testimony of their employees on the use of university revenues, the educational purposes.
report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and revenues DLSU can only assert that the CTA violated the rule on uniformity if it can show
had indeed been used for educational purposes. that, despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes. That
The CTA significantly found that some documents that could have fully supported DLSU’s claim the DLSU secured a different result happened because it failed to fully prove that it used
were not produced in court. Indeed, the Independent CPA testified that some disbursements actually, directly and exclusively for educational purposes its revenues and income.
had not been proven to have been used actually, directly and exclusively for educational
purposes.144
66
 On this point, we remind DLSU that the rule on uniformity of taxation does not mean Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it
that subjects of taxation similarly situated are treated in literally the same way in all and was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that
every occasion. The fact that the Ateneo and DLSU are both non-stock, nonprofit handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in
educational institutions, does not mean that the CTA or this Court would similarly the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.
decide every case for (or against) both universities. Success in tax litigation, like in any
other litigation, depends to a large extent on the sufficiency of evidence. DLSU’s Thus, the Court sustains the finding of the CTA that DLSU proved the payment of
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax the assessed DST deficiency, except for the unpaid balance of P13,265.48.152
liabilities.
WHEREFORE, premises considered, we DENY the petition of the Commissioner
b. DLSU proved its payment of the DST. of Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
The CTA affirmed DLSU’s claim that the DST due on its mortgage and loan No. 622, except for the total amount of deficiency tax liabilities of De La Salle University,
transactions were paid and remitted through its bank’s On-Line Electronic DST Imprinting Inc., which had been reduced.
Machine. The Commissioner argues that DLSU is not allowed to use this method of
payment because an educational institution is excluded from the class of taxpayers who We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
can use the On-Line Electronic DST Imprinting Machine. and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
We sustain the findings of the CTA. The Commissioner’s argument lacks basis in thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of
both the Tax Code and the relevant revenue regulations. Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATIONthat the
base for the deficiency income tax and VAT for taxable year 2003 is P343,576.70.
DST on documents, loan agreements, and papers shall be levied, collected and paid
for by the person making, signing, issuing, accepting, or transferring the same.150 The Tax SO ORDERED.
Code provides that whenever one party to the document enjoys exemption from DST, ——o0o——
the other party not exempt from DST shall be directly liable for the tax. Thus, it is clear
that DST shall be payable by any party to the document, such that the payment and
compliance by one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks.
These agreements are subject to DST.151 For the purpose of showing that the DST on the
loan agreement has been paid, DLSU presented its agreements bearing the imprint
showing that DST on the document has been paid by the bank, its counterparty. The
imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be
further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST Imprinting
67
 G.R. No. 144104. June 29, 2004. * incidence of lung and pulmonary diseases in the Philippines. The raison d’etre for the creation of
LUNG CENTER OF THE PHILIPPINE vs.QUEZON CITY and CONSTANTINO P. the petitioner is stated in the decree, viz: x x x Hence, the medical services of the petitioner are
ROSAS, in his capacity as City Assessor of Quezon City to be rendered to the public in general in any and all walks of life including those who are poor
and the needy without discrimination. After all, any person, the rich as well as the poor, may fall
Taxation; Lung Center of the Philippines; Charitable Institutions; Test of Charitable Character; Words sick or be injured or wounded and become a subject of charity.
and Phrases; To determine whether an enterprise is a charitable institution/entity or not, the elements which
should be considered include the statute creating the enterprise, its corporate purpose, its constitution and by- Same; Same; Same; As a general principle, a charitable institution does not lose its character as such and
laws, the methods of administration, the nature of the actual work performed, the character of the services its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties; In the legal sense, a in the hospital, or receives subsidies from the government, so long as the money received is devoted or used
charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite altogether to the charitable object which it is intended to achieve, and no money inures to the private benefit of the
number of persons, either by bringing their minds and hearts under the influence of education or religion, by persons managing or operating the institution.—As a general principle, a charitable institution does
not lose its character as such and its exemption from taxes simply because it derives income
assisting them to establish themselves in life or otherwise lessening the burden of government. The test whether an
from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from
enterprise is charitable or not is whether it exists to carry out a purpose recognized in law as charitable or whether
the government, so long as the money received is devoted or used altogether to the charitable
