THEORY AND BASIS OF TAXATION

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs. ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
Facts: Algue, Inc. a domestic corporation engaged in engineering, construction and other allied activities,
received a letter from the CIR assessing it in the total amount of P83,183.85 as delinquency income taxes
for the years 1958 and 1959. 1 Algue, Inc. filed a protest, claiming a deduction of P75,000.00 as an
ordinary reasonable or necessary expense. It contends that the said amount had been legitimately paid 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.
On the other hand, CIR 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.
Issue: WON 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.
Held: The claimed deduction by the private respondent was permitted under the Internal Revenue Code
and should therefore not have been disallowed by the petitioner.
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.-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.
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.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO. LTD., represented
by SORIAMONT STEAMSHIP
FACTS: Private respondent is a foreign corporation that owns and operates tramper vessel M/V Gardenia.
NASUTRA chartered M/V Gardenia to load tons of raw sugar in the Philippines. In 1980, the respondent paid
the required income and common carrier's taxes (P107,142.75) based on the expected gross receipts of
the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On
January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for
Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was
realized from the charter agreement, private respondent instituted a claim for tax credit or refund of the
sum P107,142.75 before CIR. However, CIR failed to act promptly on the claim.
ISSUE: WON Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts representing prepayment of income and common carrier's taxes
HELD: YES. Pursuant to section 24 (b) (2) of the National Internal Revenue Code, a resident foreign
corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it
derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer
must be shown to have earned income sourced from the Philippines.
A claim for refund is in the nature of a claim for exemption 8 and should be construed instrictissimi
juris against the taxpayer. In this case, the respondent has adduced sufficient evidence proving that it
derived no receipt from its charter agreement with NASUTRA.
The tax was paid way back in 1980 and despite the clear showing that it was erroneously paid, the
government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the
expenses of litigation, the money that will be finally refunded to the private respondent is just worth a
damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to
increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands
that BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling
inRoxas v. Court of Tax Appeals 12 is apropos to recall:
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg." And, in order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously.
Taxpayers owe honesty to government just as government owes fairness to taxpayers.
BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs.
COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL
REVENUE,respondents.
When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to
keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of
another.
Burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement
to the claim for refund.
FACTS: BPI had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to
P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a
refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable
year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit

for the succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue
(BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. It alleged that it
did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual
Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year.
When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income
Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax
Court held that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed
to overcome this presumption because it did not present its 1990 Return, which would have shown that the
amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled
to a tax refund.
ISSUE: WON petitioner is entitled to the refund of P112,491.90, representing excess creditable
withholding tax paid for the taxable year 1989.
HELD: YES. Petitioner did not use its 1989 refund to pay its taxes for 1990.
Petitioner has established its claim. It may have failed to strictly comply with the rules of procedure; it may
have even been negligent. But there can be no just determination of the present action if we ignore, on
grounds of strict technicality, the Return submitted before the CTA and even before this Court. 15 To repeat,
the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to
which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to
withhold the tax refund which rightfully belongs to the petitioner.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not belonging to it and thereby enrich
itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, so must it apply the same standard against itself in refunding excess
payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness.
When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to
keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of
another.
PHILIPPINE BANK OF COMMUNICATIONS vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF
TAX APPEALS and COURT OF APPEALS
FACTS: PBCom, a commercial banking corporation duly organized under Philippine laws, filed its quarterly
income tax returns for the first and second quarters of 1985, reported profits, and paid the total income
tax of P5,016,954.00.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the
year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus
declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and
remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax
credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees
from property rentals in 1985 and 1986.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).

Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is
hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting
to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the
same to the succeeding year.
Petitioner relied on RMC No. 7-85 - the circular that states that overpaid income taxes are not covered by
the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for
the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code.
The respondent court nullified the said Circular.
ISSUE: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the
ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years.
HELD: NO.
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from the time of filing the Adjustment Return and final
payment of the tax for the year.
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of
two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the
law; rather it legislated guidelines contrary to the statute passed by Congress. Hence, his interpretation
could not be given weight for to do so would, in effect, amend the statute.
1986 claim for refund amounting to P234,077.69
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as
specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert
said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross
error or abuse on their part to disturb our reliance thereon.
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds
for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law
under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so
because it is upon taxation that the government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied
should be summary and interfered with as little as possible. 14
Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim
for exemption and should be construed in strictissimi juris against the taxpayer. 28
FISCAL ADEQUACY
CHAVEZ vs ONGPIN
FACTS: "EXECUTIVE ORDER No. 73 - PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED
ON THE 1984 REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX
CODE, AS AMENDED
Chavez is a taxpayer and an owner of three parcels of land. He alleges the following: that Executive Order
No. 73 accelerated the application of the general revision of assessments to January 1, 1987 thereby

mandating an excessive increase in real property taxes by 100% to 400% on improvements, and up to
100% on land; that any increase in the value of real property brought about by the revision of real property
values and assessments would necessarily lead to a proportionate increase in real property taxes; that
sheer oppression is the result of increasing real property taxes at a period of time when harsh economic
conditions prevail; and that the increase in the market values of real property as reflected in the schedule
of values was brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national association
of owners-lessors, joins Chavez in his petition.
ISSUE: WON Executive Order No. 73 insofar as the revision of the assessments and the effectivity thereof
are concerned, is unconstitutional.
HELD: No. The attack on Executive Order No. 73 has no legal basis as the general revision of assessments
is a continuing process mandated by Section 21 of Presidential Decree No. 464. If at all, it is Presidential
Decree No. 464 which should be challenged as constitutionally infirm. However, Chavez failed to raise any
objection against said decree. It was ROAP which questioned the constitutionality thereof.
Without Executive Order No. 73, the basis for collection of real property taxes will still be the 1978 revision
of property values. Certainly, to continue collecting real property taxes based on valuations arrived at
several years ago, in disregard of the increases in the value of real properties that have occurred since
then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of
a sound tax system, requires that sources of revenues must be adequate to meet government
expenditures and their variations.
Chavez argues further that the unreasonable increase in real property taxes brought about by Executive
Order No. 73 amounts to a confiscation of property repugnant to the constitutional guarantee of due
process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila and Sison v. Ancheta, et al.
The reliance on these two cases is certainly misplaced because the due process requirement called for
therein applies to the "power to tax." Executive Order No. 73 does not impose new taxes nor increase
taxes.

TAXES Distinguished from DEBT

G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, CTA, CA
FACTS: The BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of
1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123, 821.982.52. In a letter dated
August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has
pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of
P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the
tax liabilities.
In reply, the BIR found no merit in Philex's position. Since these pending claims have not yet been
established or determined with certainty, it follows that no legal compensation can take place. Hence, the
BIR reiterated its demand. Philex raised the issue with CTA, but the latter denied the same, which was also
later on affirmed by the CA. In the course of the proceedings with CA, Philex was able to obtain its VAT
input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994. In view of the
grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise
tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16 hence,
legal compensation can properly take place.

ISSUE: WON Philex S/B allowed to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been granted.
HELD: NO. Taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. 17 There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in
its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction. The
collection of a tax cannot await the results of a lawsuit against the government.
We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that
taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been granted. It must be
noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the
payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the government or that the collection of the tax is contingent
on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers credit and offset their
tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of
1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to
grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to
establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has
submitted all the required documents it is the function of the BIR to assess these documents with
purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government
render fair service to the taxpayers. 34
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled
rule that in the performance of governmental function, the State is not bound by the neglect of its agents
and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's
predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax
liabilities.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every public employee or
servant must strive to render service to the people with utmost diligence and efficiency. Insolence and
delay have no place in government service. The BIR, being the government collecting arm, must and
should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take judicial notice of the
taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its
detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same
cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own
hands" should have guided Philex's action.
Gerochi vs Dept. of Energy

FACTS: Petitioners seek to declare unconstitutional Section 34 of Republic Act (RA) 9136, otherwise known
as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the Universal Charge, 1and Rule 18 of
the Rules and Regulations (IRR)2 which seeks to implement the said imposition. They contend that the
Universal Charge has the characteristics of a tax which is to be collected from all electric end-users and
self-generating entities and is collected to fund the operations of the NPC. That the power to tax is strictly
a legislative function and as such, the delegation of said power to any executive or administrative agency
like the ERC is unconstitutional, giving the same unlimited authority.
ISSUE:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax;
2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC. 26
HELD: The assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police
power. Public welfare is surely promoted.
To resolve the first issue, it is necessary to distinguish the States power of taxation from the police power.
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 that is to pay it. 30 It is based on the principle that taxes are the
lifeblood of the government, and their prompt and certain availability is an imperious need. 31 Thus, the
theory behind the exercise of the power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of the people. 32
On the other hand, police power is the power of the state to promote public welfare by restraining and
regulating the use of liberty and property. 33 It is the most pervasive, the least limitable, and the most
demanding of the three fundamental powers of the State. The justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut
alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute
of sovereignty which virtually extends to all public needs, police power grants a wide panoply of
instruments through which the State, as parens patriae, gives effect to a host of its regulatory
powers.34 We have held that the power to "regulate" means the power to protect, foster, promote,
preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility
and of its patrons.35
The conservative and pivotal distinction between these two powers rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised
does not make the imposition a tax.36
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the
purposes for which the Universal Charge is imposed 37 and which can be amply discerned as regulatory in
character. The EPIRA resonates such regulatory
Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police
power.38
The Second Issue
The principle of separation of powers ordains that each of the three branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed
in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated).

