G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J .:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with
law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959.
1
On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was
stamp received on the same day in the office of the petitioner.
2
On March 12, 1965, a warrant of distraint
and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest.
3
A search of the protest in the dockets of the
case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant.
4
On April 7, 1965, Atty. Guevara was finally informed that
the BIR was not taking any action on the protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served.
5
Sixteen days later, on April 23, 1965, Algue filed a petition
for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.
6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged.
7
It is true
that as a rule the warrant of distraint and levy is "proof of the finality of the assessment"
8
and renders
hopeless a request for reconsideration,"
9
being "tantamount to an outright denial thereof and makes the
said request deemed rejected."
10
But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted,"
11
the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period
had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income
12
but later conformed to the decision of the respondent court
rejecting this assertion.
13
In fact, as the said court found, the amount was earned through the joint efforts
of the persons among whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it.
14
Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties.
15
For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.
16

There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon.
17
The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved.
18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose.
19
It should be
remembered that this was a family corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to
be closed, each payee made an accounting of all of the fees received by him or her, to make up the total
of P75,000.00.
20
Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00.
21
After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit
from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ...
22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. .
. . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders.
23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J .:
What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
This question has been brought before this Court in the past. The parties are, in effect, asking for a
re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from
the payment of taxes. The pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring
all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v.
Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality
taxes from the payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come
within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with
the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on
the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by
the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at
bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks
of "registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law,
It is not held liable for a tax but for a registration fee. It therefore cannot make use of
a backpay certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition
of additional tax on privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30,
1969.) A special science fund was thereby created and its title expressly sets forth
that a tax on privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly specifies
the" Philippine tax."(Cooley to be paid as distinguished from the registration fee
under the Motor Vehicle Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation could by
subdivision the point be susceptible of the interpretation that a tax rather than a fee
was levied. What is thus most apparent is that where the legislative body relies on its
authority to tax it expressly so states, and where it is enacting a regulatory measure,
it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand,
held:
The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)
From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portionabout 5 per centumof the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides that
all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
principal functionsthe construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act
shall be imposed," thus implying that the charges therein imposedthough called
feesare of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which
reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other
competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law
(Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.Twenty per centum of the money
collected under the provisions of this Act shall accrue to the road and bridge funds of
the different provinces and chartered cities in proportion to the centum shall during
the next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and Communications
for projects recommended by the Director of Public Works in the different provinces
and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of
this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).
It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, thePhilippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:
Sec. 13. Payment of taxes upon registration.No original registration of motor
vehicles subject to payment of taxes, customs s duties or other charges shall be
accepted unless proof of payment of the taxes due thereon has been presented to
the Commission.
referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of regulation,
As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of
taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license
fees. Isabela such case, the fees may properly be regarded as taxes even though
they also serve as an instrument of regulation. If the purpose is primarily revenue, or
if revenue is at least one of the real and substantial purposes, then the exaction is
properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs.
4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of
1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali,
Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-
593).
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law
refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an
"additional" tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition
in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as
the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal
to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for
rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular
traffic exploded in number and motor vehicles became absolute necessities without which modem
life as we know it would stand still, Congress found the registration of vehicles a very convenient
way of raising much needed revenues. Without changing the earlier deputy. of registration payments
as "fees," their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant
to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of
government even if one fifth or less of the amount collected is set aside for the operating expenses
of the agency administering the program.
May the respondent administrative agency be required to refund the amounts stated in the complaint
of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448
dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative
franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July
11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%)
of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature,
or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby expressly
exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was
repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or general laws to the contrary
notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this
section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable
net income as are imposed by this section upon associations or
corporations engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that the
law intended all corporate taxpayers to pay income tax as provided by the statute.
There can be no doubt as to the power of Congress to repeal the earlier exemption it
granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of
the Constitution as amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and unambiguous.
There is a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the petition for
lack of merit. The decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights hereby granted, the grantee shall pay to
the Philippine Government during the lifetime of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail,
and freight revenues. from its outgoing flights shall be subject to this
law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of
all other taxes, duties, royalties, registration, license and other fees and charges of
any kind, nature or description imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government, agency, now or
in the future, including but not limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees
paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is
enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur.



G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.

CRUZ, J .:
On appeal before us is the decision of the Court of Tax Appeals
1
denying petitioner's claims for refund
of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and
1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York
head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of
P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the
additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as
overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have
been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of
the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the
margin fees were deductible from gross income either as a tax or as an ordinary and necessary
business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same
reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for
1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA
decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92
for 1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police
measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to
the Central Bank on its profit remittances to its New York head office should be deductible from
ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all
taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade,
business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history
of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax
on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-
1960. It was enacted by Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed
out that
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through
the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or
of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with,
and in any way connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a matter of
fact, there may be no resort to the legislative history of the enactment of a statute, the language of
which is plain and unambiguous, since such legislative history may only be resorted to for the
purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin
fee is not a tax but an exaction designed to curb the excessive demands upon our international
reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs,
2
the Court stated through Justice Jose P.
Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction
designed to discourage imports and encourage exports, and ultimately, 'curtail any
excessive demand upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures, exchange restrictions
have come to serve various purposes, such as limiting non-essential imports,
protecting domestic industry and when combined with the use of multiple currency
rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic
development programs. The different measures of exchange control or restriction
cover different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the case of
the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part of the
rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held the contrary
for the reason that a tax is levied to provide revenue for government operations, while the proceeds
of the margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank,
3
the
same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds of the 20% retention, as we
have seen, are applied to strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power
and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The
fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the conduct of its corporate
affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a trade or business; and
rentals or other payments required to be made as a condition to the continued use or
possession, for the purpose of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations.
In the case of a non-resident alien individual or a foreign corporation, the expenses
deductible are the necessary expenses paid or incurred in carrying on any business
or trade conducted within the Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue,
4
the Court laid down the rules on the deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must
be able to prove that he is entitled to the deduction which the law allows. As
previously adverted to, the law allowing expenses as deduction from gross income
for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue
which allows a deduction of 'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the statute, must fall
squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be
deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense
is ordinary and necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws,
no adequate or satisfactory definition of those terms is possible. Similarly, this Court
has never attempted to define with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles worthy of serious consideration in the
proper adjudication of conflicting claims. Ordinarily, an expense will be considered
'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal
in relation to the business of the taxpayer and the surrounding circumstances. The
term 'ordinary' does not require that the payments be habitual or normal in the sense
that the same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of
business in which the taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn
depends on the extent and permanency of the work accomplished by the
expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held
on this issue as follows:
Considering the foregoing test of what constitutes an ordinary and necessary
deductible expense, it may be asked: Were the margin fees paid by petitioner on its
profit remittance to its Head Office in New York appropriate and helpful in the
taxpayer's business in the Philippines? Were the margin fees incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were
the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in
the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not
expenses in connection with the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of said incomes;
expenses for the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income taxpayer.
x x x
Since the margin fees in question were incurred for the remittance of funds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never be
said therefore that the margin fees were appropriate and helpful in the development
of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively
or for the purpose of realizing a profit or of minimizing a loss in the Philippines
exclusively. If at all, the margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly
not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses
are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is
error. The public respondent is correct when it asserts that "the paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere equitable considerations ... .
The taxpayer in every instance has the burden of justifying the allowance of any deduction
claimed."
5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or
business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of
P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.