it is maintained for gain, profit, or private advantage.—On the first issue, we hold that the petitioner is object which it is intended to achieve; and no money inures to the private benefit of the persons
a charitable institution within the context of the 1973 and 1987 Constitutions. To determine
managing or operating the institution. In Congregational Sunday School, etc. v. Board of Review, the
whether an enterprise is a charitable institution/entity or not, the elements which should be
State Supreme Court of Illinois held, thus: … [A]n institution does not lose its charitable
considered include the statute creating the enterprise, its corporate purposes, its constitution
character, and consequent exemption from taxation, by reason of the fact that those recipients
and by-laws, the methods of administration, the nature of the actual work performed, the
of its benefits who are able to pay are required to do so, where no profit is made by the institution
character of the services rendered, the indefiniteness of the beneficiaries, and the use and
and the amounts so received are applied in furthering its charitable purposes, and those benefits
occupation of the properties. In the legal sense, a charity may be fully defined as a gift, to be
are refused to none on account of inability to pay therefor. The fundamental ground upon which
applied consistently with existing laws, for the benefit of an indefinite number of persons, either
all exemptions in favor of charitable institutions are based is the benefit conferred upon the
by bringing their minds and hearts under the influence of education or religion, by assisting
public by them, and a consequent relief, to some extent, of the burden upon the state to care for
them to establish themselves in life or otherwise lessening the burden of government. It may be
and advance the interests of its citizens.
applied to almost anything that tend to promote the well-doing and well-being of social man. It
embraces the improvement and promotion of the happiness of man. The word “charitable” is not
Same; Same; Same; The Lung Center of the Philippines does not lose its character as a charitable institution
restricted to relief of the poor or sick. The test of a charity and a charitable organization are in
law the same. The test whether an enterprise is charitable or not is whether it exists to carry out simply because the gift or donation is in the form of subsidies granted by the government.—Under P.D. No.
a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as
advantage. a charitable institution simply because the gift or donation is in the form of subsidies granted
by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of
Same; Same; Same; The Lung Center of the Philippines was organized for the welfare and benefit of the Equalization of Salt Lake County: Second, the … government subsidy payments are provided to the
Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines; project. Thus, those payments are like a gift or donation of any other kind except they come from
Any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.— the government. In both Intermountain Health Careand the present case, the crux is the presence
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to or absence of material reciprocity. It is entirely irrelevant to this analysis that the government,
the provisions of the decree, is to be administered by the Office of the President of the rather than a private benefactor, chose to make up the deficit resulting from the exchange
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was between St. Mark’s Tower and the tenants by making a contribution to the landlord, just as it
organized for the welfare and benefit of the Filipino people principally to help combat the high would have been irrelevant in Intermountain Health Care if the patients’ income supplements had
come from private individuals rather than the government. Therefore, the fact that subsidization
68
of part of the cost of furnishing such housing is by the government rather than private charitable human mind. They are predicated upon one’s own voluntary act and not upon that of others.
contributions does not dictate the denial of a charitable exemption if the facts otherwise They proceed from the premise that the legislature would not have made specified enumeration
support such an exemption, as they do here. in a statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.
Same; Same; Same; Those portions of Lung Center’s real property that are leased to private entities are not
exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.— Same; Same; Same; Same; The exemption must not be so enlarged by construction.—The exemption
Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, must not be so enlarged by construction since the reasonable presumption is that the State has
that those portions of its real property that are leased to private entities are not exempt from granted in express terms all it intended to grant at all, and that unless the privilege is limited to
real property taxes as these are not actually, directly and exclusively used for charitable the very terms of the statute the favor would be intended beyond what was meant.
purposes.
Same; Same; Same; Same; The tax exemption under Section 28 (3), Article VI of the 1987 Constitution
Same; Same; Same; Statutory Construction; Taxation is the rule and exemption is the exception—the covers property taxes only.—Section 28(3), Article VI of the 1987 Philippine Constitution provides,
effect of an exemption is equivalent to an appropriation.—The settled rule in this jurisdiction is that laws thus: (3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in mosques, non-profit cemeteries, and all lands, buildings, and
favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an improvements, actually, directly and exclusively used for religious, charitable or educational
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments purposes shall be exempt from taxation. The tax exemption under this constitutional provision