This is based on the ethical principle that such delegated power constitutes not only a right but a duty to
be performed by the delegate through the instrumentality of his own judgment and not through the
intervening mind of another. 47 In the face of the increasing complexity of modern life, delegation of
legislative power to various specialized administrative agencies is allowed as an exception to this
principle.48 Given the volume and variety of interactions in today's society, it is doubtful if the legislature
can promulgate laws that will deal adequately with and respond promptly to the minutiae of everyday life.
Hence, the need to delegate to administrative bodies - the principal agencies tasked to execute laws in
their specialized fields - the authority to promulgate rules and regulations to implement a given statute
and effectuate its policies. All that is required for the valid exercise of this power of subordinate legislation
is that the regulation be germane to the objects and purposes of the law and that the regulation be not in
contradiction to, but in conformity with, the standards prescribed by the law. These requirements are
denominated as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature
such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test
mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's
authority and prevent the delegation from running riot.49
The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.
SCOPE OF THE LEGISLATIVE TAXING POWER
ROXAS vs CTA
FACTS: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province; - sold to the agricultural farmers in instalment for a period of 10 years
(2) A residential house and lot located at Wright St., Malate, Manila; and - Jose paid to Roxas y Cia.
rentals for the house in the sum of P8,000.00 a year.
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose
Roxas, formed a partnership called Roxas y Compania.

CIR - CIR demanded from Roxas y Cia the payment of real estate dealer's tax based on the fact that Roxas
y Cia. received house rentals from Jose Roxas.
Assessed deficiency income taxes against the Roxas Brothers which resulted from the inclusion as income
of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia and the Roxas brothers. For the reason that
Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the
Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the
profits derived therefrom was taxed.
ISSUES:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%
taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
HELD:
NASUGBU Farm
NO. Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to
Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the
sale thereof is capital gain, taxable only to the extent of 50%.
This is an isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds
of vendees. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who
tilled them for generations was not only in consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the
Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and
to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the same way and
under the same terms as would have been the case had the Government done it itself. For this
magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the
general public's trust and confidence in the Government this power must be used justly and not
treacherously. It does not conform with Our sense of justice in the instant case for the Government to
persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent
call.
DISALLOWED DEDUCTIONS
Claimed as representation expenses. > Tickets to a banquet given in honor of Sergio Osmena; San Miguel
beer given as gifts to various persons.

The evidence does not show such link between the expenses and the business of Roxas y Cia.

Contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police

Not deductible for the reason that the Christmas funds were not spent for public purposes but as
Christmas gifts to the families of the members of said entities.

Contribution to Our Lady of Fatima chapel at the FEU

ALLOWED DEDUCTIONS
Contribution to the Manila Police trust fund

Allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended
to be used exclusively for its public functions.

Philippines Herald's fund for Manila's neediest families

A group of citizens may be classified as an association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.

Fixed tax on real estate dealers rent in the house

YES. Roxas y Cia is a real state dealer in this instance, as defined by law.
PHILIPPINE HEALTH CARE PROVIDERS, INC., vs. COMMISSIONER OF INTERNAL REVENUE
FACTS: CIR sent PHILHEALTH a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes. The deficiency [documentary stamp tax (DST)] assessment
was imposed on petitioners health care agreement with the members of its health care program claimed
as a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
Petitioner protested the assessment in a letter.
ISSUE: WON PHILHEALTH is an insurance company and hence liable on DST on its health care agreements.
HELD: In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We
held that petitioners health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare
Health Systems, Inc. v. CA.4We also ruled that petitioners contention that it is a health maintenance
organization (HMO) and not an insurance company is irrelevant because contracts between companies like
petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not
a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges
for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on
June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under
RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08
representing 5% of its net worth as of the year ending December 31, 2005.8
We find merit in petitioners motion for reconsideration.
PHILHEALTH is a HMO, not an insurance company.
Petitioner was formally registered and incorporated with the SEC. It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements with it.
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO
is "an entity that provides, offers or arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium." 19 The payments do not vary with the extent, frequency or type of
services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent
taxable years? We rule that it was not. NO PROFIT derived

From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2)the maker should be transacting the business of accident, fidelity, employers
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
The Power To Tax Is Not The Power To Destroy
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 is to pay it. 51 So potent
indeed is the power that it was once opined that "the power to tax involves the power to destroy." 52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its net
worth ofP259 million.54 Respondent never disputed these assertions. Given the realities on the ground,
imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to
throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg." 58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses
because of a tax imposition may be an acceptable consequence but killing the business of an entity is
another matter and should not be allowed. It is counter-productive and ultimately subversive of the
nations thrust towards a better economy which will ultimately benefit the majority of our people. 59
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case
as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities
of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in
case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said
amnesty law.62(Emphasis supplied)
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its imposition will
elevate the cost of health care services. This will in turn necessitate an increase in the membership fees,
resulting in either placing health services beyond the reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither side wins, considering the indispensability of the
services offered by HMOs.
POWER of Judicial Review in Taxation
G.R. No. L-23771 August 4, 1988 THE COMMISSIONER OF INTERNAL REVENUE vs. LINGAYEN
GULF ELECTRIC POWER CO., INC. , CTA
FACTS: The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric power plant
serving the adjoining municipalities of Lingayen and Binmaley, both in the province of Pangasinan,
pursuant to the municipal franchise granted it by their respective municipal councils.
On November 21, 1955, the BIR assessed against and demanded from the private respondent the total
amount of P19,293.41 representing deficiency franchise taxes and surcharges for the years 1946 to 1954
applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as
prescribed in Section 259 of the National Internal Revenue Code, instead of the lower rates as provided in
the municipal franchises. On September 29, 1956, the private respondent requested for a reinvestigation
of the case on the ground that instead of incurring a deficiency liability, it made an overpayment of the

franchise tax. On April 30, 1957, the BIR through its regional director, denied the private respondent's
request for reinvestigation and reiterated the demand for payment of the same.
In a letter dated August 21, 1962, the Commissioner demanded from the private respondent the payment
of P3,616.86 representing deficiency franchise tax and surcharges for the years 1959 to 1961 again
applying the franchise tax rate of 5% on gross receipts as prescribed in Section 259 of the National Internal
Revenue Code. In a letter dated October 5, 1962, the private respondent protested the assessment and
requested reconsideration thereof The same was denied on November 9, 1962. Thus, the appeal to the
respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No. 1302.
Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22, 1 963, granting
to the private respondent a legislative franchise for the operation of the electric light, heat, and power
system in the same municipalities of Pangasinan.
ISSUES:
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code
assessed against the private respondent on its gross receipts realized before the effectivity of R.A- No.
3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the "uniformity and
equality of taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be given retroactive
effect so as to render uncollectible the taxes in question which were assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage taxes in the
amount of P3,025.96 for the period from January 1, 1946 to February 29, 1948, the period before the
approval of its municipal franchises.
HELD:
1. NO. R.A. No. 3843 granted the private respondent a legislative franchise in June, 1963, amending,
altering, or even repealing the original municipal franchises, and providing that the private
respondent should pay only a 2% franchise tax on its gross receipts, "in lieu of any and all taxes
and/or licenses of any kind, nature or description levied, established, or collected by any authority
whatsoever, municipal, provincial, or national, now or in the future ... and effective further upon
the date the original franchise was granted, no other tax and/or licenses other than the franchise
tax of two per centum on the gross receipts ... shall be collected, any provision of law to the
contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the private respondent was liable to
pay only the 2% franchise tax, effective from the date the original municipal franchise was granted.
2. On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being
violative of the "uniformity and equality of taxation" clause of the Constitution, and, if adjudged
valid, whether or not it should be given retroactive effect, the petitioner submits that the said law is
unconstitutional insofar as it provides for the payment by the private respondent of a franchise tax
of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise
tax imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on
uniformity and equality of taxation.
A tax is uniform when it operates with the same force and effect in every place where the subject of
it is found. Uniformity means that all property belonging to the same class shall be taxed alike The
Legislature has the inherent power not only to select the subjects of taxation but to grant
exemptions. Tax exemptions have never been deemed violative of the equal protection clause. It is

true that the private respondents municipal franchises were obtained under Act No. 667 2 of the
Philippine Commission, but these original franchises have been replaced by a new legislative
franchise, i.e. R.A. No. 3843.
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax
rate provided in Section 259 of the Tax Code was never intended to have a universal application. 4 We note
that the said Section 259 of the Tax Code expressly allows the payment of taxes at rates lower than 5%
when the charter granting the franchise of a grantee, like the one granted to the private respondent under
Section 4 of R.A. No. 3843, precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and
specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any and all taxes, all laws to the
contrary notwithstanding," thus, leaving no room for doubt regarding the legislative intent. "Charters or
special laws granted and enacted by the Legislature are in the nature of private contracts. They do not
constitute a part of the machinery of the general government. They are usually adopted after careful
consideration of the private rights in relation with resultant benefits to the State ... in passing a special
charter the attention of the Legislature is directed to the facts and circumstances which the act or charter
is intended to meet. The Legislature consider (sic) and make (sic) provision for all the circumstances of a
particular case." 5 In view of the foregoing, we find no reason to disturb the respondent court's ruling
upholding the constitutionality of the law in question.
3. Given its validity, should the said law be applied retroactively so as to render uncollectible the taxes
in question which were assessed before its enactment? The question of whether a statute operates
retrospectively or only prospectively depends on the legislative intent. In the instant case, Act No.
3843 provides that "effective ... upon the date the original franchise was granted, no other tax
and/or licenses other than the franchise tax of two per centum on the gross receipts ... shall be
collected, any provision to the contrary notwithstanding." Republic Act No. 3843 therefore
specifically provided for the retroactive effect of the law.
4. The last issue to be resolved is whether or not the private respondent is liable for the fixed and
deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from January 1, 1946 to
February 29, 1948) before the approval of its municipal franchises. As aforestated, the franchises
were approved by the President only on February 24, 1948. Therefore, before the said date, the
private respondent was liable for the payment of percentage and fixed taxes as seller of light, heat,
and power which as the petitioner claims, amounted to P3,025.96. The legislative franchise (R.A.
No. 3843) exempted the grantee from all kinds of taxes other than the 2% tax from the date the
original franchise was granted. The exemption, therefore, did not cover the period before the
franchise was granted, i.e. before February 24, 1948.
COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners, vs. HON.
JUDGE APOLINARIO B. SANTOS
FACTS: Letter of Authority was issued to BIR officers to examine the books of accounts and other
accounting records of the different members of private respondent Guild of Philippine Jewelers, Inc., - an
association of Filipino jewelers engaged in the manufacture of jewelries (sic) and allied undertakings.
On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with
the RTC - Pasig a petition for declaratory relief with writ of preliminary injunction and/or temporary
restraining order against herein petitioners and Revenue Regional Director Felicidad L. Viray (docketed as
Civil Case No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of the National Internal
Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs Code of
the Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and
Customs be prevented or enjoined from issuing mission orders and other orders of similar nature. .
ISSUE: WON RTC can declare a law (certain provisions of the Tariff & Customs Code and the National
Internal Revenue Code) inoperative and without force and effect or otherwise unconstitutional? If it can,
under what circumstances?