G.R. No. L-10448 August 30, 1957
IN THE MATTER OF A PETITION FOR DECLARATORY JUDGMENT REGARDING THE
VALIDITY OF MUNICIPAL ORDINANCE NO. 3659 OF THE CITY OF MANILA. PHYSICAL
THERAPY ORGANIZATION OF THE PHILIPPINES, INC., petitioner-appellant,
vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA and ARSENIO H. LACSON, as Mayor of
the City of Manila, respondents-appellees.
Mariano M. de Joya for appellant.
City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellees.
MONTEMAYOR, J .:
The petitioner-appellant, an association of registered massagists and licensed operators of massage
clinics in the City of Manila and other parts of the country, filed an action in the Court of First
Instance of Manila for declaratory judgment regarding the validity of Municipal Ordinance No. 3659,
promulgated by the Municipal Board and approved by the City Mayor. To stop the City from
enforcing said ordinance, the petitioner secured an injunction upon filing of a bond in the sum of
P1,000.00. A hearing was held, but the parties without introducing any evidence submitted the case
for decision on the pleadings, although they submitted written memoranda. Thereafter, the trial court
dismissed the petition and later dissolved the writ of injunction previously issued.
The petitioner appealed said order of dismissal directly to this Court. In support of its appeal,
petitioner-appellant contends among other things that the trial court erred in holding that the
Ordinance in question has not restricted the practice of massotherapy in massage clinics to hygienic
and aesthetic massage, that the Ordinance is valid as it does not regulate the practice of massage,
that the Municipal Board of Manila has the power to enact the Ordinance in question by virtue of
Section 18, Subsection (kk), Republic Act 409, and that permit fee of P100.00 is moderate and not
unreasonable. Inasmuch as the appellant assails and discuss certain provisions regarding the
ordinance in question, and it is necessary to pass upon the same, for purposes of ready reference,
we are reproducing said ordinance in toto.
ORDINANCE No. 3659
AN ORDINANCE REGULATING THE OPERATION OF MASSAGE CLINICS IN THE CITY
OF MANILA AND PROVIDING PENALTIES FOR VIOLATIONS THEREOF.
Be it ordained by the Municipal Board of the City of Manila, that:
Section 1. Definition. For the purpose of this Ordinance the following words and phrases
shall be taken in the sense hereinbelow indicated:
(a) Massage clinic shall include any place or establishment used in the practice of hygienic
and aesthetic massage;
(b) Hygienic and aesthetic massage shall include any system of manipulation of treatment of
the superficial parts of the human body of hygienic and aesthetic purposes by rubbing,
stroking, kneading, or tapping with the hand or an instrument;
(c) Massagist shall include any person who shall have passed the required examination and
shall have been issued a massagist certificate by the Committee of Examiners of Massagist,
or by the Director of Health or his authorized representative;
(d) Attendant or helper shall include any person employed by a duly qualified massagist in
any message clinic to assist the latter in the practice of hygienic and aesthethic massage;
(e) Operator shall include the owner, manager, administrator, or any person who operates or
is responsible for the operation of a message clinic.
SEC. 2. Permit Fees. No person shall engage in the operation of a massage clinic or in
the occupation of attendant or helper therein without first having obtained a permit therefor
from the Mayor. For every permit granted under the provisions of this Ordinance, there shall
be paid to the City Treasurer the following annual fees:
(a) Operator of a massage P100.00
(b) Attendant or helper 5.00
Said permit, which shall be renewed every year, may be revoked by the Mayor at any time
for the violation of this Ordinance.
SEC. 3. Building requirement. (a) In each massage clinic, there shall be separate rooms
for the male and female customers. Rooms where massage operations are performed shall
be provided with sliding curtains only instead of swinging doors. The clinic shall be properly
ventilated, well lighted and maintained under sanitary conditions at all times while the
establishment is open for business and shall be provided with the necessary toilet and
washing facilities.
(b) In every clinic there shall be no private rooms or separated compartment except those
assigned for toilet, lavatories, dressing room, office or kitchen.
(c) Every massage clinic shall "provided with only one entrance and it shall have no direct or
indirect communication whatsoever with any dwelling place, house or building.
SEC. 4. Regulations for the operation of massage clinics. (a) It shall be unlawful for any
operator massagist, attendant or helper to use, or allow the use of, a massage clinic as a
place of assignation or permit the commission therein of any incident or immoral act.
Massage clinics shall be used only for hygienic and aesthetic massage.
(b) Massage clinics shall open at eight o'clock a.m. and shall close at eleven o'clock p.m.
(c) While engaged in the actual performance of their duties, massagists, attendants and
helpers in a massage clinic shall be as properly and sufficiently clad as to avoid suspicion of
intent to commit an indecent or immoral act;
(d) Attendants or helpers may render service to any individual customer only for hygienic and
aesthetic purposes under the order, direction, supervision, control and responsibility of a
qualified massagist.
SEC. 5. Qualifications No person who has previously been convicted by final judgment of
competent court of any violation of the provisions of paragraphs 3 and 5 of Art. 202 and Arts.
335, 336, 340 and 342 of the Revised Penal Code, or Secs. 819 of the City of Manila, or who
is suffering from any venereal or communicable disease shall engage in the occupation of
massagist, attendant or helper in any massage clinic. Applicants for Mayor's permit shall
attach to their application a police clearance and health certificate duly issued by the City
Health Officers as well as a massagist certificate duly issued by the Committee or Examiners
for Massagists or by the Director of Health or his authorized representatives, in case of
massagists.
SEC. 6. Duty of operator of massage clinic. No operator of massage clinic shall allow
such clinic to operate without a duly qualified massagist nor allow, any man or woman to act
as massagist, attendant or helper therein without the Mayor's permit provided for in the
preceding sections. He shall submit whenever required by the Mayor or his authorized
representative the persons acting as massagists, attendants or helpers in his clinic. He shall
place the massage clinic open to inspection at all times by the police, health officers, and
other law enforcement agencies of the government, shall be held liable for anything which
may happen with the premises of the massage clinic.
SEC. 7. Penalty. Any person violating any of the provisions of this Ordinance shall upon
conviction, be punished by a fine of not less than fifty pesos nor more than two hundred
pesos or by imprisonment for not less than six days nor more than six months, or both such
fine and imprisonment, at the discretion of the court.
SEC. 8. Repealing Clause. All ordinances or parts of ordinances, which are inconsistent
herewith, are hereby repealed.
SEC. 9. Effectivity. This Ordinance shall take effect upon its approval.
Enacted, August 27, 1954.
Approved, September 7, 1954.
The main contention of the appellant in its appeal and the principal ground of its petition for
declaratory judgment is that the City of Manila is without authority to regulate the operation of
massagists and the operation of massage clinics within its jurisdiction; that whereas under the Old
City Charter, particularly, Section 2444 (e) of the Revised Administrative Code, the Municipal Board
was expressly granted the power to regulate and fix the license fee for the occupation of massagists,
under the New Charter of Manila, Republic Act 409, said power has been withdrawn or omitted and
that now the Director of Health, pursuant to authority conferred by Section 938 of the Revised
Administrative Code and Executive Order No. 317, series of 1941, as amended by Executive Order
No. 392, series, 1951, is the one who exercises supervision over the practice of massage and over
massage clinics in the Philippines; that the Director of Health has issued Administrative Order No.
10, dated May 5, 1953, prescribing "rules and regulations governing the examination for admission
to the practice of massage, and the operation of massage clinics, offices, or establishments in the
Philippines", which order was approved by the Secretary of Health and duly published in the Official
Gazette; that Section 1 (a) of Ordinance No. 3659 has restricted the practice of massage to only
hygienic and aesthetic massage prohibits or does not allow qualified massagists to practice
therapeutic massage in their massage clinics. Appellant also contends that the license fee of
P100.00 for operator in Section 2 of the Ordinance is unreasonable, nay, unconscionable.
If we can ascertain the intention of the Manila Municipal Board in promulgating the Ordinance in
question, much of the objection of appellant to its legality may be solved. It would appear to us that
the purpose of the Ordinance is not to regulate the practice of massage, much less to restrict the
practice of licensed and qualified massagists of therapeutic massage in the Philippines. The end
sought to be attained in the Ordinance is to prevent the commission of immorality and the practice of
prostitution in an establishment masquerading as a massage clinic where the operators thereof offer
to massage or manipulate superficial parts of the bodies of customers for hygienic and aesthetic
purposes. This intention can readily be understood by the building requirements in Section 3 of the
Ordinance, requiring that there be separate rooms for male and female customers; that instead of
said rooms being separated by permanent partitions and swinging doors, there should only be
sliding curtains between them; that there should be "no private rooms or separated compartments,
except those assigned for toilet, lavatories, dressing room, office or kitchen"; that every massage
clinic should be provided with only one entrance and shall have no direct or indirect communication
whatsoever with any dwelling place, house or building; and that no operator, massagists, attendant
or helper will be allowed "to use or allow the use of a massage clinic as a place of assignation or
permit the commission therein of any immoral or incident act", and in fixing the operating hours of
such clinic between 8:00 a.m. and 11:00 p.m. This intention of the Ordinance was correctly
ascertained by Judge Hermogenes Concepcion, presiding in the trial court, in his order of dismissal
where he said: "What the Ordinance tries to avoid is that the massage clinic run by an operator who
may not be a masseur or massagista may be used as cover for the running or maintaining a house
of prostitution."
Ordinance No. 3659, particularly, Sections 1 to 4, should be considered as limited to massage clinics
used in the practice of hygienic and aesthetic massage. We do not believe that Municipal Board of
the City of Manila and the Mayor wanted or intended to regulate the practice of massage in general
or restrict the same to hygienic and aesthetic only.
As to the authority of the City Board to enact the Ordinance in question, the City Fiscal, in
representation of the appellees, calls our attention to Section 18 of the New Charter of the City of
Manila, Act No. 409, which gives legislative powers to the Municipal Board to enact all ordinances it
may deem necessary and proper for the promotion of the morality, peace, good order, comfort,
convenience and general welfare of the City and its inhabitants. This is generally referred to as the
General Welfare Clause, a delegation in statutory form of the police power, under which municipal
corporations, are authorized to enact ordinances to provide for the health and safety, and promote
the morality, peace and general welfare of its inhabitants. We agree with the City Fiscal.
As regards the permit fee of P100.00, it will be seen that said fee is made payable not by the
masseur or massagist, but by the operator of a massage clinic who may not be a massagist himself.
Compared to permit fees required in other operations, P100.00 may appear to be too large and
rather unreasonable. However, much discretion is given to municipal corporations in determining the
amount of said fee without considering it as a tax for revenue purposes:
The amount of the fee or charge is properly considered in determining whether it is a tax or
an exercise of the police power. The amount may be so large as to itself show that the
purpose was to raise revenue and not to regulate, but in regard to this matter there is a
marked distinction between license fees imposed upon useful and beneficial occupations
which the sovereign wishes to regulate but not restrict, and those which are inimical and
dangerous to public health, morals or safety. In the latter case the fee may be very large
without necessarily being a tax. (Cooley on Taxation, Vol. IV, pp. 3516-17; underlining
supplied.)
Evidently, the Manila Municipal Board considered the practice of hygienic and aesthetic massage
not as a useful and beneficial occupation which will promote and is conducive to public morals, and
consequently, imposed the said permit fee for its regulation.
In conclusion, we find and hold that the Ordinance in question as we interpret it and as intended by
the appellees is valid. We deem it unnecessary to discuss and pass upon the other points raised in
the appeal. The order appealed from is hereby affirmed. No costs.
Paras, C.J., Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia and Felix, JJ., concur.

G.R. No. L-17725 February 28, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.
Office of the Solicitor General for plaintiff-appellee.
Arthur Tordesillas for defendants-appellants.
BARRERA, J .:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay
to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of
the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company
interposed the present appeal.
1

The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under
the first cause of action, for forest charges covering the period from September 10, 1952 to
May 24, 1953, defendants admitted that they have a liability of P587.37, which liability is
covered by a bond executed by defendant General Insurance & Surety Corporation for
Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor of
herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and
several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants admitted a joint
and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20,
1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of
plaintiff in the amount already mentioned is admitted, then what is the defense interposed by
the defendants? The defense presented by the defendants is quite unusual in more ways
than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for
'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948,
said defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'.
These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115
which provides that there shall be collected, in addition to the regular forest charges provided
under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code,
the amount of P0.50 on each cubic meter of timber... cut out and removed from any public
forest for commercial purposes. The amount collected shall be expended by the director of
forestry, with the approval of the secretary of agriculture and commerce, for reforestation and
afforestation of watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the
Philippines has not made use of those reforestation charges collected from it for reforesting
the denuded area of the land covered by its license, the Republic of the Philippines should
refund said amount, or, if it cannot be refunded, at least it should be compensated with what
Mambulao Lumber Company owed the Republic of the Philippines for reforestation charges.
In line with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant
requested "that our account with your bureau be credited with all the reforestation charges
that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to around
P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by the
director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry
quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend
the time for paying the reforestation charges and also explained why not all denuded areas
are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-
appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or
applied to the payment of the sum of P4,802.37 as forest charges due and owing from appellant to
appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or may be applied in
compensation of said sum of P4,802.37 due from it as forest charges.1wph 1. t
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for
under Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred
Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on
each cubic meter of timber for the first and second groups and forty centavos for the third
and fourth groups cut out and removed from any public forest for commercial purposes. The
amount collected shall be expended by the Director of Forestry, with the approval of the
Secretary of Agriculture and Natural Resources (commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within forest
reserves, communal forest, national parks, timber lands, sand dunes, and other public forest
lands, which upon investigation, are found needing reforestation or afforestation, or needing
to be under forest cover for the growing of economic trees for timber, tanning, oils, gums,
and other minor forest products or medicinal plants, or for watersheds protection, or for
prevention of erosion and floods and preparation of necessary plans and estimate of costs
and for reconnaisance survey of public forest lands and for such other expenses as may be
deemed necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived from
plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to
be expended exclusively in carrying out the purposes provided for under this Act. All
provincial or city treasurers and their deputies shall act as agents of the Director of Forestry
for the collection of the revenues or incomes derived from the provisions of this Act.
(Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from a
timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and
that the same shall be expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among others, of denuded
areas which, upon investigation, are found to be needing reforestation or afforestation. Note that
there is nothing in the law which requires that the amount collected as reforestation charges should
be used exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to him. Observe too, that the
licensee's area may or may not be reforested at all, depending on whether the investigation thereof
by the Director of Forestry shows that said area needs reforestation. The conclusion seems to be
that the amount paid by a licensee as reforestation charges is in the nature of a tax which forms a
part of the Reforestation Fund, payable by him irrespective of whether the area covered by his
license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying
out the purposes provided for thereunder, namely, the reforestation or afforestation, among others,
of denuded areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code
2
is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this
case, appellant and appellee are not mutually creditors and debtors of each other. Consequently, the
law on compensation is inapplicable. On this point, the trial court correctly observed: .
Under Article 1278, NCC, compensation should take place when two persons in their own
right are creditors and debtors of each other. With respect to the forest charges which the
defendant Mambulao Lumber Company has paid to the government, they are in the coffers
of the government as taxes collected, and the government does not owe anything, crystal
clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who
is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental purposes.
The reason on which the general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called
upon by the Collector, because he has a claim against the governmental body which is not
included in the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide
the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown
into great confusion. (47 Am. Jur. 766-767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with
costs against the defendant-appellant. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and
De Leon, JJ., concur.

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

GUTIERREZ, JR., J .:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section
73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00
as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW
IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS
ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977
TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE
THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that
his property was sold at public auction without notice to him and that the price paid for the property
was shockingly inadequate, amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the
facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as
of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:
(1) that each one of the obligors be bound principally and that he be at the same time
a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes
levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of individual taxpayers is not
required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was followed.
... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore
rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p.
18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by
proof and thegeneral rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction
sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown
by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As
long as there was substantial compliance with the requirements of the notice, the
validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho
Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?
A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to court
assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy
of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation
Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo
Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of
price is not material when the law gives the owner the right to redeem as when a sale is made at
public auction, upon the theory that the lesser the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold
are unconscionable considering the wide divergence between their assessed values
and the amounts for which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify
the courts to interfere, such does not follow when the law gives to the owner the right
to redeem, as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price
obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is
stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price for
the land were essential to the sale, it would be useless to offer the property. Indeed,
it is notorious that the prices habitually paid by purchasers at tax sales are grossly
out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307,
73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):
Like most cases of this character there is here a certain element of hardship from
which we would be glad to relieve, but do so would unsettle long-established rules
and lead to uncertainty and difficulty in the collection of taxes which are the life blood
of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no
strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14
years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale
without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on
November 3, 1978, during the period of redemption, regarding his tax delinquency. There is
furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez.
The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision
of the respondent court is affirmed.
SO ORDERED.