must be clearly shown and based on language in the law too plain to be mistaken. As held covers propertytaxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
in Salvation Army v. Hoehn: An intention on the part of the legislature to grant an exemption from Constitutional Commission, explained: “. . . what is exempted is not the institution itself . . .;
the taxing power of the state will never be implied from language which will admit of any other those exempted from real estate taxes are lands, buildings and improvements actually, directly
reasonable construction. Such an intention must be expressed in clear and unmistakable terms, and exclusively used for religious, charitable or educational purposes.”
or must appear by necessary implication from the language used, for it is a well settled principle
that, when a special privilege or exemption is claimed under a statute, charter or act of Same; Same; Same; Same; Under the 1973 and the present Constitutions, for “lands, buildings, and
incorporation, it is to be construed strictly against the property owner and in favor of the public. improvements” of the charitable institution to be considered exempt, the same should not only be “exclusively”
This principle applies with peculiar force to a claim of exemption from taxation . … used for charitable purposes—it is required that such property be used “actually” and “directly” for such
purposes.—We note that under the 1935 Constitution, “. . . all lands, buildings, and improvements
Same; Same; Same; Same; It is plain as day that under P.D. 1823, the Lung Center of the Philippines does not used ‘exclusively’ for . . . charitable . . . purposes shall be exempt from taxation.” However, under
enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon.— the 1973 and the present Constitutions, for “lands, buildings, and improvements” of the
It is plain as day that under the decree (P.D. 1823), the petitioner does not enjoy any property tax charitable institution to be considered exempt, the same should not only be “exclusively” used
exemption privileges for its real properties as well as the building constructed thereon. If the intentions were for charitable purposes; it is required that such property be used “actually” and “directly” for
otherwise, the same should have been among the enumeration of tax exempt privileges under such purposes. In light of the foregoing substantial changes in the Constitution, the petitioner
Section 2: It is a settled rule of statutory construction that the express mention of one person, cannot rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was
thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took effect.
maxim, expressio unius est exclusio alterius. The rule of expressio unius est exclusio alterius is formulated
in a number of ways. One variation of the rule is the principle that what is expressed puts an Same; Same; Same; Same; Words and Phrases; If real property is used for one or more commercial purposes,
end to that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is it is not exclusively used for the exempted purposes but is subject to taxation—the words “dominant use” or
expressly limited to certain matters, it may not, by interpretation or construction, be extended “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitutions
to other matters. ... The rule of expressio unius est exclusio alterius and its variations are canons of and the law.—Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled
restrictive interpretation. They are based on the rules of logic and the natural workings of the to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a)
69
it is a charitable institution; and (b) its real properties in the middle of the aforesaid lot is a hospital known as the Lung Center of the
are ACTUALLY, DIRECTLY and EXCLUSIVELYused for charitable purposes. “Exclusive” is Philippines. A big space at the ground floor is being leased to private parties, for canteen
defined as possessed and enjoyed to the exclusion of others; debarred from participation or and small store spaces, and to medical or professional practitioners who use the same as
enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege their private clinics for their patients whom they charge for their professional services.
exclusively.” If real property is used for one or more commercial purposes, it is not exclusively Almost one-half of the entire area on the left side of the building along Quezon Avenue
used for the exempted purposes but is subject to taxation. The words “dominant use” or is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue
“principal use” cannot be substituted for the words “used exclusively” without doing violence
and Elliptical Road, is being leased for commercial purposes to a private enterprise
to the Constitutions and the law. Solely is synonymous with exclusively. What is meant by
actual, direct and exclusive use of the property for charitable purposes is the direct and known as the Elliptical Orchids and Garden Center.
immediate and actual application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property that is The petitioner accepts paying and non-paying patients. It also renders medical
determinative of whether the property is used for tax-exempt purposes. services to out-patients, both paying and non-paying. Aside from its income from paying
patients, the petitioner receives annual subsidies from the government.
Same; Same; Same; Portions of the land leased to private entities as well as those parts of Lung Center
leased to private individuals are not exempt from taxes but portions of the land occupied by the hospital and On June 7, 1993, both the land and the hospital building of the petitioner were
portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property assessed for real property taxes in the amount of P4,554,860 by the City Assessor of
taxes.—We hold that the portions of the land leased to private entities as well as those parts of Quezon City. Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-
3