HELD: There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judge
encroached upon matters properly falling within the province of legislative functions. In citing as basis for
his decision unproven comparative data pertaining to differences between tax rates of various Asian
countries, and concluding that the jewelry industry in the Philippines suffers as a result, the respondent
judge took it upon himself to supplant legislative policy regarding jewelry taxation. In advocating the
abolition of local tax and duty on jewelry simply because other countries have adopted such policies, the
respondent judge overlooked the fact that such matters are not for him to decide. There are reasons why
jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by our
legislature, are beyond the reach of judicial questioning. As held in Macasiano vs. National Housing
Authority: 15
The policy of the courts is to avoid ruling on constitutional questions and to presume that
the acts of the political departments are valid in the absence of a clear and unmistakable
showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of
separation of powers which enjoins upon each department a becoming respect for the acts
of the other departments. The theory is that as the joint act of Congress and the President of
the Philippines, a law has been carefully studied and determined to be in accordance with
the fundamental low before it was finally enacted. (emphasis ours)
What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is
not competent to rule. 16 As Cooley observed: "Debatable questions are for the legislature to decide. The
courts do not sit to resolve the merits of conflicting issues." 17 In Angara vs. Electoral
Commission, 18 Justice Laurel made it clear that "the judiciary does not pass upon questions of wisdom,
justice or expediency of legislation." And fittingly so, for in the exercise of judicial power, we are allowed
only "to settle actual controversies involving rights which are legally demandable and enforceable", and
may not annul an act of the political departments simply because we feel it is unwise or impractical. 19This
is not to say that Regional Trial Courts have no power whatsoever to declare a law unconstitutional.
In J.M. Tuason andCo. v. Court of Appeals, 20 we said that "[p]lainly the Constitution contemplates that the
inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks
of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be
in issue." This authority of lower courts to decide questions of constitutionality in the first instance
reaffirmed in Ynos v. Intermediate Court of Appeals. 21 But this authority does not extend to deciding
questions which pertain to legislative policy.
The trial court is not the proper forum for the ventilation of the issues raised by the private respondents.
The arguments they presented focus on the wisdom of the provisions of law which they seek to nullify.
Regional Trial Courts can only look into the validity of a provision, that is, whether or not it has been
passed according to the procedures laid down by law, and thus cannot inquire as to the reasons for its
existence. Granting arguendo that the private respondents may have provided convincing arguments why
the jewelry industry in the Philippines should not be taxed as it is, it is to the legislature that they must
resort to for relief, since with the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) andsitus (place) of taxation. This Court cannot freely
delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. 22
As succinctly put in Lim vs. Pacquing: 23 "Where a controversy may be settled on a platform other than one
involving constitutional adjudication, the court should exercise becoming modesty and avoid the
constitutional question." As judges, we can only interpret and apply the law and, despite our doubts about
its wisdom, cannot repeal or amend it. 24
The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian
countries. This is meant to convince us that compared to other countries, the tax rates imposed on said
industry in the Philippines is oppressive and confiscatory. This Court, however, cannot subscribe to the
theory that the tax rates of other countries should be used as a yardstick in determining what may be the
proper subjects of taxation in our own country. It should be pointed out that in imposing the
aforementioned taxes and duties, the State, acting through the legislative and executive branches, is
exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to select the

subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out or
one particular class for taxation, or exemption, infringe no constitutional limitation.
Nature of the Power of Taxation Subject to Constitutional and Inherent Limitations
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY 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
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.
FACTS: 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.
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
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:
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:
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 governmentowned 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
ISSUE: WON petitioner is a taxable person ; exempted from realty taxes on parcels of land
belonging to it
HELD:
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.
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.
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. 14So 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. 16But 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.
LUZON STEVEDORING CORPORATION vs. COURT OF TAX APPEALS and the HONORABLE
COMMISSIONER OF INTERNAL REVENUE
FACTS: In 1961 and 1962, for the repair and maintenance of its tugboats, imported various engine parts
and other equipment for which it paid, under protest, the assessed compensating tax. Unable to secure a
tax refund from the Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review
(Rollo, pp. 14-18) with the Court of Tax Appeals.
ISSUE: WON petitioner's tugboats" can be interpreted to be included in the term "cargo vessels" for
purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as
amended by Republic Act No. 3176.
HELD: In order that the importations in question may be declared exempt from the compensating tax, it is
indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and
spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said
passenger and/or cargo vessel must be used in coastwise or oceangoing navigation.
The amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating tax to
imported items to be used by the importer himself as operator of passenger and/or cargo vessel
Petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. Thus, it is a
cardinal principle of statutory construction that where a provision of law speaks categorically, the need for
interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to
be done is to apply it in every case that falls within its terms.
ESSENTIAL Characteristics of TAX
JOSE DE BORJA vs VICENTE G. GELLA, ET AL., respondents-appellants.
FACTS: Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties
located in the City of Manila and Pasay City and has offered to pay them with two negotiable, certificates of
indebtedness Nos. 3064 and 3065 in the amounts of P793.40 and P717.69, respectively. Borja was,
however, a mere assignee of the aforesaid negotiable certificates, the applicants for backpay rights
covered by them being respectively Rafael Vizcaya and Pablo Batario Luna. The offers to pay the estate
taxes in question were rejected by the city treasurers of both Manila and Pasay cities on the ground of their

limited negotiability under Section 2, Republic Act No. 304, as amended by Republic Act 800, and in the
case of the city treasurer of Manila on the further ground that he was ordered not to accept them by the
city mayor, for which reason Borja was prompted to bring the question to the Treasurer of the Philippines
who opined, among others, that the negotiable certificates cannot be accepted as payment of real estate
taxes inasmuch as the law provides for their acceptance from their backpay holder only or the original
applicant himself, but not his assignee.
ISSUES:
(a) has appellee the right to apply to the payment of his real estate taxes to the government of Manila and
Pasay cities the certificates of indebtedness he holds while appellants have the correlative legal duty to
accept the certificates in payment of said taxes?;
(b) can compensation be invoked to extinguish appellee's real estate tax liability between the latter's
obligation and the credit represented by said certificates of indebtedness?

HELD: To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable
certificates of indebtedness held by appellee in payment of his real estate taxes for the simple reason that
they were not obligations subsisting at the time of the approval of Republic Act No. 304 which took effect
on June 18, 1948. It should be noted that the real estate taxes in question have reference to those due in
1958 and subsequent years. The law is explicit that in order that a certificate may be used in payment of
an obligation the same must be subsisting at the time of its approval even if we hold that a tax partakes of
this character, neither can it be contended that appellee can compel the government to accept the alleged
certificates of indebtedness in payment of his real estate taxes under proviso No. 2 abovequoted also for
the reason that in order that such payment may be allowed the tax must be owed by the applicant
himself . This is the correct implication that may be drawn from the use by the law of the words "his
taxes". Verily, the right to use the backpay certificate in settlement of taxes is given only to the applicant
and not to any holder of any negotiable certificate to whom the law only gives the right to have it
discounted by a Filipino citizen or corporation under certain limitations. Here appellee is not himself the
applicant of the certificate, in question. He is merely an assignee thereof, or a subsequent holder whose
right is at most to have it discounted upon maturity or to negotiate it in the meantime.
We are aware of the cases 2 cited by the court a quo wherein the government banking institutions were
ordered to accept the backpay certificates of petitioners in payment of their indebtedness to them, but
they are not here in point because in the cases mentioned the petitioners were applicants and original
holders of the corresponding backpay certificates. Here appellee is not.
Second issue, i.e., whether compensation can be invoked insofar as the two obligations are
concerned, Articles 1278 and 1279 of the new Civil Code.
It is clear from the above legal provisions that compensation cannot be effected with regard to the two
obligations in question. In the first place, the debtor insofar as the certificates of indebtedness are
concerned is the Republic of the Philippines, whereas the real estate taxes owed by appellee are due to the
City of Manila and Pasay City, each one of which having a distinct and separate personality from our
Republic. With regard to the certificates, the creditor is the appellee while the debtor is the Republic of the
Philippines. And with regard to the taxes, the creditors are the City of Manila and Pasay City while the
debtor is the appellee. It appears, therefore, that each one of the obligors concerning the two obligations is
not at the same time the principal creditor of the other. It cannot also be said for certain that the
certificates are already due. Although on their faces the certificates issued to appellee state that they are
redeemable on June 18, 1958, yet the law does not say that they are redeemable from its approval on June
18, 1948 but "within ten years from the date of issuance" of the certificates. There is no certainty,
therefore, when the certificates are really redeemable within the meaning of the law. Since the requisites
for the accomplishment of legal compensation cannot be fulfilled, the latter cannot take place with regard
to the two obligations as found by the court a quo.