G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott
Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J .:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of
Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an
order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court
of First Instance of Leyte in, special 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 petition dated June 21, 1961, to the court below for the execution of the judgment. The petition
was, however, denied by the court which held that the execution is not justifiable as the Government
is indebted to the estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated
December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract 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 in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order
of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)
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
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 its accounts to
its citizens-creditors before it can insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September
28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to
settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for
the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs.
Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of real property of the deceased
and all debts or expenses of administrator and with the written notice to all the heirs legatees
and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made, the regulations contained
in Rule 90, section 7, should be complied with.1wph 1. t
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 mayissue execution if
circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
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 the 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 demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against
the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
Bengzon, C.J., took no part.

G.R. No. 117359 July 23, 1998

DAVAO GULF LUMBER CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.



PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the government. Otherwise stated, any exemption from
the payment of a tax

must be clearly stated in the language of the law; it cannot be merely implied therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review under Rule 45 of the Rules
of Court, assailing the Decision 1 of Respondent Court of Appeals 2 in CA-GR SP No. 34581 dated
September 26, 1994,

which affirmed the June 21, 1994 Decision 3 of the Court of Tax Appeals 4 in CTA Case No. 3574.
The dispositive portion of the CTA Decision affirmed by Respondent Court reads:

WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner the
amount of P2,923.15 representing the partial refund of specific taxes paid on manufactured oils and
fuels. 5

The Antecedent Facts

The facts are undisputed. 6 Petitioner is a licensed forest concessionaire possessing a Timber
License Agreement granted by the Ministry of Natural Resources (now Department of Environment
and Natural Resources). From

July 1, 1980 to January 31, 1982 petitioner purchased, from various oil companies, refined and
manufactured mineral oils as well as motor and diesel fuels, which it used exclusively for the
exploitation and operation of its

forest concession. Said oil companies paid the specific taxes imposed, under Sections 153 and 156
7 of the 1977 National Internal Revenue Code (NIRC), on the sale of said products. Being included
in the purchase price of the

oil products, the specific taxes paid by the oil companies were eventually passed on to the user, the
petitioner in this case.

On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue (CIR)
a claim for refund in the amount of P120,825.11, representing 25% of the specific taxes actually paid
on the above-

mentioned fuels and oils that were used by petitioner in its operations as forest concessionaire. The
claim was based on Insular Lumber Co. vs. Court of Tax Appeals 8 and Section 5 of RA 1435 which
reads:

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge
funds of the political subdivision for whose benefit the tax is collected: Provided, however, That
whenever any oils

mentioned above are used by miners or forest concessionaires in their operations, twenty-five per
centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon
submission of proof of

actual use of oils and under similar conditions enumerated in subparagraphs one and two of section
one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided,
further, That no new road

shall be constructed unless the routes or location thereof shall have been approved by the
Commissioner of Public Highways after a determination that such road can be made part of an
integral and articulated route in the

Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.

It is an unquestioned fact that petitioner complied with the procedure for refund, including the
submission of proof of the actual use of the aforementioned oils in its forest concession as required
by the above-quoted law.

Petitioner, in support of its claim for refund, submitted to the CIR the affidavits of its general
manager, the president of the Philippine Wood Products Association, and three disinterested
persons, all attesting that the said

manufactured diesel and fuel oils were actually used in the exploitation and operation of its forest
concession.

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case No.
3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to a partial refund
of specific taxes the latter

had paid in the reduced amount of P2,923.15. The CTA ruled that the claim on purchases of
lubricating oil (from July 1, 1980 to January 19, 1981) and on manufactured oils other than
lubricating oils (from July 1, 1980 to

January 4, 1981) had prescribed. Disallowed on the ground that they were not included in the
original claim filed before the CIR were the claims for refund on purchases of manufactured oils from
January 1, 1980 to June 30,

1980 and from February 1, 1982 to June 30, 1982. In regard to the other purchases, the CTA
granted the claim, but it computed the refund based on rates deemed paid under RA 1435, and not
on the higher rates actualhy

paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased rates prescribed by
Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of Appeals. As noted
earlier, the Court of Appeals

affirmed the CTA Decision. Hence, this petition for review. 9

Public Respondent's Ruling

In its petition before the Court of Appeals, petitioner raised the following arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme Court's Decision in Insular
Lumber Co. v. Court of Tax Appeals which granted the claim for partial refund of specific taxes paid
by the claimant, without

qualification or limitation.

II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding
amendatory laws,under which the petitioner paid the specific taxes on manufactured and diesel
fuels.

III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of
law when it lent itself to interpreting Section 5 of R.A. 1435, when the construction of said law is not
necessary.

IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather,
Sections 153 and 156 of the National Internal Revenue Code, as amended.

V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of
R.A. 1435 rather than Section 153 and 156 of the National Internal Revenue Code is unfair,
erroneous, arbitrary, inequitable

and oppressive. 10

The Court of Appeals held that the claim for refund should indeed be computed on the basis of the
amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited our pronouncement
in Commissioner of

Internal Revenue v. Rio Tuba Nickel Mining Corporation 11 and subsequent Resolution dated June
15, 1992 clarifying the said Decision. Respondent Court further ruled that the claims for refund which
prescribed and those

which were not filed at the administrative level must be excluded.

The Issue

In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the amount
of specific taxes it actually paid on various refined and manufactured mineral oils and other oil
products taxed under Sec.

153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal Revenue Code.
12

In the main, the question before us pertains only to the computation of the tax refund. Petitioner
argues that the refund should be based on the increased rates of specific taxes which it actually
paid, as prescribed in Sections

153 and 156 of the NIRC. Public respondent, on the other hand, contends that it should be based on
specific taxes deemed paid under Sections 1 and 2 of RA 1435.

The Court's Ruling

The petition is not meritorious.

Petitioner Entitled to Refund

Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5 of RA
1435, which was enacted to provide means for increasing the Highway Special Fund.

The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured
diesel and fuel oils rests on the character of the Highway Special Fund. The specific taxes collected
on gasoline and fuel accrue to

the Fund, which is to be used for the construction and maintenance of the highway system. But
because the gasoline and fuel purchased by mining and lumber concessionaires are used within
their own compounds and

roads, and their vehicles seldom use the national highways, they do not directly benefit from the
Fund and its use. Hence, the tax refund gives the mining and the logging companies a measure of
relief in light of their peculiar

situation. 13 When the Highway Special Fund was abolished in 1985, the reason for the refund
likewise ceased to exist. 14 Since petitioner purchased the subject manufactured diesel and fuel oils
from July 1, 1980 to January

31, 1982 and submitted the required proof that these were actually used in operating its forest
concession, it is entitled to claim the refund under Section 5 of RA 1435.

Tax Refund Strictly Constrtued

Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually
paid for the petroleum products used in its operations. In other words, it claims a refund based on
the increased rates under

Sections 153 and 156 of the NIRC. 15 Petitioner argues that the statutory grant of the refund
privilege, specifically the phrase "twenty-five per centum of the specific tax paid thereon shall be
refunded by the Collector of

Internal Revenue," is "clear and unambiguous" enough to require construction or qualification
thereof. 16 In addition, it cites our pronouncement in Insular Lumber vs. Court of Tax Appeals: 17

. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the purpose
of prescribing the procedure for refund. This express reference cannot be expanded in scope to
include the limitation of the

period of refund. If the limitation of the period of refund of specific taxes paid on oils used in aviation
and agriculture is intended to cover similar taxes paid on oil used by miners and forest
concessionaires, there would have

been no need of dealing with oil used by miners and forest concessions separately and Section 5
would very well have been included in Section 1 of Republic Act No. 1435, notwithstanding the
different rate of exemption.

Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5 cannot be
expanded to include a limitation on the tax rates to be applied . . . [otherwise,] Section 5 should very
well have been included in

Section 1 . . . ." 18

The Court is nor persuaded. The relevant statutory provisions do not clearly support petitioner's
claim for refund. RA 1435 provides:

Sec. 1 Section one hundred and forty-two of the National Internal Revenue Code, as amended, is
further amended to read as follows:

Sec. 142. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes:

(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos;

(b) Lubricating oils, per liter of volume capacity, seven centavos;

(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity,
eight centavos; and

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:
Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which has already
been paid, only the

alcohol content shall be subject to the tax herein prescribed. For the purpose of this subsection, the
removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum
absolute alcohol) shall

be deemed to have been removed for motive power, unless shown to the contrary.

Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen
hundred and fifty two, used in agriculture and aviation, fifty per centum of the specific tax paid
thereon shall be refunded by

the Collector of Internal Revenue upon the submission of the following:

(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils
were actually used in agriculture, or in lieu thereof.

(2) Should the producer belong to any producers' association or federation, duly registered with the
Securities and Exchange Commission, the affidavit of the president of the association or federation,
attesting to the fact that

the oils were actually used in agriculture.

(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the
said oils were actually used in aviation: Provided, That no such refunds shall be granted in respect to
the oils used in aviation

by citizens and corporations of foreign countries which do not grant equivalent refunds or
exemptions in respect to similar oils used in aviation by citizens and corporations of the Philippines.

Sec. 2 Section one hundred and forty-five of the National Internal Revenue Code, as amended, is
further amended to read as follows:

Sec. 145. Specific Tax on Diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and on all similar fuel oils, having more or less the same generating power, there shall be collected,
per metric ton, one peso.

xxx xxx xxx

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge
funds of the political subdivision for whose benefit the tax is collected: Provided, however, That
whenever any oils

mentioned above are used by miners or forest concessionaires in their operations, twenty-five per
centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon
submission of proof of

actual use of oils and under similar conditions enumerated in subparagraphs one and two of section
one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided,
further, That no new road

shall be constructed unless the route or location thereof shall have been approved by the
Commissioner of Public Highways after a determination that such road can be made part of an
integral and articulated route in the

Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.

Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions, renumbering
them and prescribing higher rates. Accordingly, petitioner paid specific taxes on petroleum products
purchased from July 1,

1980 to January 31, 1982 under the following statutory provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:

Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the
articles hereunder enumerated as

soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, seven centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
ninety-one centavos: Provided, That on premium and aviation gasoline, the tax shall be one peso
per liter of volume

capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:
Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with
gasoline, the specific

tax on which has already been paid, only the alcohol content shall be subject to the tax herein
prescribed. For the purposes of this subsection, the removal of denatured alcohol of not less than
one hundred eighty degrees

proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power,
unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;

(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That liquefied petroleum
gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel oil;

(h) Asphalts, per kilogram, eight centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec.
1, P.D. No. 1672.)

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and on all similar fuel oils, having more or less the same generating power, per liter of volume
capacity, seventeen and one-half

centavos, which tax shall attach to this fuel oil as soon as it is in existence as such.

Then on March 21, 1981, these provisions were amended by EO 672 to read:

Sec. 153. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the
articles hereunder enumerated as

soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, nine centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
one peso and six centavos: Provided, That on premium and aviation gasoline, the tax shall be one
peso and ten centavos

and one peso, respectively, per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo;
Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with
gasoline, the specific

tax on which has already been paid, only the alcohol content shall be subject to the tax herein
prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one
hundred eighty degrees

proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power,
unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;

(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified
petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on
diesel fuel oil;

(h) Asphalts, per kilogram, twelve centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known as diesel fuel oil,
and all similar fuel oils, having more or less the same generating power, per liter of volume capacity,
twenty-five and one-half

centavos, which tax shall attach to this fuel oil as soon as it is in existence as such.

A tax cannot be imposed unless it is supported by the clear and express language of a statute; 19 on
the other hand, once the tax is unquestionably imposed, "[a] claim of exemption from tax payments
must be clearly shown

and based on language in the law too plain to be mistaken." 20 Since the partial refund authorized
under Section 5, RA 1435, is in the nature of a tax exemption, 21 it must be construed strictissimi
Juris against the grantee.

Hence, petitioner's claim of refund on the basis of the specific taxes it actually paid must expressly
be granted in a statute stated in a language too clear to be mistaken.