the hospital leased to private individuals are not exempt from such taxes. On the other hand, 01231 (15-2518-A) were issued for the land and the hospital building, respectively. On 4

the portions of the land occupied by the hospital and portions of the hospital used for its August 25, 1993, the petitioner filed a Claim for Exemption from real property taxes
5

patients, whether paying or non-paying, are exempt from real property taxes. with the City Assessor, predicated on its claim that it is a charitable institution. The
petitioner’s request was denied, and a petition was, thereafter, filed before the Local
CALLEJO, SR., J.: Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of
the resolution of the City Assessor. The petitioner alleged that under Section 28,
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes.
amended, of the Decision dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No.
1
It averred that a minimum of 60% of its hospital beds are exclusively used for charity
57014which affirmed the decision of the Central Board of Assessment Appeals holding patients and that the major thrust of its hospital operation is to serve charity patients.
that the lot owned by the petitioner and its hospital building constructed thereon are The petitioner contends that it is a charitable institution and, as such, is exempt from
subject to assessment for purposes of real property tax. real property taxes. The QC-LBAA rendered judgment dismissing the petition and
holding the petitioner liable for real property taxes.6

The Antecedents
The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity Assessment Appeals of Quezon City (CBAA, for brevity) which ruled that the
7

established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the 2
petitioner was not a charitable institution and that its real properties were not actually,
registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, directly and exclusively used for charitable purposes; hence, it was not entitled to real
SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District, property tax exemption under the constitution and the law. The petitioner sought relief
Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer from the Court of Appeals, which rendered judgment affirming the decision of the
Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected CBAA. 8