TAN TIONG BIO, ET AL., vs. COMMISSIONER OF INTERNAL REVENUE

FACTS: On January 31, 1948, the syndicate again wrote the Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due to the adjustment and reduction of the purchase
price in the amount of P31,522.18. Said letter was referred to an agent for verification and report. On
September 18, 1951, after a thorough investigation of the facts and circumstances surrounding the
transaction, the agent reported (1) that Dee Hong Lue purchased the surplus goods as trustee for the
Central Syndicate which was in the process of organization at the time of the bidding; (2) that it was the
representatives of the Central Syndicate that removed the surplus goods from their base at Leyte on
February 21, 1947; (3) that the syndicate must have realized a gross profit of 18.8% from its sales thereof;
and (4) that if the sales tax were to be assessed on its gross sales it would still be liable for the amount of
P33,797.88 as deficiency sales tax and surcharge in addition to the amount of P43,750.00 which the
corporation had deposited in the name of Dee Hong Lue as estimated sales tax due from the latter.
Based on the above findings of the agent in charge of the investigation, the Collector decided that the
Central Syndicate was the importer and original seller of the surplus goods in question and, therefore, the
one liable to pay the sales tax. Accordingly, on January 4, 1952, the Collector assessed against the
syndicate the amount of P33,797.88 and P300.00 as deficiency sales tax, inclusive of the 25% surcharge
and compromise penalty, respectively, and on the same date, in a separate letter, he denied the request of
the syndicate for the refund of the sum of P1,103.28.
ISSUES:
(1) whether the importer of the surplus goods in question the sale of which is subject to the present tax
liability is Dee Hong Lue or the Central Syndicate who has been substituted by the present
petitioners;
(2) whether the deficiency sales tax which is now sought to be collected has already prescribed; and
(3) the Central Syndicate having already been dissolved because of the expiration of its corporate
existence, whether the sales tax in question can be enforced against its successors-in-interest who
are the present petitioners.
HELD: Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of
P229,073.83, and that the sale of said goods was the only transaction undertaken by said syndicate, there
being no evidence to the contrary, the conclusion is that said net profit remained intact and was
distributed among the stockholders when the corporation liquidated and distributed its assets on August
15, 1948, immediately after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of
the defunct corporation and as such should be held liable to pay the taxes in question. However, there
being no express provision requiring the stockholders of the corporation to be solidarily liable for its debts
which liability must be express and cannot be presumed, petitioners should be held to be liable for the tax
in question only in proportion to their shares in the distribution of the assets of the defunct corporation.
The decision of the trial court should be modified accordingly.
1. The overwhelming evidence presented by the Collector points to the conclusion that Dee Hong Lue
purchased the surplus goods in question not for himself but for the Central Syndicate which was then in
the process of incorporation such that the deed of sale Exhibit 13 which purports to show that Dee
Hong Lue sold said goods to the syndicate for a consideration of P1,250,000.00 (the same amount paid
by Dee Hong Lue to the Foreign Liquidation Commission) "is but a ruse to evade payment of a greater
amount of percentage tax." The aforesaid conclusion of the lower court was arrived at after a thorough
analysis of the evidence on record.
On the basis of the above figures, the re-allocation of shares in favor of the four (4)
incorporators who advanced enormous sums for the Syndicate seems at first glance to be totally

disproportionate and unfair to them. However, in the final analysis it is not so as we will now show.
Immediately after the incorporation of the Syndicate, as the evidence shows, Dee Hong Lue was
made to execute a deed of transfer under the guise of a contract of sale, conveying full and
complete ownership of the "Mystery Pile" to the newly organized corporation. So we have, on the
face of the Articles of Incorporation and Exhibit 13, a corporation with assets worth only P50,000.00
cash owning properties worth over a million pesos. Obviously, the incorporators of the Syndicate,
particularly those four who advanced enormous sums to Dee Hong Lue, are not ordinary
businessmen who could easily be taken for a ride. With the precipitated execution of the "Deed of
Sale" by Dee Hong Lue in favor of the Syndicate, transferring and conveying ownership over the
entire pile to the latter, the recoupment of their advances from the newly acquired assets of the
corporation was sufficiently secured, and at the same time, by making the document appear to be a
deed of sale instead of a deed of transfer as it should be under Article 1891 of the New Civil Code,
they have reduced (at least attempted to) their sales tax liability with the argument that Dee Hong
Lue was the original "purchaser" or "importer" of the goods and therefore the taxable sale was that
one made by him to the Syndicate and not the sales made by the latter to the public. After going
over the Articles of Incorporation of the Central Syndicate and the other circumstances of this case,
we draw the conclusion that it was organized just for this particular transaction that its life span
was expressly limited to two (2) years from and after the date of incorporation just to give it time to
dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven
incorporators-stockholders as in fact it was done on August 15, 1948; that from the very start, the
seven (7) incorporators had intended it to be a closed corporation without the least intention of
ever selling to other persons the remaining authorized capital stock of P300,000.00 still
unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got much
more than their investments including those who advanced P1,181,000.00 to the FLC for the
corporation.
2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus goods in
question, it was its duty under Section 183 of the Internal Revenue Code to file a return of its gross sales
within 20 days after the end of each quarter in order that the office of the internal revenue may assess the
sales tax that may be due thereon, but, as the record shows, the Central Syndicate failed to file any return
of its quarterly sales on the pretext that it was Dee Hong Lue who imported the surplus goods and it
merely purchased them from said importer.
3. It should be stated at the outset that it was petitioners themselves who caused their substitution as
parties in the present case, being the successors-in-interest of the defunct syndicate, when they appealed
this case to the Supreme Court for which reason the latter Court declared that "the respondent Court of Tax
Appeals should have allowed the substitution of its former officers and directors is parties-appellants, since
they are proper parties in interest insofar as they may be (and in fact are) held personally liable for the
unpaid deficiency assessments made by the Collector of Internal Revenue against the defunct Syndicate."
In fact, because of this directive their substitution was effected. They cannot, therefore, be now heard to
complain if they are made responsible for the tax liability of the defunct syndicate whose representation
they assumed and whose assets were distributed among them.
In the second place, there is good authority to the effect that the creditor of a dissolved corporation may
follow its assets once they passed into the hands of the stockholders. Thus, recognized are the following
rules in American jurisprudence: The dissolution of a corporation does not extinguish the debts due or
owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed., 705).
A creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the hands of
its stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a corporation
to the federal government for income and excess profit taxes is not extinguished by the dissolution of the
corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32).
And it has been stated, with reference to the effect of dissolution upon taxes due from a corporation, "that
the hands of the government cannot, of course, collect taxes from a defunct corporation, it loses thereby
none of its rights to assess taxes which had been due from the corporation, and to collect them from
persons, who by reason of transactions with the corporation, hold property against which the tax can be
enforced and that the legal death of the corporation no more prevents such action than would the physical

death of an individual prevent the government from assessing taxes against him and collecting them from
his administrator, who holds the property which the decedent had formerly possessed" (Wonder Bakeries
Co. v. U.S. [1934] Ct. Cl. 6 F. Supp. 288). Bearing in mind that our corporation law is of American origin, the
foregoing authorities have persuasive effect in considering similar cases in this jurisdiction. This must have
been taken into account when in G.R. No. L-8800 this Court said that petitioners could be held personally
liable for the taxes in question as successors-in-interest of the defunct corporation.
LIMITATIONS UPON THE POWER OF TAXATION
A. Inherent Limitations
1. Public Purpose
BENJAMIN P. GOMEZ, petitioner-appellee, vs. ENRICO PALOMAR
FACTS: On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San
Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street,
Singalong, Manila did not bear the special anti-TB stamp required by the statute, it was returned to the
petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of First Instance of
Pampanga, to test the constitutionality of the statute, as well as the implementing administrative orders
issued, contending that it violates the equal protection clause of the Constitution as well as the rule of
uniformity and equality of taxation. The lower court declared the statute and the orders unconstitutional;
hence this appeal by the respondent postal authorities.
ISSUE: WON the statute is violative of the equal protection clause and; WON the tax is not valid.
HELD: NO.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More specifically
the claim is made that it constitutes mail users into a class for the purpose of the tax while leaving
untaxed the rest of the population and that even among postal patrons the statute discriminatorily grants
exemption to newspapers while Administrative Order 9 of the respondent Postmaster General grants a
similar exemption to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid
upon the exercise of a privilege, namely, the privilege of using the mails. As such the objections levelled
against it must be viewed in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation and
to grant exemptions.4 This power has aptly been described as "of wide range and flexibility." 5 Indeed, it is
said that in the field of taxation, more than in other areas, the legislature possesses the greatest freedom
in classification.6 The reason for this is that traditionally, classification has been a device for fitting tax
programs to local needs and usages in order to achieve an equitable distribution of the tax burden. 7
We are not wont to invalidate legislation on equal protection grounds except by the clearest demonstration
that it sanctions invidious discrimination, which is all that the Constitution forbids. The remedy for unwise
legislation must be sought in the legislature. Now, the classification of mail users is not without any reason.
It is based on ability to pay, let alone the enjoyment of a privilege, and on administrative convinience. In
the allocation of the tax burden, Congress must have concluded that the contribution to the anti-TB fund
can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it is now a settled
principle of law that "consideration of practical administrative convenience and cost in the administration
of tax laws afford adequate ground for imposing a tax on a well recognized and defined class." 9 In the case