We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no
expression of a legislative will authorizing a refund based on the higher rates claimed by petitioner.
The mere fact that the privilege of

refund was included in Section 5, and not in Section 1, is insufficient to support petitioner's claim.
When the law itself does not explicitly provide that a refund under RA 1435 may be based on higher
rates which were

nonexistent at the time of its enactment, this Coure cannot presume otherwise. A legislative lacuna
cannot be filled by judicial fiat. 22

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals and Atlas
Consolidated Mining and Development
Corporation 23 (the second Atlas case), the CIR contended that the refund should be based on
Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In categorically ruling
that Private Respondent Atlas

Consolidated Mining and Development Corporation was entitled to a refund based on Sections 1
and 2 of RA 1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated our
pronouncement in Commissioner of

Internal Revenue vs. Rio Tuba Nickel and Mining Corporation:

Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio Tuba case
sets forth the controlling doctrine. In that Resolution, we stated:

Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983
then we find that the private respondent is entitled to a refund. It should be made clear, however,
that Rio Tuba is not entitled

to the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the
rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under
Sections 153 and 156 of the

National Internal Revenue Code of 1977. We note however, that the latter law does not specifically
provide for a refund to these mining and lumber companies of specific taxes paid on manufactured
and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the
authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax exemption
and therefore cannot be

allowed unless granted in the most explicit and categorical language. Since the grant of refund
privileges must be strictly construed against the taxpayer, the basis for the refund shall be the
amounts deemed paid under

Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's
CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under
Sections 1 and 2 of R.A. No.

1435, without interest. 24

We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it
should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and
not on the increased rates

under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not yet barred by
prescription. (Emphasis supplied.)

Insular Lumber Co. and First Atlas Case

Not Inconsistent With Rio Tuba

and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should be Commissioner of Internal
Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an unsigned resolution, and
Insular Lumber Co. vs.

Court of Tax Appeals, an en banc decision. 25 Petitioner also asks the Court to take a "second look"
at Rio Tuba and the second Atlas case, both decided by Divisions, in view of Insular which was
decided en banc. Petitioner

posits that "[I]n view of the similarity of the situation of herein petitioner with Insular Lumber
Company (claimant in Insular Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio
Tuba), a dilemma has been created

as to whether or not Insular Lumber, which has been decided by the Honorable Court en banc, or
Rio Tuba, which was decided only [by] the Third Division of the Honorable Court, should
apply." 26

We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first Atlas
case ruled on the issue of whether the refund privilege under Section 5 should be computed based
on the specific tax

deemed paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid under the
increased rates. Rio Tuba and the second Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased
in the year 1963, when the increased rates under the NIRC of 1977 were nor yet in effect. Thus, the
issue now before us did

not exist at the time, since the applicable rates were still those prescribed under Sections 1 and 2 of
RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled to
the refund under Section 5, notwithstanding its failure to pay any additional tax under a municipal or
city ordinance. Although

Atlas purchased petroleum products in the years, 1976 to 1978 when the rates had already been
changed, the Court did not decide or make any pronouncement on the issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio Tuba and
second Atlas case, in which we ruled that the refund granted be computed on the basis of the
amounts deemed paid under

Sections 1 and 2 of RA 1435. In this light, we find no basis for petitioner's invocation of the
constitutional proscription that "no doctrine or principle of law laid down by the Court in a decision
rendered en banc or in division

may be modified or reversed except by the Court sitting en banc. 27

Finally, petitioner asserts that "equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC." 28 We disagree. According
to an eminent

authority on taxation, "there is no tax exemption solely on the, ground of equity." 29

WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza,
Martinez, Qiusumbing and Purisima, JJ., concur.


G.R. No. 92585 May 8, 1992
CALTEX PHILIPPINES, INC., petitioner,
vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J .:
This is a petition erroneously brought under Rule 44 of the Rules of Court
1
questioning the authority
of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price
Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for
recovery of financing charges from the Fund and reimbursement of underrecovery arising from sales to
the National Power Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its
remittances against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still
pending resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).
Pursuant to the 1987 Constitution,
2
any decision, order or ruling of the Constitutional
Commissions
3
may be brought to this Court on certiorari by the aggrieved party within thirty (30) days
from receipt of a copy thereof. The certiorari referred to is the special civil action for certiorari under Rule
65 of the Rules of Court.
4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings
and rulings of the administrator of the fund itself and in disallowing a claim which is still pending
resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction"
5
in declaring that petitioner cannot avail of the right to offset any amount that it may be
required under the law to remit to the OPSF against any amount that it may receive by way of
reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court, and,
considering further the importance of the issues raised, the error in the designation of the remedy
pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.)
No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as
follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the
Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the
purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be sourced from any of the
following:
a) Any increase in the tax collection from ad valorem tax or customs
duty imposed on petroleum products subject to tax under this Decree
arising from exchange rate adjustment, as may be determined by the
Minister of Finance in consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax
exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy;
c) Any additional amount to be imposed on petroleum products to
augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment by persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate adjustment
and/or increase in world market prices of crude oil;
2) To reimburse the oil companies for possible cost under-recovery
incurred as a result of the reduction of domestic prices of petroleum
products. The magnitude of the underrecovery, if any, shall be
determined by the Ministry of Finance. "Cost underrecovery" shall
include the following:
i. Reduction in oil company take as directed by the
Board of Energy without the corresponding reduction
in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result
of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry
of Finance to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the
years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be
held in abeyance.
6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with
the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:
1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods.
7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to
March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward
payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims.
9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the
payment of the collections and the recovery of claims, since the outright payment of the sum of
P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will
cause a very serious impairment of its cash position.
10
The proposal reads:
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate
monitoring of payments and reimbursements will be administered by
the ERB/Finance Dept./OEA, as agencies designated by law to
administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex the
same amount in cash reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted
expeditiously.
(4) The review of current claims (1989) will be conducted
expeditiously to preclude further accumulation of reimbursement from
OPSF.
On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years.
11
Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel A. Estrella, President,
Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex
(Philippines) Inc., for reconsideration of this Commission's adverse action embodied
in its letters dated February 2, 1989 and March 9, 1989, the former directing
immediate remittance to the Oil Price Stabilization Fund of collections made by the
firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter
reiterating the same directive but further advising the firms to desist from offsetting
collections against their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory
Board, the aforenamed oil companies were allowed to offset the amounts due to the
Oil Price Stabilization Fund against their outstanding claims from the said Fund for
the calendar years 1987 and 1988, pending with the then Ministry of Energy, the
government entity charged with administering the OPSF. This Commission, however,
expressing serious doubts as to the propriety of the offsetting of all types of
reimbursements from the OPSF against all categories of remittances, advised these
oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these
companies now seek reconsideration and in support thereof clearly manifest their
intent to make arrangements for the remittance to the Office of Energy Affairs of the
amount of collections equivalent to what has been previously offset, provided that
this Commission authorizes the Office of Energy Affairs to prepare the corresponding
checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to
the OPSF and the reimbursement of claims from the Fund shall be made within a
period of not more than one week from each other, will benefit the Fund and not
unduly jeopardize the continuing daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this
Commission perceives no further objectionable feature in the proposed arrangement,
provided that 15% of whatever amount is due from the Fund is retained by the Office
of Energy Affairs, the same to be answerable for suspensions or disallowances,
errors or discrepancies which may be noted in the course of audit and surcharges for
late remittances without prejudice to similar future retentions to answer for any
deficiency in such surcharges, and provided further that no offsetting of remittances
and reimbursements for the current and ensuing years shall be allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs:
12

Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989,
as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as
of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc.
shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of
Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing
claims initially allowed in audit, the details of which are presented hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535,
which included P130,420,235 representing those claims disallowed by OEA, details
of which is (sic) shown in Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

P257,263,300
Disallowances of OEA 130,420,235

Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate
that recovery of financing charges by oil companies is not among the items for which
the OPSF may be utilized. Therefore, it is our view that recovery of financing charges
has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.
b. Product Sales Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order
No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic)
oil companies should pay OPSF impost on export sales of petroleum products.
Effective February 7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity date of the resolution
from February 7, 1987 to October 20, 1987 as covered by subsequent ERB
Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in
their domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our opinion that
the effectivity of the said resolution should be February 7, 1987.
c. Inventory losses Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA) transactions including
the related BLA agreement, as they affect the claims for reimbursements of ad
valorem taxes. We observed that oil companies immediately settle ad valorem taxes
for BLA transaction (sic). Loan balances therefore are not tax paid inventories of
Caltex subject to reimbursements but those of the borrower. Hence, we recommend
reduction of the claim for July, August, and November, 1987 amounting to
P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges whether
direct or indirect due and payable by the copper mining companies in distress to the
national and local governments." It is our opinion that LOI 1416 which implements
the exemption from payment of OPSF imposts as effected by OEA has no legal
basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount
as herein authorized shall be subject to availability of funds of OPSF as of May 31,
1989 and applicable auditing rules and regulations. With regard to the disallowances,
it is further informed that the aggrieved party has 30 days within which to appeal the
decision of the Commission in accordance with law.
On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds:
13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,
ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF
FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO
EXECUTIVE ORDER NO. 137.
xxx xxx xxx
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF
EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY
LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS
AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.
xxx xxx xxx
On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration.
14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales.
15
Decision No. 1171 reads
as follows:
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the
.authority to recover financing charges from the OPSF on the basis of Department of
Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies
to "recover cost of financing working capital associated with crude oil shipments,"
and provided a schedule of reimbursement in terms of peso per barrel. It appears
that on November 6, 1989, the DOF issued a memorandum to the President of the
Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:
As part of your program to promote economic recovery, . . . oil
companies (were authorized) to refinance their imports of crude oil
and petroleum products from the normal trade credit of 30 days up to
360 days from date of loading . . . Conformably . . ., the oil companies
deferred their foreign exchange remittances for purchases by
refinancing their import bills from the normal 30-day payment term up
to the desired 360 days. This refinancing of importations carried
additional costs (financing charges) which then became, due to
government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.
We beg to disagree with such contention. The justification that financing charges
increased oil costs and the schedule of reimbursement rate in peso per barrel
(Exhibit 1) used to support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the same formula which the
DOF used in arriving at the reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were
obtained from CPI (CALTEX) Management and can easily be verified from our
records.
With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.
As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such surtax
on inventory losses because these are paid to BIR and not OPSF, in view of which
CPI (CALTEX) should seek refund from BIR. . . .
Finally, as regards the sales to Atlas and Marcopper, it is represented that you are
entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17,
1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.
Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies
from "all taxes, duties, import fees and other charges" was issued when OPSF was
not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation. Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors:
16

I
RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF
FINANCING CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's
17
CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
SALES TO NPC.
III
RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR
REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING
ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS
REIMBURSEMENT VIS-A-VIS THE OPSF.
V
RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH
ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice.
18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment.
19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice.
20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents.
21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:
2) To reimburse the oil companies for possible cost underrecovery incurred as a
result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy
without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the
price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing
government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to
result in cost underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department) of
Finance may include financing charges for "in essence, financing charges constitute unrecovered
cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989
Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the
tax on interest income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the
basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:
To allow oil companies to recover the costs of financing working capital associated
with crude oil shipments, the following guidelines on the utilization of the Oil Price
Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk
premium and recovery of financing charges will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat
rate of one (1) percent for the first (6) months and 1/32 of one percent
per month thereafter up to a maximum period of one year, to be
applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the
basis of the fee applicable to the remaining period of financing.
2. In addition, for shipments loaded after January 1987, oil companies
shall be allowed to recover financing charges directly from the OPSF
per barrel of crude oil based on the following schedule:
F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
e
n
t

R
a
t
e

P
e
s
o
s

p
e
r

B
a
r
r
e
l
Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty
days.
22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:
HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and February 5,
1987 and subsequent discussions held by the Price Review committee on February
6, 1987.
On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price
Stabilization Fund (OPSF). Such a reduction would allow the industry to recover
partly associated financing charges on crude oil imports. Accordingly, the OPSF
foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6)
months plus 1/32% of 1% per month thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the
OPSF in accordance with the provisions of the attached Department of Finance
circular.
23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges
from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges
directly from the OPSF for both crude and product shipments loaded
after January 1, 1987 based on the following rates:
F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
e
n
t