70
 contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month,
Undaunted, the petitioner filed its petition in this Court contending that: when the monthly rental should be P357,000 a month as determined by the Commission
on Audit; and that instead of complying with the directive of the COA for the
1. A.THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED cancellation of the contract for being grossly prejudicial to the government, the
TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING petitioner renewed the same on March 13, 1995 for a monthly rental of only P24,000.
AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, They assert that the petitioner uses the subsidies granted by the government for charity
DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES. patients and uses the rest of its income from the property for the benefit of paying
2. B.WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT patients, among other purposes. They aver that the petitioner failed to adduce
UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE substantial evidence that 100% of its out-patients and 170 beds in the hospital are
EXTENDED UPON PROPER APPLICATION.
reserved for indigent patients. The respondents further assert, thus:
The petitioner avers that it is a charitable institution within the context of Section 13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service.
28(3), Article VI of the 1987 Constitution. It asserts that its character as a charitable That before a patient is admitted for treatment in the Center, first impression is that it is pay-
institution is not altered by the fact that it admits paying patients and renders medical patient and required to pay a certain amount as deposit. That even if a patient is living below
services to them, leases portions of the land to private parties, and rents out portions of the poverty line, he is charged with high hospital bills. And, without these bills being first
the hospital to private medical practitioners from which it derives income to be used for settled, the poor patient cannot be allowed to leave thE hospital or be discharged without first
operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of paying the hospital bills or issue a promissory note guaranteed and indorsed by an influential
its out-patients were charity patients and of the hospital’s 282-bed capacity, 60% agency or person known only to the Center; that even the remains of deceased poor patients
thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives suffered the same fate. Moreover, before a patient is admitted for treatment as free or charity
subsidies from the government attests to its character as a charitable institution. It patient, one must undergo a series of interviews and must submit all the requirements needed
by the Center, usually accompanied by endorsement by an influential agency or person known
contends that the “exclusivity” required in the Constitution does not necessarily mean
only to the Center. These facts were heard and admitted by the Petitioner LCP during the
“solely.” Hence, even if a portion of its real estate is leased out to private individuals from hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent
whom it derives income, it does not lose its character as a charitable institution, and its patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon
exemption from the payment of real estate taxes on its real property. The petitioner Institute. Can such practice by the Center be called charitable?10

cited our ruling in Herrera v. QC-BAA to bolster its pose. The petitioner further contends
9

that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is The Issues
not precluded from seeking tax exemption under the 1987 Constitution.
The issues for resolution are the following: (a) whether the petitioner is a charitable
In their comment on the petition, the respondents aver that the petitioner is not a institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
charitable entity. The petitioner’s real property is not exempt from the payment of real Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real
estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed properties of the petitioner are exempt from real property taxes.
to prove that it is a charitable institution and that the said property is actually, directly
and exclusively used for charitable purposes. The respondents noted that in a The Court’s Ruling
newspaper report, it appears that graft charges were filed with the Sandiganbayan
against the director of the petitioner, its administrative officer, and Zenaida Rivera, the The petition is partially granted.
proprietress of the Elliptical Orchids and Garden Center, for entering into a lease
71
 On the first issue, we hold that the petitioner is a charitable institution within the undertake research and training on the cure and prevention of lung diseases, through a Lung
context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a Center which will house and nurture the above and related activities and provide tertiary-level
charitable institution/entity or not, the elements which should be considered include care for more difficult and problematical cases;
the statute creating the enterprise, its corporate purposes, its constitution and by-laws, Whereas, to achieve this purpose, the Government intends to provide material and financial
the methods of administration, the nature of the actual work performed, the character support towards the establishment and maintenance of a Lung Center for the welfare and
benefit of the Filipino people.15

of the services rendered, the indefiniteness of the beneficiaries, and the use and
The purposes for which the petitioner was created are spelled out in its Articles of
occupation of the properties. 11