of the anti-TB stamps, undoubtedly, the single most important and influential consideration that led the
legislature to select mail users as subjects of the tax is the relative ease and convenienceof collecting the
tax through the post offices. The small amount of five centavos does not justify the great expense and
inconvenience of collecting through the regular means of collection. On the other hand, by placing the duty
of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users
were already a class by themselves even before the enactment of the statue and all that the legislature did
was merely to select their class. Legislation is essentially empiric and Republic Act 1635, as amended, no
more than reflects a distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences
that exist in fact is living law; to disregard [them] and concentrate on some abstract identities is lifeless
logic."10
2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public
purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates the rule
of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means
benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit
to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of
living in an organized society, established Nor is the rule of uniformity and equality of taxation infringed by
the imposition of a flat rate rather than a graduated tax. A tax need not be measured by the weight of the
mail or the extent of the service rendered. We have said that considerations of administrative convenience
and cost afford an adequate ground for classification. The same considerations may induce the legislature
to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons within
the class regardless of the amount involved.
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant, vs. J. ANTONIO ARANETA, as the Collector of Internal
Revenue, defendant-appellee.
FACTS: This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the
taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the
estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively,
which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court
(Judiciary Act, section 17).
ISSUE: WON the tax imposed is valid
HELD: YES. Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must be
allowed fully play, subject only to the test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive
in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may
not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of
the state's police power.
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be

benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation".
From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that
very enterprise that is being protected. It may be that other industries are also in need of similar
protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As
ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably
hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it
might have been applied;" and that "the legislative authority, exerted within its proper field, need not
embrace all the evils within its reach".
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of byproducts and solution of allied problems, as well as to the improvements of living and working conditions in
sugar mills or plantations, without any part of such money being channeled directly to private persons,
constitutes expenditure of tax money for private purposes.
The decision appealed from is affirmed, with costs against appellant. So ordered.
PLANTERS PRODUCTS, INC., vs. FERTIPHIL CORPORATION
FACTS: Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws.3 They are both engaged in the importation and distribution of fertilizers, pesticides and
agricultural chemicals. On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component
(CRC) on the domestic sale of all grades of fertilizers in the Philippines. 4
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the
Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and
Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January
24, 1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI
refused to accede to the demand.7
Fertiphil filed a complaint for collection and damages 8 against FPA and PPI with the RTC in Makati. It
questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an
unlawful imposition that amounted to a denial of due process of law. 9 Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.
ISSUE: WON LOI 1465, being a law implemented for the purpose of assuring the fertilizer supply and
distribution in the country, and for benefiting a foundation created by law to hold in trust for millions of
farmers their stock ownership in PPI constitutes a valid legislation pursuant to the exercise of taxation and
police power for public purposes.
HELD: NOPE . The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the
ground that the law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void.
It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies
duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against
unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC

surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota of
the complaint with the RTC.
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt,
was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as
much as five percent.45 A plain reading of the LOI also supports the conclusion that the levy was for
revenue generation. The LOI expressly provided that the levy was imposed "until adequate capital is raised
to make PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a
public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private
persons.46 The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in
its power is the limitation that it should be used only for a public purpose. It would be a robbery for the
State to tax its citizens and use the funds generated for a private purpose. As an old United States case
bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with
the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called taxation." 47
The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not
only pertain to those purposes which are traditionally viewed as essentially government functions, such as
building roads and delivery of basic services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and
urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benefit and advantage to a private enterprise, that
law will not satisfy the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree
with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose. We agree
with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is
true that the power of taxation can be used as an implement of police power, 41 the primary purpose of the
levy is revenue generation. 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.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and
have different tests for validity. Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the general welfare, 39 while the power of
taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the
regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and "lawful
means" tests are used to determine the validity of a law enacted under the police power. 40 The power of
taxation, on the other hand, is circumscribed by inherent and constitutional limitations.
Inherent Limitations Non-DELEGABILITY
CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan) vs. THE EXECUTIVE SECRETARY
FACTS: On 27 November 1990, the President issued Executive Order No. 438 which imposed, in addition
to any other duties, taxes and charges imposed by law on all articles imported into the Philippines, an

additional duty of five percent (5%) ad valorem. This additional duty was imposed across the board on all
imported articles, including crude oil and other oil products imported into the Philippines. This additional
duty was subsequently increased from five percent (5%) ad valorem to nine percent (9%) ad valorem by
the promulgation of Executive Order No. 443, dated 3 January 1991.
On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the process
required by the Tariff and Customs Code for the imposition of a specific levy on crude oil and other
petroleum products, covered by HS Heading Nos. 27.09, 27.10 and 27.11 of Section 104 of the Tariff and
Customs Code as amended. Accordingly, the Tariff Commission, following the procedure set forth in Section
401 of the Tariff and Customs Code, scheduled a public hearing to give interested parties an opportunity to
be heard and to present evidence in support of their respective positions.
Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991 reducing the rate of
additional duty on all imported articles from nine percent (9%) to five percent (5%) ad valorem, except in
the cases of crude oil and other oil products which continued to be subject to the additional duty of nine
percent (9%) ad valorem.
Upon completion of the public hearings, the Tariff Commission submitted to the President a "Report on
Special Duty on Crude Oil and Oil Products" dated 16 August 1991, for consideration and appropriate
action. Seven (7) days later, the President issued Executive Order No. 478, dated 23 August 1991, which
levied (in addition to the aforementioned additional duty of nine percent (9%) ad valorem and all other
existing ad valorem duties) a special duty of P0.95 per liter or P151.05 per barrel of imported crude oil and
P1.00 per liter of imported oil products.
In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the validity of Executive
Orders Nos. 475 and 478. He argues that Executive Orders Nos. 475 and 478 are violative of Section 24,
Article VI of the 1987 Constitution which provides as follows:
Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
He contends that since the Constitution vests the authority to enact revenue bills in Congress, the
President may not assume such power by issuing Executive Orders Nos. 475 and 478 which are in
the nature of revenue-generating measures.
Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of the Tariff and
Customs Code, which Section authorizes the President, according to petitioner, to increase, reduce or
remove tariff duties or to impose additional duties only when necessary to protect local industries or
products but not for the purpose of raising additional revenue for the government.
ISSUE: First the constitutionality and second the legality of Executive Orders Nos. 475 and 478, and asks
us to restrain the implementation of those Executive Orders.
HELD: Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the
enactment of appropriation, revenue and tariff bills, like all other bills is, of course, within the province of
the Legislative rather than the Executive Department. It does not follow, however, that therefore Executive
Orders Nos. 475 and 478, assuming they may be characterized as revenue measures, are prohibited to the
President, that they must be enacted instead by the Congress of the Philippines.
There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to such
limitations and restrictions is [Congress] may impose" to fix "within specific limits" "tariff rates . . . and
other duties or imposts . . ."

The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections 104 and
401, the pertinent provisions thereof. These are the provisions which the President explicitly invoked in
promulgating Executive Orders Nos. 475 and 478.
Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in Sections 104 and
401 of the Tariff and Customs Code, by contending that the President is authorized to act under the Tariff
and Customs Code only "to protect local industries and products for the sake of the national economy,
general welfare and/or national security."2
The Court is not persuaded. In the first place, there is nothing in the language of either Section 104 or of
401 of the Tariff and Customs Code that suggest such a sharp and absolute limitation of authority. The
entire contention of petitioner is anchored on just two (2) words, one found in Section 401 (a)(1):
"existing protective rates of import duty," and the second in the proviso found at the end of Section 401
(a): "protection levels granted in Section 104 of this Code . . . . " We believe that the words "protective"
and ''protection" are simply not enough to support the very broad and encompassing limitation which
petitioner seeks to rest on those two (2) words.
In the third place, customs duties which are assessed at the prescribed tariff rates are very much like taxes
which are frequently imposed for both revenue-raising and for regulatory purposes. 4 Thus, it has been
held that "customs duties" is "the name given to taxes on the importation and exportation of commodities,
the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country." 5 The
levying of customs duties on imported goods may have in some measure the effect of protecting local
industries where such local industries actually exist and are producing comparable goods.
Simultaneously, however, the very same customs duties inevitably have the effect of producing
governmental revenues. Customs duties like internal revenue taxes are rarely, if ever, designed to achieve
one policy objective only. Most commonly, customs duties, which constitute taxes in the sense of exactions
the proceeds of which become public funds 6 have either or both the generation of revenue and the
regulation of economic or social activity as their moving purposes and frequently, it is very difficult to say
which, in a particular instance, is the dominant or principal objective. In the instant case, since the
Philippines in fact produces ten (10) to fifteen percent (15%) of the crude oil consumed here, the
imposition of increased tariff rates and a special duty on imported crude oil and imported oil products may
be seen to have some "protective" impact upon indigenous oil production. For the effective, price of
imported crude oil and oil products is increased. At the same time, it cannot be gainsaid that substantial
revenues for the government are raised by the imposition of such increased tariff rates or special duty.
In the fourth place, petitioner's concept which he urges us to build into our constitutional and customs law,
is a stiflingly narrow one. Section 401 of the Tariff and Customs Code establishes general standards with
which the exercise of the authority delegated by that provision to the President must be consistent: that
authority must be exercised in "the interest of national economy, general welfare and/or national security."
Petitioner, however, insists that the "protection of local industries" is the only permissible objective that
can be secured by the exercise of that delegated authority, and that therefore "protection of local
industries" is the sum total or the alpha and the omega of "the national economy, general welfare and/or
national security." We find it extremely difficult to take seriously such a confined and closed view of the
legislative standards and policies summed up in Section 401. We believe, for instance, that the protection
of consumers, who after all constitute the very great bulk of our population, is at the very least as
important a dimension of "the national economy, general welfare and national security" as the protection
of local industries. And so customs duties may be reduced or even removed precisely for the purpose of
protecting consumers from the high prices and shoddy quality and inefficient service that tariff-protected
and subsidized local manufacturers may otherwise impose upon the community.
CONSTITUTIONAL LIMITATIONS
ARTURO M. TOLENTINO vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on
the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money

of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of
services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code.
FACTS: Tolentino and other petitioners questioned the constitutionality of RA 7716 otherwise known as the
EVAT Law. RA 7716 sought to widen the tax base of the existing VAT system and enhance its administration
by amending the National Internal Revenue Code.The original draft of RA 7716 (House Bill No. 11197)
originated in the House of Representatives where it passed three readings and afterward was sent to the
Senate which came up with its own version (Senate Bill No. 1630). The house bill and senate bill were then
referred to a Conference Committee which consolidated the two bill versions to produce the enrolled bill
which the President signed into law.
Tolentino avers that (1) RA 7716 did not "originate exclusively" in the House of Representatives as required
by Art. VI, Section 24 of the Constitution because it is the result of the consolidation of two distinct bills; (2)
Senate bill did not pass three readings on separate days as required by the Art. VI,Section 26 of the
Constitution because the second and third readings were done on the same day; and (3) the Conference
Committee version included provisions not found in either the House bill or the Senate bill.
HELD:
Revenue Bills to originate exclusively in the House of Representatives

1. The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in
order to compensate for the grant to the Senate of the treaty-ratifying power and thereby equalize the
powers of both houses overlooks the fact that the powers being compared are different. We are dealing
here with the legislative power, which under the Constitution is vested not in any particular chamber but in
the Congress of the Philippines, consisting of a 'Senate and a House of Representatives.' The exercise of
the treaty-ratifying power is not the exercise of legislative power. It is the exercise of a check on the
executive power.