R
a
t
e

(
P
B
b
l
.
)
Less than 180 days None
180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28
2. The above rates shall be subject to review every sixty days.
24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:
Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):
1. The Claim for reimbursement shall be on a per shipment basis.
2. The claim shall be filed with the Office of Energy Affairs together
with the claim on peso cost differential for a particular shipment and
duly certified supporting documents provided for under Ministry of
Finance No. 11-85.
3. The reimbursement shall be on the form of reimbursement
certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the
OPSF. The oil companies may also redeem said certificates in cash if
not utilized, subject to availability of funds.
25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017.
26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration.
27
The function of the COA, particularly in the matter of allowing or disallowing certain
expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses
of government funds and properties.
28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that
petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not
supported by expert analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:
1. The Constitution gives the COA discretionary power to disapprove irregular or
unnecessary government expenditures and as the monetary claims of petitioner are
not allowed by law, the COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges
from the OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of
the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not
likewise allow reimbursement of financing
charges.
29

We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of
petitioner that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only to
the promulgation of accounting and auditing rules for, among others, such disallowance to be
untenable in the light of the provisions of the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining
to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and
on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is inadequate,
the Commission may adopt such measures, including temporary or special pre-audit,
as are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts, of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this
Article, to define the scope of its audit and examination, establish the techniques and
methods required therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of
government funds and properties.
These present powers, consistent with the declared independence of the Commission,
30
are broader
and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was
empowered to:
Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities including government-owned or
controlled corporations, keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses
of funds and property.
31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor,
the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section
2 of Article XI thereofprovided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining
to the revenues and receipts from whatever source, including trust funds derived
from bond issues; and audit, in accordance with law and administrative regulations,
all expenditures of funds or property pertaining to or held in trust by the Government
or the provinces or municipalities thereof. He shall keep the general accounts of the
Government and the preserve the vouchers pertaining thereto. It shall be the duty of
the Auditor General to bring to the attention of the proper administrative officer
expenditures of funds or property which, in his opinion, are irregular, unnecessary,
excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures
or uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules
and regulations to prevent the same. His was merely to bring that matter to the attention of the
proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez
32
and Ramos vs.Aquino,
33
are no longer controlling as the two (2) were decided in the light
of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains
that same power and authority, further strengthened by the definition of the COA's general
jurisdiction in Section 26 of the Government Auditing Code of the Philippines
34
and Administrative
Code of 1987.
35
Pursuant to its power to promulgate accounting and auditing rules and regulations for
the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of funds,
36
the
COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the
enforcement of the rules and regulations, it goes without saying that failure to comply with them is a
ground for disapproving the payment of the proposed expenditure. As observed by one of the
Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas:
37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary, excessive
or extravagant" expenditures of public funds but could only "bring [the matter] to the
attention of the proper administrative officer," under the 1987 Constitution, as also
under the 1973 Constitution, the Commission on Audit can "promulgate accounting
and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since the
Commission on Audit must ultimately be responsible for the enforcement of these
rules and regulations, the failure to comply with these regulations can be a ground for
disapproving the payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active
role and invested it with broader and more extensive powers, they did not intend merely to make the
COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent
watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No.
1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued
pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine
"other factors" which may result in cost underrecovery and a consequent reimbursement from the
OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges
are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the
oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government
mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they
are in the nature of government mandated price reductions. Hence, any other factor which seeks to
be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same
class or nature as those specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed in
their widest extent, but are held to be as applying only to persons or things of the same kind or class
as those specifically mentioned.
38
A reading of subparagraphs (i) and (ii) easily discloses that they do
not have a common characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be
limited by the enumeration in these subparagraphs. What should be considered for purposes of
determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section
which explicitly allows cost underrecovery only if such were incurred as a result of the reduction of
domestic prices of petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the
sense that such were incurred as a result of the inability to fully offset financing expenses from yields
in money market placements, they do not, however, fall under the foregoing provision of P.D. No.
1956, as amended, because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended
by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or
interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case
have shown, it was at the behest of the Government that petitioner refinanced its oil import
payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial institution which
refinanced said payments charged a higher interest, thereby resulting in higher financing expenses
for the petitioner. It would appear then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any, which may have been sustained because
it accommodated the request of the Government. Although under Section 29 of the National Internal
Revenue Code such losses may be deducted from gross income, the effect of that loss would be
merely to reduce its taxable income, but not to actually wipe out such losses. The Government then
may consider some positive measures to help petitioner and others similarly situated to obtain
substantial relief. An amendment, as aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for the
exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of the delegated
authority.
39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by
reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove
COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently
show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It
cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner.
The respondents themselves admit in their Comment that underrecovery arising from sales to NPC
are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this,
respondents trace the laws providing for such exemption.
40
The last law cited is the Fiscal Incentives
Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty
exemption privileges of the National Power Corporation, including those pertaining to its domestic
purchases of petroleum and petroleum products . . . are restored effective March 10, 1987." In a
Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was
confirmed and approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to
the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price
Standby Fund to support the OPSF.
41
The pertinent part of Section 2, Republic Act No. 6952 provides:
Sec. 2. Application of the Fund shall be subject to the following conditions:
(1) That the Fund shall be used to reimburse the oil companies for (a)
cost increases of imported crude oil and finished petroleum products
resulting from foreign exchange rate adjustments and/or increases in
world market prices of crude oil; (b) cost underrecovery incurred as a
result of fuel oil sales to the National Power Corporation (NPC); and
(c) other cost underrecoveries incurred as may be finally decided by
the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by
the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation are
among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected by OEA has no legal
basis;"
42
in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued when
OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation."
43
It is further stated that: "Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended
to exempt said distressed mining companies from the payment of OPSF dues for the following
reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956
creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending
P.D. 1956, was issued on February 25, 1987.
b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line
with the government's effort to prevent the collapse of the copper industry. P.D No.
1956, as amended, was issued for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in world market prices
of crude oil and imported petroleum product's; and
c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining companies
in distress to the Notional and Local Governments . . ." On the other hand, OPSF
dues are not payable by (sic) distressed copper companies but by oil companies. It is
to be noted that the copper mining companies do not pay OPSF dues. Rather, such
imposts are built in or already incorporated in the prices of oil products.
44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay
OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette
45
as required by Article 2 of the
Civil Code, which reads:
Laws shall take effect after fifteen days following the completion of their publication in
the Official Gazette, unless it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of Taada vs. Tuvera:
46

WHEREFORE, the Court hereby orders respondents to publish in the Official
Gazette all unpublished presidential issuances which are of general application, and
unless so published they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated
on 29 December 1986,
47
ruled:
We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin fifteen
days after publication unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly
delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing laws pursuant also to a valid delegation.
xxx xxx xxx
WHEREFORE, it is hereby declared that all laws as above defined shall immediately
upon their approval, or as soon thereafter as possible, be published in full in the
Official Gazette, to become effective only after fifteen days from their publication, or
on another date specified by the legislature, in accordance with Article 2 of the Civil
Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette
after its issuance or at any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18
June 1987. As amended, the said provision now reads:
Laws shall take effect after fifteen days following the completion of their publication
either in the Official Gazette or in a newspaper of general circulation in the
Philippines, unless it is otherwiseprovided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to
Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still
fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor
of the taxing authority.
48
The burden of proof rests upon the party claiming exemption to prove that it is in
fact covered by the exemption so claimed. The party claiming exemption must therefore be expressly
mentioned in the exempting law or at least be within its purview by clear legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS
and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may
suspend the payment of taxes by copper mining companies, it does not give petitioner the same
privilege with respect to the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction.
49
Respondents,
on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it.
50
In fact, when OEA submitted the claims of petitioner for pre-audit, the abovementioned
amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has
already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against its contributions to the fund as
this has been allowed in the past, particularly in the years 1987 and 1988.
51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides
for "Retention of Money for Satisfaction of Indebtedness to Government."
52
Petitioner also mentions
communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez,
53
contend that there can be
no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do
not arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents
also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code,
is misplaced because "while this provision empowers the COA to withhold payment of a government
indebtedness to a person who is also indebted to the government and apply the government
indebtedness to the satisfaction of the obligation of the person to the government, like authority or right to
make compensation is not given to the private person."
54
The reason for this, as stated in Commissioner
of Internal Revenue vs.Algue, Inc.,
55
is that money due the government, either in the form of taxes or
other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a
reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to
collect petitioner's indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .,"
56
and that the OPSF contributions do not go to the general fund of the
state and are not used for public purpose, i.e., not for the support of the government, the administration of
law, or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions
distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:
Sec. 2. Application of the fund shall be subject to the following conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be
used to pay any oil company which has an outstanding obligation to
the Government without said obligation being offset first, subject to
the requirements of compensation or offset under the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the state.
57
There can be no
doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any
unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage
increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of
prime concern which the state, via its police power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government.
58
Taxes cannot be the subject of compensation because the government and taxpayer are
not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality,
passed unto the end-users the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two;
petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible.
Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the government from paying any amount from
the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the
government, without said obligation being offset first subject to the rules on compensation in the Civil
Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged
decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for
reimbursement of underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.
With costs against petitioner.
SO ORDERED.
Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Grio-Aquino,
Medialdea, Regalado, Romero and Nocon, JJ., concur.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J .:
Is the income derived from rentals of real property owned by the Young Men's Christian Association
of the Philippines, Inc. (YMCA) established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals
1
on September 28, 1995
2
and February 29, 1996
3
in CA-
GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the
YMCA to claim tax exemption on the latter's income from the lease of its real property.
The Facts
The facts are undisputed.
4
Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner of
internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private
respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter
dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals
(CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of
the [private respondents]. It appears from the testimonies of the witnesses for the
[private respondent] particularly Mr. James C. Delote, former accountant of YMCA,
that these facilities were leased to members and that they have to service the needs
of its members and their guests. The rentals were minimal as for example, the
barbershop was only charged P300 per month. He also testified that there was
actually no lot devoted for parking space but the parking was done at the sides of the
building. The parking was primarily for members with stickers on the windshields of
their cars and they charged P.50 for non-members. The rentals and parking fees
were just enough to cover the costs of operation and maintenance only. The
earning[s] from these rentals and parking charges including those from lodging and
other charges for the use of the recreational facilities constitute [the] bulk of its
income which [is] channeled to support its many activities and attainment of its
objectives. As pointed out earlier, the membership dues are very insufficient to
support its program. We find it reasonably necessary therefore for [private
respondent] to make [the] most out [of] its existing facilities to earn some income. It
would have been different if under the circumstances, [private respondent] will
purchase a lot and convert it to a parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it out to the highest bidder or at the
market rate for commercial purposes, or should it invest its funds in the buy and sell
of properties, real or personal. Under these circumstances, we could conclude that
the activities are already profit oriented, not incidental and reasonably necessary to
the pursuit of the objectives of the association and therefore, will fall under the last
paragraph of Section 27 of the Tax Code and any income derived therefrom shall be
taxable.
Considering our findings that [private respondent] was not engaged in the business
of operating or contracting [a] parking lot, we find no legal basis also for the
imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s] of
P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but
not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National
Internal Revenue Code effective as of 1984.
5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA
6
initially decided in favor of the CIR and disposed of the appeal
in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs.
Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court
of Tax Appeals that "the leasing of petitioner's (herein respondent's) facilities to small
shop owners, to restaurant and canteen operators and the operation of the parking
lot are reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the petitioners, and the income derived therefrom are tax exempt,
must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect.
7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported
by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from
the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence.
8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the exemption.
Not even the petitioner would hazard the suggestion that YMCA is designed for
profit. Consequently, the little income from small shops and parking fees help[s] to
keep its head above the water, so to speak, and allow it to continue with its laudable
work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's
decision is AFFIRMED in toto.
9