Incorporation, thus:
In the legal sense, a charity may be fully defined as a gift, to be applied consistently SECOND: That the purposes for which such corporation is formed are as follows:
with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to 1. 1.To construct, establish, equip, maintain, administer and conduct an integrated
establish themselves in life or otherwise lessening the burden of government. It may be
12
medical institution which shall specialize in the treatment, care, rehabilitation and/or
applied to almost anything that tend to promote the well-doing and well-being of social relief of lung and allied diseases in line with the concern of the government to assist
man. It embraces the improvement and promotion of the happiness of man. The word 13
and provide material and financial support in the establishment and maintenance of a
“charitable” is not restricted to relief of the poor or sick. The test of a charity and a
14 lung center primarily to benefit the people of the Philippines and in pursuance of the
charitable organization are in law the same. The test whether an enterprise is charitable policy of the State to secure the well-being of the people by providing them specialized
or not is whether it exists to carry out a purpose reorganized in law as charitable or health and medical services and by minimizing the incidence of lung diseases in the
whether it is maintained for gain, profit, or private advantage. country and elsewhere.
2. 2.To promote the noble undertaking of scientific research related to the prevention of
lung or pulmonary ailments and the care of lung patients, including the holding of a
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
series of relevant congresses, conventions, seminars and conferences;
subject to the provisions of the decree, is to be administered by the Office of the 3. 3.To stimulate and, whenever possible, underwrite scientific researches on the
President of the Philippines with the Ministry of Health and the Ministry of Human biological, demographic, social, economic, eugenic and physiological aspects of lung or
Settlements. It was organized for the welfare and benefit of the Filipino people pulmonary diseases and their control; and to collect and publish the findings of such
principally to help combat the high incidence of lung and pulmonary diseases in the research for public consumption;
Philippines. The raison d’etre for the creation of the petitioner is stated in the decree, viz.: 4. 4.To facilitate the dissemination of ideas and public acceptance of information on lung
consciousness or awareness, and the development of fact-finding, information and
Whereas, for decades, respiratory diseases have been a priority concern, having been the leading reporting facilities for and in aid of the general purposes or objects aforesaid, especially
cause of illness and death in the Philippines, comprising more than 45% of the total annual in human lung requirements, general health and physical fitness, and other relevant or
deaths from all causes, thus, exacting a tremendous toll on human resources, which ailments are related fields;
likely to increase and degenerate into serious lung diseases on account of unabated pollution, 5. 5.To encourage the training of physicians, nurses, health officers, social workers and
industrialization and unchecked cigarette smoking in the country; medical and technical personnel in the practical and scientific implementation of
Whereas, the more common lung diseases are, to a great extent, preventable, and curable services to lung patients;
with early and adequate medical care, immunization and through prompt and intensive 6. 6.To assist universities and research institutions in their studies about lung diseases, to
prevention and health education programs; encourage advanced training in matters of the lung and related fields and to support
Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies educational programs of value to general health;
and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to 7. 7.To encourage the formation of other organizations on the national, provincial and/or
city and local levels; and to coordinate their various efforts and activities for the
72
 purpose of achieving a more effective programmatic approach on the common benefit of the persons managing or operating the institution. In Congregational Sunday
18

problems relative to the objectives enumerated herein; School, etc. v. Board of Review, the State Supreme Court of Illinois held, thus:
19

1. 8.To seek and obtain assistance in any form from both international and local . . . [A]n institution does not lose its charitable character, and consequent exemption from
foundations and organizations; and to administer grants and funds that may be given taxation, by reason of the fact that those recipients of its benefits who are able to pay are
to the organization; required to do so, where no profit is made by the institution and the amounts so received are
2. 9.To extend, whenever possible and expedient, medical services to the public and, in applied in furthering its charitable purposes, and those benefits are refused to none on account
general, to promote and protect the health of the masses of our people, which has long of inability to pay therefor. The fundamental ground upon which all exemptions in favor of
been recognized as an economic asset and a social blessing; charitable institutions are based is the benefit conferred upon the public by them, and a
3. 10.To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies consequent relief, to some extent, of the burden upon the state to care for and advance the
of the people in any and all walks of life, including those who are poor and needy, all interests of its citizens.
20

without regard to or discrimination, because of race, creed, color or political belief of

the persons helped; and to enable them to obtain treatment when such disorders occur;
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
4. 11.To participate, as circumstances may warrant, in any activity designed and carried on
to promote the general health of the community; Association of South Dakota v. Baker:21

5. 12.To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and . . . [T]he fact that paying patients are taken, the profits derived from attendance upon these
distribute the same in such manner, and, on such basis as the Center shall, from time patients being exclusively devoted to the maintenance of the charity, seems rather to enhance
to time, deem proper and best, under the particular circumstances, to serve its general the usefulness of the institution to the poor; for it is a matter of common observation amongst
and non-profit purposes and objectives; those who have gone about at all amongst the suffering classes, that the deserving poor can with
6. 13.To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of
properties, whether real or personal, for purposes herein mentioned; and charity; and that their honest pride is much less wounded by being placed in an institution in
7. 14.To do everything necessary, proper, advisable or convenient for the accomplishment which paying patients are also received. The fact of receiving money from some of the patients
of any of the powers herein set forth and to do every other act and thing incidental does not, we think, at all impair the character of the charity, so long as the money thus received
thereto or connected therewith. 16 is devoted altogether to the charitable object which the institution is intended to further.22