2. It is not the law - but the revenue bill - which is required by the Constitution to "originate exclusively" in
the House of Representatives. A bill originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. As a result of the Senate action, a distinct bill may
be produced.

3. To insist that a revenue statute must substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to " propose amendments." It would violate
the coequality of legislative power of the two houses of Congress and in fact make the House superior to
the Senate.

4. What the Constitution simply means is that the initiative for filing appropriation, revenue or tariff bills,
bills authorizing increase of the public debt, bills of local application, and private bills must come from the
House of Representatives on the theory that, elected as they are from the districts, the members of the

House can be expected to be more sensitive to the local needs and problems. On the other hand, the
senators, who are elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.

5. In fact, the Constitution does not prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of
the House bill.

Procedure for Passage of Bill into Law; Presidential certification

6. The second and third reading of the Senate bill were done on the same day because the President
had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement
not only of printing but also that of reading the bill on separate days.

7. The phrase except when the President certifies to the necessity of its immediate enactment, etc. in
Art. VI, Sec 26(2) qualified the two stated conditions before a bill can become a law: (i) the bill has passed
three readings on separate days and (ii) it has been printed in its final form and distributed three days
before it is finally approved.

Bicameral Conference Committee

8. It is within the power of a conference committee to include in its report an entirely new provision that is
not found either in the House bill or in the Senate bill. If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it cannot propose several provisions,
collectively considered as an "amendment in the nature of a substitute," so long as such amendment is
germane to the subject of the bills before the committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act of the legislative department. The charge
that in this case the Conference Committee acted as a third legislative chamber is thus without any basis.

9. As to the contention that the Rules of the two chambers were disregarded in the preparation of the
Conference Committee Report because the Report did not contain a 'detailed statement of changes in, or
amendments to, the subject measure', this Court is not the proper forum for the enforcement of these
internal rules. Parliamentary rules are merely procedural and with their observance the courts have no
concern. So long as the procedural requirements under the Constitution have been observed, the court will
not step in to interfere.

10. Nor is there any reason for requiring that the Committee's Report must have undergone three readings
in each of the two houses. The nature of the bill requires that it be acted upon by each house on a 'take it

or leave it' basis, with the only alternative that if it is not approved by both houses, another conference
committee must be appointed. Art. VI, Sec 26(2) must be construed as referring only to bills introduced for
the first time in either house of Congress, not to the conference committee report.

Enrolled Bill Doctrine

11. An enrolled copy of a bill is conclusive not only of its provisions but also of its due enactment.

12. On the mere allegation that the Conference Committee surreptitiously inserted provisions into a bill
which it had prepared, the court should decline to go behind the enrolled copy of the bill. To disregard the
"enrolled bill" rule in such case would be to disregard the respect due to a co-equal branch of our
government.

One Bill, One Subject rule

13. Art. IV, Sec 26(1) provides that "Every bill passed by Congress shall embrace only one subject which
shall be expressed in the title thereof."

14. The amendment of Sec. 103 of the NIRC (which removed the VAT exemption of PAL) is fairly
embraced in the title of RA 7716. The title states that the purpose of the statute is to expand the VAT
system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted
before.

15. It is sufficient if the title expresses the general subject of the statute and all its provisions are germane
to the general subject thus expressed Congressional Franchise subject to amendment.

16. Sec 103 (Vat Exemptions) of the NIRC was amended by RA 7716. The effect of the amendment is to
remove the exemption granted to PAL, as far as the VAT is concerned.

17. This is within the power of Congress to do under Art. XII, Sec 11 of the Constitution, which provides

that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or
repeal by Congress when the common good so requires.

Freedom of Speech and of the Press (VAT on Print Publications)

18. Republic Act No. 7716 amended Sec 103 by deleting par. (f) with the result that print media became
subject to the VAT with respect to all aspects of their operations.

19. If the press is now required to pay a value-added tax on its transactions, it is not because it is being
singled out, much less targeted, for special treatment but only because of the removal of the exemption
previously granted to it by law. Other transactions, likewise previously granted exemption, have been
delisted as part of the scheme to expand the base and the scope of the VAT system. The law would
perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that
granted to the press. But that is not the case.

20. The press is not exempt from the taxing power of the State. By granting exemptions, the State does
not forever waive the exercise of its sovereign prerogative.

21. Likewise, the removal of the exemption of printing, publication or importation of books and religious
articles, as well as their printing and publication, does not violate freedom of thought and of conscience.
For as the U.S. Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization,
the Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax
on the sale of religious material by a religious organization.

22. The registration fee is not equivalent to a prior restraint. The registration requirement is a central
feature of the VAT system. The fee is not imposed for the exercise of a privilege but only for the purpose
of defraying part of the cost of registration. The registration fee is thus a mere administrative fee.

Progressive System of Taxation

23. Congress shall evolve a progressive system of taxation has been interpreted to mean that direct
taxes are to be preferred and as much as possible and indirect taxes should be minimized.

24. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation."
These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable
rights.

Non-impairment of Contracts

25. As to the contention that the imposition of the VAT on the sales and leases of real estate by virtue of
contracts entered into prior to the effectivity of the law would violate the constitutional provision that "No
law impairing the obligation of contracts shall be passed," it is enough to say that the parties to a contract
cannot fetter the exercise of the taxing power of the State. For not only are existing laws read into
contracts in order to fix obligations as between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of the legal order.

26. The Contract Clause has never been thought as a limitation on the exercise of the State's power of
taxation save only where a tax exemption has been granted for a valid consideration.

SISON vs ANCHETA

FACTS:The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on
the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity.
The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which
provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net
income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and
share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against
by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-avis those which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the
above sction as arbitrary amounting to class legislation, oppressive and capricious in character 5 For

petitioner, therefore, there is a transgression of both the equal protection and due process clauses
Constitution as well as of the rule requiring uniformity in taxation.

of the

ISSUE: WON Sec 1 of BP 135 is valid

HELD: Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling
doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the
distinction between compensation and taxable net income of professionals and businessman certainly not
a suspect classification
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly
set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and
initiative and which the government was called upon to enter optionally, and only 'because it was better
equipped to administer for the public welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be absorbed within activities that the government
must undertake in its sovereign capacity if it is to meet the increasing social challenges of the
times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed
of to assure the performance of vital state functions. It is the source of the bulk of public funds. To
praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain
availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude
'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits .
Adversely affecting as it does properly rights, both the due process and equal protection clauses inay
properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after
referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the
intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it
is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude:
"The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the
Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative
or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the
challenged statutory provision as petitioner here alleges fails to abide by its command, then this
Court must so declare and adjudge it null. The injury thus is centered on the question of whether the
imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void or its face, he has not made out a case. This is
merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to the
confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to
say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls
for the application of the Holmes dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so
harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of
eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the
attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination
that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons
under similar circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue
preference cannot be allowed. For the principle is that equal protection and security shall be given to every
person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden
or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast
on some in the group equally binding on the rest." 20 That same formulation applies as well to taxation
measures. The equal protection clause is, of course, inspired by the noble concept of approximating the
Ideal of the laws benefits being available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as
realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is
not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and
laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of
policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific
remedies. The Constitution does not require things which are different in fact or opinion to be treated in
law as though they were the same." 21 Hence the constant reiteration of the view that classification if
rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court,
through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of
taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does
not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity
then to the standard of equal protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing the applicable tax rate.
Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must
rest upon substantial distinctions that make real differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the
income to the application of generalized rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically no overhead expense, these

taxpayers are e not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately
impose on all alike the same tax rates on the basis of gross income. There is ample justification then for
the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.