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

The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation.
11

This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of
the CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA
that the leasing of private respondent's facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the private respondent and that the income derived
therefrom are tax exempt."
12
Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA.
13
The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts.
14
In the present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as found by
the CTA and ruled on the issue raised by the CIR: "Whether or not the collection or earnings of rental
income from the lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended."
15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as
indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is
on a certain state of facts; there is a question of fact when the doubt or difference arises as to the
truth or falsehood of alleged facts."
16
In the present case, the CA did not doubt, much less change, the
facts narrated by the CTA. It merely applied the law to the facts. That its interpretation or conclusion is
different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to
tax? At the outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations shall
not be taxed under this Title in respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27
(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income
received by them as such," the exemption does not apply to income derived ". . . from any of their
properties, real or personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives."
17
We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions.
18
Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated in a language too clear to be
mistaken."
19

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

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the
income from the properties must arise from activities 'conducted for profit' before it may be
considered taxable."
23
This argument is erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt organizations, as well as that arising from
any activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does
not qualify the word "properties." This makes from the property of the organization taxable, regardless of
how that income is used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error
when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from
renting out its real property, on the solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation. The law does not make a distinction. The
rental income is taxable regardless of whence such income is derived and how it is used or disposed
of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI,
Section 28 of par. 3 of the 1987 Constitution,
24
exempts "charitable institutions" from the payment not
only of property taxes but also of income tax from any source.
25
In support of its novel theory, it
compares the use of the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other
hand.
26

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

The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers
of the Constitution reveal their intent which, in turn, may have guided the people in ratifying the
Charter.
32
Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that ". . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational
purposes."
33
Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of
the Concom, adhered to the same view that the exemption created by said provision pertained only to
property taxes.
34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers property taxes only."
35
Indeed, the income tax exemption claimed by private respondent finds no
basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character,
36
claiming that the
YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from taxes on its properties and
income."
37
We reiterate that private respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the members of the Constitutional Commission
are deemed cognizant.
38
Under the Education Act of 1982, such term refers to schools.
39
The school
system is synonymous with formal education,
40
which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to the higher
levels."
41
The Court has examined the "Amended Articles of Incorporation" and "By-Laws"
43
of the
YMCA, but found nothing in them that even hints that it is a school or an educational institution.
44

Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are ruled
out.
45
It is settled that the term "educational institution," when used in laws granting tax exemptions,
refers to a ". . . school seminary, college or educational establishment . . . ."
46
Therefore, the private
respondent cannot be deemed one of the educational institutions covered by the constitutional provision
under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation.
While in its broadest and best sense education embraces all forms and phases of
instruction, improvement and development of mind and body, and as well of religious
and moral sentiments, yet in the common understanding and application it means a
place where systematic instruction in any or all of the useful branches of learning is
given by methods common to schools and institutions of learning. That we conceive
to be the true intent and scope of the term [educational institutions,] as used in the
Constitution.
47

Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court
also notes that the former did not submit proof of the proportionate amount of the subject income
that was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the
YMCA by-laws, which formed part of the evidence submitted, is patently insufficient, since the same
merely signified that "[t]he net income derived from the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations as the National Board may decide."
48
In
sum, we find no basis for granting the YMCA exemption from income tax under the constitutional
provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases
49
relied on by private respondent do not support its cause. YMCA of Manila v. Collector of
Internal Revenue
50
and Abra Valley College, Inc. v. Aquino
51
are not applicable, because the controversy
in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan
de Dios, Inc. v. Pasay City
52
is not in point either, because it involves a claim for exemption from the
payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City
an issue not at all related to that involved in a claimed exemption from the payment of income taxes
imposed on property leases. In Jesus Sacred Heart College v. Com. of Internal Revenue,
53
the party
therein, which claimed an exemption from the payment of income tax, was an educational institution
which submitted substantial evidence that the income subject of the controversy had been devoted or
used solely for educational purposes. On the other hand, the private respondent in the present case has
not given any proof that it is an educational institution, or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited merely to
applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It
needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that,
given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of government. Indeed, some of the members of the
Court may even believe in the wisdom and prudence of granting more tax exemptions to private
respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the
power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September
28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court
of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by
petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., Vitug and Quisumbing, JJ., concur.
Bellosillo, J., Please see Dissenting Opinion.



Separate Opinions

BELLOSILLO, J ., dissenting;
I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals
when supported by substantial evidence will not be disturbed on appeal unless it is shown that the
court committed grave error in the appreciation of facts.
1
In the instant case, there is no dispute as to
the validity of the findings of the Court of Tax Appeals that private respondent Young Men's Christian
Association (YMCA) is an association organized and operated exclusively for the promotion of social
welfare and other non-profitable purposes, particularly the physical and character development of the
youth.
2
The enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness of
individuals, and the promotion of unity among Christians and understanding among
peoples of all faiths, to the end that the Brotherhood of Man under the Fatherhood of
God may be fostered in an atmosphere of mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of the youth,
with emphasis on reverence for God, social discipline, responsibility for the common
good, respect for human dignity, and the observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the
Philippines to participate loyally in the life of their respective churches; to bring these
churches closer together; and to participate in the effort to realize the church
Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian Associations
in the Philippines and to foster the extension of the Youth Men's Christian
Associations to new areas;
(e) To help its Member Associations develop and adopt their programs to the needs
of the youth;
(f) To assist the Member Associations in developing and maintaining a high standard
of management, operation and practice; and
(g) To undertake and sponsor national and international programs and activities in
pursuance of its purposes and objectives.
3

Pursuant to these objectives, YMCA has continuously organized and undertaken throughout the
country various programs for the youth through actual workshops, seminars, training, sports and
summer camps, conferences on the cultivation of Christian moral values, drug addiction, out-of-
school youth, those with handicap and physical defects and youth alcoholism. To fulfill these
multifarious projects and attain the laudable objectives of YMCA, fund raising has become an
indispensable and integral part of the activities of the Association. YMCA derives its funds from
various sources such as membership dues, charges on the use of facilities like bowling and billiards,
lodging, interest income, parking fees, restaurant and canteen. Since the membership dues are very
minimal, the Association derives funds from rentals of small shops, restaurant, canteen and parking
fees. For the taxable year ending December 1980, YMCA earned gross rental income of
P676,829.00 and P44,259.00 from parking fees which became the subject of the questioned
assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of
petitioner's facilities to small shop owners and to restaurant and canteen operators in addition to the
operation of a parking lot are reasonably necessary for and incidental to the accomplishment of the
objectives of YMCA.
4
In fact, these facilities are leased to members in order to service their needs and
those of their guests. The rentals are minimal, such as, the rent of P300.00 for the barbershop. With
regard to parking space, there is no lot actually devoted therefor and the parking is done only along the
sides of the building. The parking is primarily for members with car stickers but to non-members, parking
fee is P0.50 only. The rentals and parking fees are just enough to cover the operation and maintenance
costs of these facilities. The earnings which YMCA derives from these rentals and parking fees, together
with the charges for lodging and use of recreational facilities, constitute the bulk or majority of its income
used to support its programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in departing
from the findings of the Court of Tax Appeals by declaring that the leasing of YMCA's facilities to
shop owners and restaurant operators and the operation of a parking lot are used for commercial
purposes or for profit, which fact takes YMCA outside the coverage of tax exemption. In later
granting the motion for reconsideration filed by respondent YMCA, the Court of Appeals correctly
reversed its earlier decision and upheld the findings of the Court of Tax Appeals by ruling that YMCA
is not designed for profit and the little income it derives from rentals and parking fees helps maintain
its noble existence for the fulfillment of its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions of Sec.
27, pars. (g) and (h), of the National Internal Revenue Code, to wit:
Sec. 27. Exemptions from tax on corporations. The following organizations shall
not be taxed under this Title in respect to income received by them as such . . . (g)
civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare; (h) club organized and operated exclusively for pleasure,
recreation and other non-profitable purposes, no part of the net income of which
inures to the benefit of any private stockholder or member . . . . Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however extend to
their income of whatever kind or character from any of their properties real or personal regardless of
the disposition made of such income; that based on the wording of the law which is plain and simple
and does not need any interpretation, any income of a tax exempt entity from any of its properties is
a taxable income; hence, the rental income derived by a tax exempt organization from the lease of
its properties is not therefore exempt from income taxation even if such income is exclusively used
for the accomplishment of its objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in
solitude, a word or phrase such as, in this case, "the income of whatever kind and character . . . from
any of their properties" might easily convey a meaning quite different from the one actually intended
and evident when a word or phrase is considered with those with which it is associated.
5
It is a rule in
statutory construction that every part of the statute must be interpreted with reference to the context, that
every part of the statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment.
6
A close reading of the last paragraph of Sec. 27 of the National
Internal Revenue Code, in relation to the whole section on tax exemption of the organizations
enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27
qualifies, limits and describes "the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities" in order to make such income
taxable. It is the exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of
said organizations. Hence, if such income from property or any other property is not conducted for profit,
then it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the word
"income" which is derived from property, real or personal, provided in the last paragraph of Sec. 27
means the amount of money coming to a person or corporation within a specified time as profit from
investment; the return in money from one's business or capital invested.
7
Income from property also
means gains and profits derived from the sale or other disposition of capital assets; the money which any
person or corporation periodically receives either as profits from business, or as returns from
investments
8
The word "income" as used in tax statutes is to be taken in its ordinary sense as gain or
profit.
9

Clearly, therefore, income derived from property whether real or personal connotes profit from
business or from investment of the same. If we are to apply the ordinary meaning of income from
property as profit to the language of the last paragraph of Sec. 27 of the NIRC, then only those
profits arising from business and investment involving property are taxable. In the instant case, there
is no question that in leasing its facilities to small shop owners and in operating parking spaces,
YMCA does not engage in any profit-making business. Both the Court of Tax Appeals, and the Court
of Appeals in its resolution of 25 September 1995, categorically found that these activities conducted
on YMCA's property were aimed not only at fulfilling the needs and requirements of its members as
part of YMCA's youth program but, more importantly, at raising funds to finance the multifarious
projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition fees and
other fees for the different services it renders to the students does not in itself make the school a
profit-making enterprise that would place it beyond the purview of the law exempting it from taxation.
The mere realization of profits out of its operation does not automatically result in the loss of an
educational institution's exemption from income tax as long as no part of its profits inures to the
benefit of any stockholder or individual.
10
In order to claim exemption from income tax, a corporation or
association must show that it is organized and operated exclusively for religious, charitable, scientific,
athletic, cultural or educational purposes or for the rehabilitation of veterans, and that no part of its
income inures to the benefit of any private stockholder or individual.
11
The main evidence of the purpose
of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute
to be stated in the articles of incorporation, and the by-laws outline the administrative organization of the
corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.
12

The foregoing principle applies to income derived by tax exempt corporations from their property.
The criterion or test in order to make such income taxable is when it arises from purely profit-making
business. Otherwise, when the income derived from use of property is reasonable and incidental to
the charitable, benevolent, educational or religious purpose for which the corporation or association
is created, such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City
13
we held
In this connection, it should be noted that respondent therein is a corporation
organized for "charitable, educational and religious purposes"; that no part of its net
income inures to the benefit of any private individual; that it is exempt from paying
income tax; that it operates a hospital in which MEDICAL assistance is given to
destitute persons free of charge; that it maintains a pharmacy department within the
premises of said hospital, to supply drugs and medicines only to charity and paying
patients confined therein; and that only the paying patients are required to pay the
medicines supplied to them, for which they are charged the cost of the medicines,
plus an additional 10% thereof, to partly offset the cost of medicines supplied free of
charge to charity patients. Under these facts we are of the opinion and so hold that
the Hospital may not be regarded as engaged in "business" by reason of said sale of
medicines to its paying patients . . . (W)e held that the UST Hospital was not
established for profit-making purposes, despite the fact that it had 140 paying beds,
because the same were maintained only to partly finance the expenses of the free
wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue,
14
this Court explained
It is claimed however that the institution is run as a business in that it keeps a lodging
and boarding house. It may be admitted that there are 64 persons occupying rooms
in the main building as lodgers or roomers and that they take their meals at the
restaurant below. These facts however are far from constituting a business in the
ordinary acceptation of the word. In the first place, no profit is realized by the
association in any sense. In the second place it is undoubted, as it is undisputed, that
the purpose of the association is not primarily to obtain the money which comes from
the lodgers and boarders. The real purpose is to keep the membership continually
within the sphere of influence of the institution; and thereby to prevent, as far as
possible, the opportunities which vice presents to young men in foreign countries
who lack home or other similar influences.
The majority, if not all, of the income of the organizations covered by the exemption provided in Sec.
27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we are to
interpret the last paragraph of Sec. 27 to the effect that all income of whatever kind from the
properties of said organization, real or personal, are taxable, even if not conducted for profit, then
Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this Court elucidated
in Jesus Sacred Heart College v. Collector of Internal Revenue,
15
every responsible organization must
be so run as to at least insure its existence by operating within the limits of its own resources, especially
its regular income. It should always strive whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or propose to have such surplus, then the
exemption would apply only to schools which are on the verge of bankruptcy. Unlike the United States
where a substantial number of institutions of learning are dependent upon voluntary contributions and still
enjoy economic stability, such as Harvard, the trust fund of which has been steadily increasing with the
years, there are and there have always been very few educational enterprises in the Philippines which
are supported by donations, and these organizations usually have a very precarious existence.
16