Hence, the medical services of the petitioner are to be rendered to the public in general The money received by the petitioner becomes a part of the trust fund and must be
in any and all walks of life including those who are poor and the needy without devoted to public trust purposes and cannot be diverted to private profit or benefit. 23

discrimination. After all, any person, the rich as well as the poor, may fall sick or be
injured or wounded and become a subject of charity. 17 Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner
does not lose its character as a charitable institution simply because the gift or donation
As a general principle, a charitable institution does not lose its character as such and is in the form of subsidies granted by the government. As held by the State Supreme
its exemption from taxes simply because it derives income from paying patients, Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County: 24

whether out-patient, or confined in the hospital, or receives subsidies from the

government, so long as the money received is devoted or used altogether to the Second, the . . . government subsidy payments are provided to the project. Thus, those payments
are like a gift or donation of any other kind except they come from the government. In
charitable object which it is intended to achieve; and no money inures to the private
both Intermountain Health Care and the present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
73
private benefactor, chose to make up the deficit resulting from the exchange between St. Mark’s SEC. 2. TAX EXEMPTIONS AND PRIVILEGES.—Being a nonprofit, non-stock corporation
Tower and the tenants by making a contribution to the landlord, just as it would have been organized primarily to help combat the high incidence of lung and pulmonary diseases in the
irrelevant in Intermountain Health Care if the patients’ income supplements had come from private Philippines, all donations, contributions, endowments and equipment and supplies to be
individuals rather than the government. imported by authorized entities or persons and by the Board of Trustees of the Lung Center of
the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the and gift taxes, the same further deductible in full for the purpose of determining the maximum deductible amount
government rather than private charitable contributions does not dictate the denial of a under Section 30, paragraph (h), of the National Internal Revenue Code, as amended.
charitable exemption if the facts otherwise support such an exemption, as they do here. 25
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed
In this case, the petitioner adduced substantial evidence that it spent its income, by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases
including the subsidies from the government for 1991 and 1992 for its patients and for made by, or for the Lung Center.29

the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its
operations. It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
Even as we find that the petitioner is a charitable institution, we hold, anent the otherwise, the same should have been among the enumeration of tax exempt privileges
second issue, that those portions of its real property that are leased to private entities under Section 2:
are not exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes. It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
The settled rule in this jurisdiction is that laws granting exemption from tax are maxim, expressio unius est exclusio alterius.
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation
equivalent to an appropriation. Hence, a claim for exemption from tax payments must of the rule is the principle that what is expressed puts an end to that which is implied. Expressium
be clearly shown and based on language in the law too plain to be mistaken. As held 26 facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it
in Salvation Army v. Hoehn: 27 may not, by interpretation or construction, be extended to other matters.
...
An intention on the part of the legislature to grant an exemption from the taxing power of the The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
state will never be implied from language which will admit of any other reasonable construction. interpretation. They are based on the rules of logic and the natural workings of the human mind.
Such an intention must be expressed in clear and unmistakable terms, or must appear by They are predicated upon one’s own voluntary act and not upon that of others. They proceed
necessary implication from the language used, for it is a well settled principle that, when a from the premise that the legislature would not have made specified enumeration in a statute
special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to had the intention been not to restrict its meaning and confine its terms to those expressly
be construed strictly against the property owner and in favor of the public. This principle mentioned. 30

applies with peculiar force to a claim of exemption from taxation . . . .28

The exemption must not be so enlarged by construction since the reasonable

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically presumption is that the State has granted in express terms all it intended to grant at all,
provides that the petitioner shall enjoy the tax exemptions and privileges: and that unless the privilege is limited to the very terms of the statute the favor would
be intended beyond what was meant. 31