BRITISH AMERICAN TOBACCO vs. JOSE ISIDRO N. CAMACHO

FACTS: Petitioner insists that the assailed provisions (1) violate the equal protection and uniformity of
taxation clauses of the Constitution, (2) contravene Section 19, 1 Article XII of the Constitution on unfair
competition, and (3) infringe the constitutional provisions on regressive and inequitable taxation. Petitioner
further argues that assuming the assailed provisions are constitutional, petitioner is entitled to a downward
reclassification of Lucky Strike from the premium-priced to the high-priced tax bracket.
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by
machine.
ISSUE:
HELD:
The assailed law does not violate the equal protection and uniformity of taxation clauses.
Petitioner argues that the classification freeze provision violates the equal protection and uniformity of
taxation clauses because Annex "D" brands are taxed based on their 1996 net retail prices while new
brands are taxed based on their present day net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc
City,2 petitioner asserts that the assailed provisions accord a special or privileged status to Annex "D"
brands while at the same time discriminate against other brands.
These contentions are without merit and a rehash of petitioners previous arguments before this Court. As
held in the assailed Decision, the instant case neither involves a suspect classification nor impinges on a
fundamental right. Consequently, the rational basis test was properly applied to gauge the constitutionality
of the assailed law in the face of an equal protection challenge. It has been held that "in the areas of social
and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes
constitutional rights must be upheld against equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification." 3 Under the rational
basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate
State interest. As the Court ruled in the assailed Decision, viz:
A legislative classification that is reasonable does not offend the constitutional guaranty of the equal
protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on

substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to
both present and future conditions; and (4) it applies equally to all those belonging to the same class.
The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law
for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time
of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new
brand. The current net retail price, similar to what was used to classify the brands under Annex "D" as of
October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by RA
9334, the freezing of the tax classifications now expressly applies not just to Annex "D" brands but to
newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be
introduced in the future. (However, as will be discussed later, the intent to apply the freezing mechanism
to newer brands was already in place even prior to the amendments introduced by RA 9334 to RA 8240.)
This does not explain, however, why the classification is "frozen" after its determination based on current
net retail price and how this is germane to the purpose of the assailed law. An examination of the
legislative history of RA 8240 provides interesting answers to this question.
The assailed provisions do not violate the constitutional prohibition on unfair competition.
The argument lacks merit. While previously arguing that the rational basis test was not satisfied, petitioner
now asserts that this test does not apply in this case and that the proper matrix to evaluate the
constitutionality of the assailed law is the prohibition on unfair competition under Section 19, Article XII of
the Constitution. It should be noted that during the trial below, petitioner did not invoke said constitutional
provision as it relied solely on the alleged violation of the equal protection and uniformity of taxation
clauses. Well-settled is the rule that points of law, theories, issues and arguments not adequately brought
to the attention of the lower court will not be ordinarily considered by a reviewing court as they cannot be
raised for the first time on appeal. 13 At any rate, even if we were to relax this rule, as previously stated, the
evidence presented before the trial court is insufficient to establish the alleged violation of the
constitutional proscription against unfair competition.
Indeed, in Tatad we ruled that a law which imposes substantial barriers to the entry and exit of new players
in our downstream oil industry may be struck down for being violative of Section 19, Article XII of the
Constitution.14However, we went on to say in that case that "if they are insignificant impediments, they
need not be stricken down."15 As we stated in our August 20, 2008 Decision, petitioner failed to
convincingly prove that there is a substantial barrier to the entry of new brands in the cigarette market
due to the classification freeze provision. We further observed that several new brands were introduced in
the market after the assailed law went into effect thus negating petitioners sweeping claim that the
classification freeze provision is an insurmountable barrier to the entry of new brands. We also noted that
price is not the only factor affecting competition in the market for there are other factors such as taste,
brand loyalty, etc.
The assailed law does not transgress the constitutional provisions on regressive and inequitable taxation.
Petitioner argues that the classification freeze provision is a form of regressive and inequitable tax system
which is proscribed under Article VI, Section 28(1) 18 of the Constitution. It claims that people in equal
positions should be treated alike. The use of different tax bases for brands under Annex "D" vis--vis new
brands is discriminatory, and thus, iniquitous. Petitioner further posits that the classification freeze
provision is regressive in character. It asserts that the harmonization of revenue flow projections and ease
of tax administration cannot override this constitutional command.
We note that the points raised by petitioner with respect to alleged inequitable taxation perpetuated by
the classification freeze provision are a mere reformulation of its equal protection challenge. As stated
earlier, the assailed provisions do not infringe the equal protection clause because the four-fold test is
satisfied. In particular, the classification freeze provision has been found to rationally further legitimate
State interests consistent with rationality review. Petitioners repackaged argument has, therefore, no
merit.

Anent the issue of regressivity, it may be conceded that the assailed law imposes an excise tax on
cigarettes which is a form of indirect tax, and thus, regressive in character.
Petitioner is not entitled to a downward reclassification of Lucky Strike.
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO, Petitioners,
vs. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA
NOTE: Reread full text
The expenses of government, having for their object the interest of all, should be borne by everyone, and
the more man enjoys the advantages of society, the more he ought to hold himself honored in contributing
to those expenses. -Anne Robert Jacques Turgot (1727-1781) French statesman and economist
FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition
on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes
a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned
provisions contain a uniformp ro v is o authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been
satisfied. Petitioners argue that the law is unconstitutional.
ISSUES:
1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.
2. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.
3. Whether or not there is a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution.
RULING:
1. Since there is no question that the revenue bill exclusively originated in the House of Representatives,
the Senate was acting within its constitutional power to introduce amendments to the House bill when it
included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and
franchise taxes.
2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power
when it describes what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go forward.
3. The power of the State to make reasonable and natural classifications for the purposes of taxation has
long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be
levied, or the amounts to be raised, the methods of assessment, valuation and collection, the States
power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.

FACTS:

ISSUE: WON RA 9337 is unconstitutional

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section
12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

HELD: Mounting budget deficit, revenue generation inadequate fiscal allocation for education, increased emoluments for health
workers, and wider coverage for full value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A. No.
9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power of review, cannot probe.
The petitioners in these cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its
passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax
(VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on
the amount of tax paid to the buyer, 9 with the seller acting merely as a tax collector. 10 The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in, without transferring the burden to someone else. 11 Examples are individual and corporate
income taxes, transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and
was payable only by the original sellers. The single-stage system was subsequently modified, and a
mixture of the "cost deduction method" and "tax credit method" was used to determine the value-added
tax payable.13 Under the "tax credit method," an entity can credit against or subtract from the VAT charged
on its sales or outputs the VAT paid on its purchases, inputs and imports. 14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT
system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit
method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997, 18 and finally, the presently beleaguered R.A. No. 9337,
also referred to by respondents as the VAT Reform Act.
A. No Undue Delegation of Legislative Power
B. Uniformity and Equitability of Taxation
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the

plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in
other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary
should stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for
instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to
the preservation of the independence of the three, and a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may be
brought to account, either by impeachment, trial or by the ballot box. 100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered,
there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
MAYOR ANTONIO J. VILLEGAS, petitioner, vs. HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO
ARCA, respondents.
FACTS: The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila on February
22, 1968 and signed by the herein petitioner Mayor Antonio J. Villegas of Manila on March 27, 1968. 2
Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to engage or participate in
any position or occupation or business enumerated therein, whether permanent, temporary or casual,
without first securing an employment permit from the Mayor of Manila and paying the permit fee of P50.00
except persons employed in the diplomatic or consular missions of foreign countries, or in the technical
assistance programs of both the Philippine Government and any foreign government, and those working in
their respective households, and members of religious orders or congregations, sect or denomination, who
are not paid monetarily or in kind.
Violations of this ordinance is punishable by an imprisonment of not less than three (3) months to six (6)
months or fine of not less than P100.00 but not more than P200.00 or both such fine and imprisonment,
upon conviction. 5
On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila, filed a petition
with the Court of First Instance of Manila, Branch I, denominated as Civil Case No. 72797, praying for the
issuance of the writ of preliminary injunction and restraining order to stop the enforcement of Ordinance
No. 6537 as well as for a judgment declaring said Ordinance No. 6537 null and void.
Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void on the ground
that it violated the rule on uniformity of taxation because the rule on uniformity of taxation applies only to
purely tax or revenue measures and that Ordinance No. 6537 is not a tax or revenue measure but is an
exercise of the police power of the state, it being principally a regulatory measure in nature.
ISSUE: WON Ordinance No. 6537 is null and void

HELD: YES. The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its
principal purpose is regulatory in nature has no merit. While it is true that the first part which requires that
the alien shall secure an employment permit from the Mayor involves the exercise of discretion and
judgment in the processing and approval or disapproval of applications for employment permits and
therefore is regulatory in character the second part which requires the payment of P50.00 as employee's
fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50.00 from aliens
who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise money
under the guise of regulation.