Finally, the non-taxability of all income and properties of educational institutions finds enduring
support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes shall be exempt from taxes
and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue
17
this Court categorically held and found YMCA to
be an educational institution exclusively devoted to educational and charitable purposes and not operated
for profit. The purposes of the Association as set forth in its charter and constitution are "to develop the
Christian character and usefulness of its members, to improve the spiritual, intellectual, social and
physical condition of young men and to acquire, hold, mortgage and dispose of the necessary lands,
buildings and personal property for the use of said corporation exclusively for religious, charitable and
educational purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase the mental
efficiency and wage-earning capacity of young men, prepare them in special lines of business and offer
them special lines of study. We ruled therein that YMCA cannot be said to be an institution used
exclusively for religious purposes or an institution devoted exclusively for charitable purposes or an
institution devoted exclusively to educational purposes, but it can be truthfully said that it is an institution
used exclusively for all three purposes and that, as such, it is entitled to be exempted from taxation.
Separate Opinions
BELLOSILLO, J ., dissenting;
I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals
when supported by substantial evidence will not be disturbed on appeal unless it is shown that the
court committed grave error in the appreciation of facts.
1
In the instant case, there is no dispute as to
the validity of the findings of the Court of Tax Appeals that private respondent Young Men's Christian
Association (YMCA) is an association organized and operated exclusively for the promotion of social
welfare and other non-profitable purposes, particularly the physical and character development of the
youth.
2
The enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness of
individuals, and the promotion of unity among Christians and understanding among
peoples of all faiths, to the end that the Brotherhood of Man under the Fatherhood of
God may be fostered in an atmosphere of mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of the youth,
with emphasis on reverence for God, social discipline, responsibility for the common
good, respect for human dignity, and the observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the
Philippines to participate loyally in the life of their respective churches; to bring these
churches closer together; and to participate in the effort to realize the church
Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian Associations
in the Philippines and to foster the extension of the Youth Men's Christian
Associations to new areas;
(e) To help its Member Associations develop and adopt their programs to the needs
of the youth;
(f) To assist the Member Associations in developing and maintaining a high standard
of management, operation and practice; and
(g) To undertake and sponsor national and international programs and activities in
pursuance of its purposes and objectives.
3

Pursuant to these objectives, YMCA has continuously organized and undertaken throughout the
country various programs for the youth through actual workshops, seminars, training, sports and
summer camps, conferences on the cultivation of Christian moral values, drug addiction, out-of-
school youth, those with handicap and physical defects and youth alcoholism. To fulfill these
multifarious projects and attain the laudable objectives of YMCA, fund raising has become an
indispensable and integral part of the activities of the Association. YMCA derives its funds from
various sources such as membership dues, charges on the use of facilities like bowling and billiards,
lodging, interest income, parking fees, restaurant and canteen. Since the membership dues are very
minimal, the Association derives funds from rentals of small shops, restaurant, canteen and parking
fees. For the taxable year ending December 1980, YMCA earned gross rental income of
P676,829.00 and P44,259.00 from parking fees which became the subject of the questioned
assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of
petitioner's facilities to small shop owners and to restaurant and canteen operators in addition to the
operation of a parking lot are reasonably necessary for and incidental to the accomplishment of the
objectives of YMCA.
4
In fact, these facilities are leased to members in order to service their needs and
those of their guests. The rentals are minimal, such as, the rent of P300.00 for the barbershop. With
regard to parking space, there is no lot actually devoted therefor and the parking is done only along the
sides of the building. The parking is primarily for members with car stickers but to non-members, parking
fee is P0.50 only. The rentals and parking fees are just enough to cover the operation and maintenance
costs of these facilities. The earnings which YMCA derives from these rentals and parking fees, together
with the charges for lodging and use of recreational facilities, constitute the bulk or majority of its income
used to support its programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in departing
from the findings of the Court of Tax Appeals by declaring that the leasing of YMCA's facilities to
shop owners and restaurant operators and the operation of a parking lot are used for commercial
purposes or for profit, which fact takes YMCA outside the coverage of tax exemption. In later
granting the motion for reconsideration filed by respondent YMCA, the Court of Appeals correctly
reversed its earlier decision and upheld the findings of the Court of Tax Appeals by ruling that YMCA
is not designed for profit and the little income it derives from rentals and parking fees helps maintain
its noble existence for the fulfillment of its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions of Sec.
27, pars. (g) and (h), of the National Internal Revenue Code, to wit:
Sec. 27. Exemptions from tax on corporations. The following organizations shall
not be taxed under this Title in respect to income received by them as such . . . (g)
civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare; (h) club organized and operated exclusively for pleasure,
recreation and other non-profitable purposes, no part of the net income of which
inures to the benefit of any private stockholder or member . . . . Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however extend to
their income of whatever kind or character from any of their properties real or personal regardless of
the disposition made of such income; that based on the wording of the law which is plain and simple
and does not need any interpretation, any income of a tax exempt entity from any of its properties is
a taxable income; hence, the rental income derived by a tax exempt organization from the lease of
its properties is not therefore exempt from income taxation even if such income is exclusively used
for the accomplishment of its objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in
solitude, a word or phrase such as, in this case, "the income of whatever kind and character . . . from
any of their properties" might easily convey a meaning quite different from the one actually intended
and evident when a word or phrase is considered with those with which it is associated.
5
It is a rule in
statutory construction that every part of the statute must be interpreted with reference to the context, that
every part of the statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment.
6
A close reading of the last paragraph of Sec. 27 of the National
Internal Revenue Code, in relation to the whole section on tax exemption of the organizations
enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27
qualifies, limits and describes "the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities" in order to make such income
taxable. It is the exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of
said organizations. Hence, if such income from property or any other property is not conducted for profit,
then it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the word
"income" which is derived from property, real or personal, provided in the last paragraph of Sec. 27
means the amount of money coming to a person or corporation within a specified time as profit from
investment; the return in money from one's business or capital invested.
7
Income from property also
means gains and profits derived from the sale or other disposition of capital assets; the money which any
person or corporation periodically receives either as profits from business, or as returns from
investments
8
The word "income" as used in tax statutes is to be taken in its ordinary sense as gain or
profit.
9

Clearly, therefore, income derived from property whether real or personal connotes profit from
business or from investment of the same. If we are to apply the ordinary meaning of income from
property as profit to the language of the last paragraph of Sec. 27 of the NIRC, then only those
profits arising from business and investment involving property are taxable. In the instant case, there
is no question that in leasing its facilities to small shop owners and in operating parking spaces,
YMCA does not engage in any profit-making business. Both the Court of Tax Appeals, and the Court
of Appeals in its resolution of 25 September 1995, categorically found that these activities conducted
on YMCA's property were aimed not only at fulfilling the needs and requirements of its members as
part of YMCA's youth program but, more importantly, at raising funds to finance the multifarious
projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition fees and
other fees for the different services it renders to the students does not in itself make the school a
profit-making enterprise that would place it beyond the purview of the law exempting it from taxation.
The mere realization of profits out of its operation does not automatically result in the loss of an
educational institution's exemption from income tax as long as no part of its profits inures to the
benefit of any stockholder or individual.
10
In order to claim exemption from income tax, a corporation or
association must show that it is organized and operated exclusively for religious, charitable, scientific,
athletic, cultural or educational purposes or for the rehabilitation of veterans, and that no part of its
income inures to the benefit of any private stockholder or individual.
11
The main evidence of the purpose
of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute
to be stated in the articles of incorporation, and the by-laws outline the administrative organization of the
corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.
12

The foregoing principle applies to income derived by tax exempt corporations from their property.
The criterion or test in order to make such income taxable is when it arises from purely profit-making
business. Otherwise, when the income derived from use of property is reasonable and incidental to
the charitable, benevolent, educational or religious purpose for which the corporation or association
is created, such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City
13
we held
In this connection, it should be noted that respondent therein is a corporation
organized for "charitable, educational and religious purposes"; that no part of its net
income inures to the benefit of any private individual; that it is exempt from paying
income tax; that it operates a hospital in which MEDICAL assistance is given to
destitute persons free of charge; that it maintains a pharmacy department within the
premises of said hospital, to supply drugs and medicines only to charity and paying
patients confined therein; and that only the paying patients are required to pay the
medicines supplied to them, for which they are charged the cost of the medicines,
plus an additional 10% thereof, to partly offset the cost of medicines supplied free of
charge to charity patients. Under these facts we are of the opinion and so hold that
the Hospital may not be regarded as engaged in "business" by reason of said sale of
medicines to its paying patients . . . (W)e held that the UST Hospital was not
established for profit-making purposes, despite the fact that it had 140 paying beds,
because the same were maintained only to partly finance the expenses of the free
wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue,
14
this Court explained
It is claimed however that the institution is run as a business in that it keeps a lodging
and boarding house. It may be admitted that there are 64 persons occupying rooms
in the main building as lodgers or roomers and that they take their meals at the
restaurant below. These facts however are far from constituting a business in the
ordinary acceptation of the word. In the first place, no profit is realized by the
association in any sense. In the second place it is undoubted, as it is undisputed, that
the purpose of the association is not primarily to obtain the money which comes from
the lodgers and boarders. The real purpose is to keep the membership continually
within the sphere of influence of the institution; and thereby to prevent, as far as
possible, the opportunities which vice presents to young men in foreign countries
who lack home or other similar influences.
The majority, if not all, of the income of the organizations covered by the exemption provided in Sec.
27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we are to
interpret the last paragraph of Sec. 27 to the effect that all income of whatever kind from the
properties of said organization, real or personal, are taxable, even if not conducted for profit, then
Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this Court elucidated
in Jesus Sacred Heart College v. Collector of Internal Revenue,
15
every responsible organization must
be so run as to at least insure its existence by operating within the limits of its own resources, especially
its regular income. It should always strive whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or propose to have such surplus, then the
exemption would apply only to schools which are on the verge of bankruptcy. Unlike the United States
where a substantial number of institutions of learning are dependent upon voluntary contributions and still
enjoy economic stability, such as Harvard, the trust fund of which has been steadily increasing with the
years, there are and there have always been very few educational enterprises in the Philippines which
are supported by donations, and these organizations usually have a very precarious existence.
16

Finally, the non-taxability of all income and properties of educational institutions finds enduring
support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes shall be exempt from taxes
and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue
17
this Court categorically held and found YMCA to
be an educational institution exclusively devoted to educational and charitable purposes and not operated
for profit. The purposes of the Association as set forth in its charter and constitution are "to develop the
Christian character and usefulness of its members, to improve the spiritual, intellectual, social and
physical condition of young men and to acquire, hold, mortgage and dispose of the necessary lands,
buildings and personal property for the use of said corporation exclusively for religious, charitable and
educational purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase the mental
efficiency and wage-earning capacity of young men, prepare them in special lines of business and offer
them special lines of study. We ruled therein that YMCA cannot be said to be an institution used
exclusively for religious purposes or an institution devoted exclusively for charitable purposes or an
institution devoted exclusively to educational purposes, but it can be truthfully said that it is an institution
used exclusively for all three purposes and that, as such, it is entitled to be exempted from taxation.
Footnotes