74
 Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: . . . Under the 1935 Constitution: “Cemeteries, churches, and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious,
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, charitable, or educational purposes shall be exempt from taxation.” The present Constitution
non-profit cemeteries, and all lands, buildings, and added “charitable institutions, mosques, and non-profit cemeteries” and required that for the
improvements, actually, directly and exclusively used for religious, charitable or educational exemption of “lands, buildings, and improvements,” they should not only be “exclusively” but
purposes shall be exempt from taxation. 32 also “actually” and “directly” used for religious or charitable purposes. The Constitution is
The tax exemption under this constitutional provision covers property taxes only. As 33
worded differently. The change should not be ignored. It must be duly taken into consideration.
Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Reliance on past decisions would have sufficed were the words “actually” as well as “directly”
Commission, explained: “. . . what is exempted is not the institution itself . . .; those not added. There must be proof therefore of the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be exempt from taxation . . .
exempted from real estate taxes are lands, buildings and improvements actually, directly
and exclusively used for religious, charitable or educational purposes.” 34
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that
Consequently, the constitutional provision is implemented by Section 234(b) of (a) it is a charitable institution; and (b) its real properties
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
follows:
“Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from
SECTION 234. Exemptions from Real Property Tax.—The following are exempted from payment of
participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as
the real property tax: enjoying a privilege exclu-sively.” If real property is used for one or more commercial
40

... purposes, it is not exclusively used for the exempted purposes but is subject to
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, taxation. The words “dominant use” or “principal use” cannot be substituted for the
41

non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, words “used exclusively” without doing violence to the Constitutions and the
and exclusively used for religious, charitable or educational purposes.
35 law. Solely is synonymous with exclusively.
42 43

We note that under the 1935 Constitution, “. . . all lands, buildings, and improvements What is meant by actual, direct and exclusive use of the property for charitable
used ‘exclusively’ for … charitable . . . purposes shall be exempt from taxation.” However,
36 purposes is the direct and immediate and actual application of the property itself to the
under the 1973 and the present Constitutions, for “lands, buildings, and improvements” purposes for which the charitable institution is organized. It is not the use of the income
of the charitable institution to be considered exempt, the same should not only be from the real property that is determinative of whether the property is used for tax-
“exclusively” used for charitable purposes; it is required that such property be used exempt purposes. 44

“actually” and “directly” for such purposes. 37

The petitioner failed to discharge its burden to prove that the entirety of its real
In light of the foregoing substantial changes in the Constitution, the petitioner property is actually, directly and exclusively used for charitable purposes. While
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was portions of the hospital are used for the treatment of patients and the dispensation of
promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took medical services to them, whether paying or non-paying, other portions thereof are
effect. As this Court held in Province of Abra v. Hernando:
38 39
being leased to private individuals for their clinics and a canteen. Further, a portion of
the land is being leased to a private individual for her business enterprise under the
business name “Elliptical Orchids and Garden Center.” Indeed, the petitioner’s evidence

75
shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from
the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from such
taxes. On the other hand, the portions of the land occupied by the hospital and portions
45

of the hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing,
the precise portions of the land and the area thereof which are leased to private persons,
and to compute the real property taxes due thereon as provided for by law. SO
ORDERED.

Notes.—It is settled that tax exemptions should be strictly construed against those
claiming to be qualified thereto. (Commissioner of Customs vs. Court of Tax Appeals, 328 SCRA
822 [2000])

The presumption of regularity does not apply to administrative proceedings

resulting in the deprivation of a citizen or a taxpayer of his property. (Requiron vs.
Sinaban, 398 SCRA 713 [2003])

——o0o——

76