G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-
appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-
appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J .:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a)
thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and
improvement" of Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen.
Capinpin Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and
planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder
roads were to be construed) were private properties of respondent Jose C. Zulueta, who, at the time
of the passage and approval of said Act, was a member of the Senate of the Philippines; that on
May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering
to donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the
offer was accepted by the council, subject to the condition "that the donor would submit a plan of the
said roads and agree to change the names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote
another letter to said council, calling attention to the approval of Republic Act. No. 920, and the sum
of P85,000.00 appropriated therein for the construction of the projected feeder roads in question;
that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch
as the projected feeder roads in question were private property at the time of the passage and
approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for the
construction, reconstruction, repair, extension and improvement of said projected feeder roads, was
illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by Congress
because its members were made to believe that the projected feeder roads in question were "public
roads and not private streets of a private subdivision"'; that, "in order to give a semblance of legality,
when there is absolutely none, to the aforementioned appropriation", respondents Zulueta executed
on December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed of
donation copy of which is annexed to the petition of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the Philippines; that said
alleged deed of donation was, on the same date, accepted by the then Executive Secretary; that
being subject to an onerous condition, said donation partook of the nature of a contract; that, such,
said donation violated the provision of our fundamental law prohibiting members of Congress from
being directly or indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and voidab initio, for the construction of the projected feeder roads in
question with public funds would greatly enhance or increase the value of the aforementioned
subdivision of respondent Zulueta, "aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense"; that the construction of said projected feeder roads
was then being undertaken by the Bureau of Public Highways; and that, unless restrained by the
court, the respondents would continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice not only
to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared unconstitutional
and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta
from ordering or allowing the continuance of the above-mentioned feeder roads project, and from
making and securing any new and further releases on the aforementioned item of Republic Act No.
920, and the disbursing officers of the Department of Public Works and Highways from making any
further payments out of said funds provided for in Republic Act No. 920; and that pending final
hearing on the merits, a writ of preliminary injunction be issued enjoining the aforementioned parties
respondent from making and securing any new and further releases on the aforesaid item of
Republic Act No. 920 and from making any further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to
sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent
is " not aware of any law which makes illegal the appropriation of public funds for the improvements
of . . . private property"; and that, the constitutional provision invoked by petitioner is inapplicable to
the donation in question, the same being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail the appropriation in question
because "there is no actual bona fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a personal and substantial interest"
in said Act "and that its enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor
of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that "the
legislature is without power appropriate public revenues for anything but a public purpose", that the
instructions and improvement of the feeder roads in question, if such roads where private property,
would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the Republic
of the Philippines will use the parcels of land hereby donated for street purposes only and for
no other purposes whatsoever; it being expressly understood that should the Government of
the Republic of the Philippines violate the condition hereby imposed upon it, the title to the
land hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause, objector
purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interest are not directly affected" thereby; and
that, accordingly, the appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said petition, respondent Zulueta is the
owner of several parcels of residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the projected feeder roads
aforementioned, which, admittedly, were private property of said respondent when Republic Act No.
920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as well as when it was approved by the
President on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of constructing his subdivision streets or roads at his own
expenses,
1
and would "greatly enhance or increase the value of the subdivision" of said respondent.
The lower court held that under these circumstances, the appropriation in question was "clearly for a
private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident.
2
However,
respondent Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of any law
which makes illegal the appropriation of public funds for the improvement of what we, in the
meantime, may assume as private property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws.
3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude of the
interest to be affected nor the degree to which the general advantage of the community, and
thus the public welfare, may be ultimately benefited by their promotion. Incidental to the
public or to the state, which results from the promotion of private interest and the prosperity
of private enterprises or business, does not justify their aid by the use public money. (25
R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes only,
discussedsupra sec. 14, money raised by taxation can be expended only for public purposes
and not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may be
used only for public purpose. The right of the legislature to appropriate funds is correlative
with its right to tax, and, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to
another purpose, no appropriation of state funds can be made for other than for a public
purpose.
x x x x x x x x x
The test of the constitutionality of a statute requiring the use of public funds is whether the
statute is designed to promote the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve the
public. (81 C.J.S. pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon
the ground that petitioner may not contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably, based upon the following
premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of the
aforementioned appropriation; (2) that the latter may not be annulled without a previous declaration
of unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421 of the Civil
Code is absolute, and admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the
projected feeder roads in question, the legality thereof depended upon whether said roads were
public or private property when the bill, which, latter on, became Republic Act 920, was passed by
Congress, or, when said bill was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which
the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is
that said appropriation sought a private purpose, and hence, was null and void. 4 The donation to
the Government, over five (5) months after the approval and effectivity of said Act, made, according
to the petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation in
question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions.
For instance, the creditors of a party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the latter, except only those which are
inherent in his person, including therefore, his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in the manner indicated in said legal
provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a
direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds,
5
upon the theory that "the
expenditure of public funds by an officer of the State for the purpose of administering
an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer.
6
Although there are some decisions to the contrary,
7
the prevailing view in the
United States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to attack
the constitutionality of a statute, the general rule is that not only persons individually affected,
but alsotaxpayers, have sufficient interest in preventing the illegal expenditure of moneys
raised by taxation and may therefore question the constitutionality of statutes requiring
expenditure of public moneys. (11 Am. Jur. 761; emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under the composite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint, but,
each state enjoys internally a substantial measure of sovereignty, subject to the limitations imposed
by the Federal Constitution. In fact, the same was made by representatives ofeach state of the
Union, not of the people of the U.S., except insofar as the former represented the people of the
respective States, and the people of each State has, independently of that of the others, ratified said
Constitution. In other words, the Federal Constitution and the Federal statutes have become binding
upon the people of the U.S. in consequence of an act of, and, in this sense, through the respective
states of the Union of which they are citizens. The peculiar nature of the relation between said
people and the Federal Government of the U.S. is reflected in the election of its President, who is
chosen directly, not by the people of the U.S., but by electors chosen by each State, in such manner
as the legislature thereof may direct (Article II, section 2, of the Federal Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully
direct than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of the
Union. For this reason, the rule recognizing the right of taxpayers to assail the constitutionality of a
legislation appropriating local or state public funds which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) has greater application in the Philippines
than that adopted with respect to acts of Congress of the United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by
the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of an appropriation for backpay of
members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and
Barredo vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action
of taxpayers impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2) cases
the importance of the issues therein raised is present in the case at bar. Again, like the petitioners
in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The Province of
Rizal, which he represents officially as its Provincial Governor, is our most populated political
subdivision,
8
and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not
have been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this instance
against respondent Jose C. Zulueta. It is so ordered.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez David,
Paredes, and Dizon, JJ., concur.


G.R. No. 120082 September 11, 1996
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J .:
For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995
1
of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International
Airport Authority vs. City of Cebu", and its order of 4, May 1995
2
denying the motion to reconsider
the decision.
We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue
of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and
b) upgrade the services and facilities of the airports
and to formulate internationally acceptable standards
of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from
realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of
the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified,
claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:
Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical,including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government. Petitioner insisted
that while it is indeed a government-owned corporation, it nonetheless stands on the
same footing as an agency or instrumentality of the national government by the very
nature of its powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the
government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.
3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995,
4
the trial court dismissed the petition in light of its findings, to
wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.
This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall provide
for a more responsive and accountable local government structure instituted through
a system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. . . .
5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:
I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER
IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF
CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people.
6
Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the Government policies of promoting and
developing the Central Visayas and Mindanao regions as centers of international trade and
tourism, and accelerating the development of the means of transportation and communication in
the country,"
7
and that it is an attached agency of the Department of Transportation and
Communication (DOTC),
8
the petitioner "may stand in [sic] the same footing as an agency or
instrumentality of the national government." Hence, its tax exemption privilege under Section 14
of its Charter "cannot be considered withdrawn with the passage of the Local Government Code
of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing powers
of local government units shall not extend to the levy of taxes of fees or charges of any kind on
the national government its agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation;
9

Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original character, PD
1869. All its shares of stock are owned by the National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke
is governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (McCulloch v. Maryland,
4 Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over local
government.
Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (Emphasis supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to allgovernment corporations." For it is clear
from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution
10
and enhanced further by the LGC.
While it may be true that under its Charter the petitioner was exempt from the payment of realty
taxes,
11
this exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's
claim that such exemption was not repealed because being an instrumentality of the National
Government, Section 133 of the LGC prohibits local government units from imposing taxes, fees,
or charges of any kind on it, respondent City of Cebu points out that the petitioner is likewise a
government-owned corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not distinguish between
government-owned or controlled corporations performing governmental and purely proprietary
functions. Respondent city of Cebu urges this the Manila International Airport Authority is a
governmental-owned corporation,
12
and to reject the application of Basco because it was
"promulgated . . . before the enactment and the singing into law of R.A. No. 7160," and was not,
therefore, decided "in the light of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through
their Constitutions.
13
Our Constitution, for instance, provides that the rule of taxation shall be
uniform and equitable and Congress shall evolve a progressive system of taxation.
14
So potent
indeed is the power that it was once opined that "the power to tax involves the power to
destroy."
15
Verily, taxation is a destructive power which interferes with the personal and property
for the support of the government. Accordingly, tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.
16
But since taxes are what we pay for civilized
society,
17
or are the lifeblood of the nation, the law frowns against exemptions from taxation and
statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers and
liberally in favor of the taxing authority.
18
A claim of exemption from tax payment must be clearly
shown and based on language in the law too plain to be mistaken.
19
Elsewise stated, taxation is
the rule, exemption therefrom is the exception.
20
However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be handled
by the government in the course of its operations.
21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution.
22
Under the latter, the exercise of the power may be subject to such guidelines and
limitations as the Congress may provide which, however, must be consistent with the basic policy
of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution.
23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein
(d) Customs duties, registration fees of vessels and wharfage on
wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained
by the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of
Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on
petroleum products;
(i) Percentage or value added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractor and
person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in this
code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine product actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprise and Cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE
NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity,
24
while "charges" are pecuniary
liabilities such as rents or fees against person or property.
25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:
Sec. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of
its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and;
(e) Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemptions from payment of real
property tax previously granted to or presently enjoyed by, all persons
whether natural or juridical, including all government owned or
controlled corporations are hereby withdrawn upon the effectivity of
his Code.
These exemptions are based on the ownership, character, and use of the property. Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on
the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the
basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the
basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of
electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously
granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code.
26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
this code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned, or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by
the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of
Section 133;
(2) "Unless otherwise provided in this Code" in section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and
other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees,
and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items (c)
and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then Section
232 must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section
232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph
of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical
persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption
is withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:
(o) taxes, fees, or charges of any kind on the National Government,
its agencies, or instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to embrace . . . . .
. "instrumentalities" and "agencies" or expediency we quote:
(a) real property owned by the Republic of the Philippines, or any of
the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government."
27
These autonomous regions, provincial, city, municipal or barangay subdivisions"
are the political subdivision.
28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments."
29
The National
Government then is composed of the three great departments the executive, the legislative and
the judicial.
30

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;"
31
while an "instrumentality" refers
to "any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy; usually through a
charter. This term includes regulatory agencies, chartered institutions and government-owned
and controlled corporations".
32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o),
then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including government-
owned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax
Code, which reads:
Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph of
Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments
33
and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals.
34
The power to
tax is the most effective instrument to raise needed revenues to finance and support myriad
activities of local government units for the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace, progress, and prosperity of the people. It
may also be relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for this entities to share in the
requirements of the development, fiscal or otherwise, by paying the taxes and other charges due
from them.
35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu",
36
which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO).
37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports."
38
Hence, the petitioner is now the owner of the
land in question and the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege only
in respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming Corporation
39
is unavailing since it was decided before
the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be
subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no
one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.