The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid
substantial differences in situation among individual aliens who are required to pay it. Although the equal
protection clause of the Constitution does not forbid classification, it is imperative that the classification
should be based on real and substantial differences having a reasonable relation to the subject of the
particular legislation. The same amount of P50.00 is being collected from every employed alien whether he
is casual or permanent, part time or full time or whether he is a lowly employee or a highly paid executive
Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his
discretion. It has been held that where an ordinance of a municipality fails to state any policy or to set up
any standard to guide or limit the mayor's action, expresses no purpose to be attained by requiring a
permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon
the Mayor arbitrary and unrestricted power to grant or deny the issuance of building permits, such
ordinance is invalid, being an undefined and unlimited delegation of power to allow or prevent an
activity per se lawful. 10 Ordinance No. 6537 is void because it does not contain or suggest any standard or
criterion to guide the mayor in the exercise of the power which has been granted to him by the ordinance.
The ordinance in question violates the due process of law and equal protection rule of the Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may
withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines to
engage in a means of livelihood. While it is true that the Philippines as a State is not obliged to admit
aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of
law. This guarantee includes the means of livelihood. The shelter of protection under the due process and
equal protection clause is given to all persons, both aliens and citizens. 13
THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA vs. HONORABLE HAROLD M.
HERNANDO, in his capacity as Presiding Judge of Branch I, Court of First Instance Abra; THE
ROMAN CATHOLIC BISHOP OF
Facts: The provincial assessor made a tax assessment on the properties of the Roman Catholic Bishop of
Bangued. The bishop claims tax exemption from real estate tax, through an action for declaratory relief. A
summary judgment was made granting the exemption without hearing the side of the Province of Abra.
Issue: Whether the properties of the Bishop of Bangued are tax-exempt.
HELD: The petition must be granted.
1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the
present Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and
improvements." There is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable, or educational purposes shall be exempt from taxation." 10 The present
Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the
exemption of ":lands, buildings, and improvements," they should not only be "exclusively" but also
"actually and "directly" used for religious or charitable purposes. 11 The Constitution is worded differently.
The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions
would have sufficed were the words "actually" as well as "directly" not added. There must be proof
therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable
purposes to be exempt from taxation. According to Commissioner of Internal Revenue v. Guerrero: 12 "From
1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner of
Customs, it has been the constant and uniform holding that exemption from taxation is not favored and is
never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the
law frowns on exemption from taxation, hence, an exempting provision should be construedstrictissimi
juris." 13 In Manila Electric Company v. Vera, 14 a 1975 decision, such principle was reiterated, reference
being made to Republic Flour Mills, Inc. v. Commissioner of Internal Revenue; 15 Commissioner of Customs
v. Philippine Acetylene Co. & CTA; 16 and Davao Light and Power Co., Inc. v. Commissioner of Customs. 17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due
process. If there is any case where proof is necessary to demonstrate that there is compliance with the
constitutional provision that allows an exemption, this is it.
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.LINGAYEN GULF ELECTRIC POWER
CO., INC. and THE CTA
Facts: Lingayen Gulf Electric Power operates an electric power plant serving the municipalities of Lingayen
and Binmaley, Pangaisnan, pursuant to municipal franchise granted it by the respective municipal councils.
The franchises provided that the grantee shall pay quarterly to the Provincial Treasury of Pangasinan 1% of
the gross earnings obtained through the privilege for the first 20 years (from 1946), and 2% during the
remaining 15 years of the life of the franchise. In 1948, the Philippine President approved the franchise (RA
3843). In 1955, the BIR assessed and demanded against the company deficiency franchise taxes and
surcharges fro the years 1946 to 1954 applying the franchise tax rate of 5% on gross receipts from 1948 to
1954. The company asked for a reinvestigation, which was denied.
Issue [1]: Whether the Court can inquire into the wisdom of the Act.
Held [1]: The Court does not have the authority to inquire into the wisdom of the Act. Charters or special
laws granted and enacted by the Legislatur are in the nature of private contracts. They do not contitute a
part of the machinery of the general government. They are usually adopted after careful consideration of
the private rights in relation with the resultant benefits of the State. In passing a special charter, the
attention of the Legislature is directed to the facts and circumstances which the act or charter is intended
to meet. The Legislature considers and makes provision for all the circumstance of the particular case. The
Court ought not to disturb the ruling of the Court of Tax Appeals on the constitutionality of the law in
question.
Issue [2]: Whether a rate below 5% on gross income violate the uniformity of tax clause in the
Constitution.
Held [2]: A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike.
The legislature has the inherent power not only to select the subjects of taxation but to grant exemptions.
Tax exemptions have never been deemed violative of the equal protection clause. Herein, the 5% franchise
tax rate provided in Section 259 of the Tax Code was never intended to have a universal application.
Section 259 expressly allows the payment of taxes at rates lower than 5% when the charter granting the
franchise precludes the imposition of a higher tax. RA 3843 did not only fix and specify a franchise tax of
2% on its gross receipts, but made it
in lieu of any and all taxes, all laws to the contrary notwithstanding.
The company, hence, is not liable for deficiency taxes.
ISSUE:

HELD: A tax is uniform when it operates with the same force and effect in every place where
the subject of it is found. Uniformity means that all property belonging to the same class shall
be taxed alike The Legislature has the inherent power not only to select the subjects of
taxation but to grant exemptions. Tax exemptions have never been deemed violative of the
equal protection clause. 1 It is true that the private respondents municipal franchises were obtained
under Act No. 667 2 of the Philippine Commission, but these original franchises have been replaced by a
new legislative franchise, i.e. R.A. No. 3843. As correctly held by the respondent court, the latter was
granted subject to the terms and conditions established in Act No. 3636, 3 as amended by C.A. No. 132.

These conditions Identify the private respondent's power plant as falling within that class of power plants
created by Act No. 3636, as amended. The benefits of the tax reduction provided by law (Act No. 3636 as
amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and others
circumscribed within this class. R.A-No. 3843 merely transferred the petitioner's power plant from that
class provided for in Act No. 667, as amended, to which it belonged until the approval of R.A- No. 3843,
and placed it within the class falling under Act No. 3636, as amended. Thus, it only effected the transfer of
a taxable property from one class to another.
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax
rate provided in Section 259 of the Tax Code was never intended to have a universal application. 4 We note
that the said Section 259 of the Tax Code expressly allows the payment of taxes at rates lower than 5%
when the charter granting the franchise of a grantee, like the one granted to the private respondent under
Section 4 of R.A. No. 3843, precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and
specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any and all taxes, all laws to the
contrary notwithstanding," thus, leaving no room for doubt regarding the legislative intent. "Charters or
special laws granted and enacted by the Legislature are in the nature of private contracts. They do not
constitute a part of the machinery of the general government. They are usually adopted after careful
consideration of the private rights in relation with resultant benefits to the State ... in passing a special
charter the attention of the Legislature is directed to the facts and circumstances which the act or charter
is intended to meet. The Legislature consider (sic) and make (sic) provision for all the circumstances of a
particular case." 5 In view of the foregoing, we find no reason to disturb the respondent court's ruling
upholding the constitutionality of the law in question.
PUNSALAN vs City of Manila

FACTS: This suit was commenced in the Court of First Instance of Manila by two lawyers, a medical
practitioner, a public accountant, a dental surgeon and a pharmacist, purportedly "in their own behalf and
in behalf of other professionals practising in the City of Manila who may desire to join it." Object of the suit
is the annulment of Ordinance No. 3398 of the City of Manila together with the provision of the Manila
charter authorizing it and the refund of taxes collected under the ordinance but paid under protest.
The ordinance in question, which was approved by the municipal board of the City of Manila on July 25,
1950, imposes a municipal occupation tax on persons exercising various professions in the city and
penalizes non-payment of the tax "by a fine of not more than two hundred pesos or by imprisonment of not
more than six months, or by both such fine and imprisonment in the discretion of the court." Among the
professions taxed were those to which plaintiffs belong. The ordinance was enacted pursuant to paragraph
(1) of section 18 of the Revised Charter of the City of Manila (as amended by Republic Act No. 409), which
empowers the Municipal Board of said city to impose a municipal occupation tax, not to exceed P50 per
annum, on persons engaged in the various professions above referred to.
HELD: As to plaintiffs' appeal, the contention in substance is that this ordinance and the law authorizing it
constitute class legislation, are unjust and oppressive, and authorize what amounts to double taxation.
In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not that the
professions to which they respectively belong have been singled out for the imposition of this municipal
occupation tax; and in any event, the Legislature may, in its discretion, select what occupations shall be
taxed, and in the exercise of that discretion it may tax all, or it may select for taxation certain classes and
leave the others untaxed. (Cooley on Taxation, Vol. 4, 4th ed., pp. 3393-3395.) Plaintiffs' complaint is that
while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from
other chartered cities, not to mention municipalities. We do not think it is for the courts to judge what
particular cities or municipalities should be empowered to impose occupation taxes in addition to those
imposed by the National Government. That matter is peculiarly within the domain of the political
departments and the courts would do well not to encroach upon it. Moreover, as the seat of the National
Government and with a population and volume of trade many times that of any other Philippine city or
municipality, Manila, no doubt, offers a more lucrative field for the practice of the professions, so that it is

but fair that the professionals in Manila be made to pay a higher occupation tax than their brethren in the
provinces.
What constitutes exercise or pursuit of a profession in the city is a matter of judicial determination. The
argument against double taxation may not be invoked where one tax is imposed by the state and the other
is imposed by the city (1 Cooley on Taxation, 4th ed., p. 492), it being widely recognized that there is
nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the
same occupation, calling or activity by both the state and the political subdivisions thereof. (51 Am. Jur.,
341.)
Coconut oil refiners vs

Note: Reread full text

FACTS: This is a Petition to enjoin and prohibit the public respondent Ruben Torres in his capacity as
Executive Secretary from allowing other private respondents to continue with the operation of tax and
duty-free shops located at the Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone
(CSEZ). The petitioner seeks to declare Republic Act No. 7227 as unconstitutional on the ground that it
allowed only tax-free (and duty-free) importation of raw materials, capital and equipment. It reads:
The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic Special Economic
Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of thePhilippines [RA 7227, Sec 12 (b)].
Petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant of tax incentives to
the importation of raw materials, capital and equipment only thereby violating the equal protection clause
of the Constitution.
He also assailed the constitutionality of Executive Order No. 97-A for being violative of their right to equal
protection. They asserted that private respondents operating inside the SSEZ are not different from the
retail establishments located outside.
The respondent moves to dismiss the petition on the ground of lack of legal standing and unreasonable
delay in filing of the petition.
ISSUE: Whether or not there is a violation of equal protection clause.

HELD: The SC ruled in the negative. The phrase tax and duty-free importations of raw materials, capital
and equipment was merely cited as an example of incentives that may be given to entities operating
within the zone. Public respondent SBMA correctly argued that the maxim expressio unius est exclusio
alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not apply when
words are mentioned by way of example.
The petition with respect to declaration of unconstitutionality of Executive Order No. 97-A cannot be,
likewise, sustained. The guaranty of the equal protection of the laws is not violated by a legislation based
which was based on reasonable classification. A classification, to be valid, must (1) rest on substantial
distinction, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4)
apply equally to all members of the same class. Applying the foregoing test to the present case, this Court
finds no violation of the right to equal protection of the laws. There is a substantial distinctions lying
between the establishments inside and outside the zone. There are substantial differences in a sense that,
investors will be lured to establish and operate their industries in the so-called secured area and the
present business operators outside the area. There is, then, hardly any reasonable basis to extend to them
the benefits and incentives accorded in R.A. 7227.

ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs. THE TREASURER OF ORMOC CITY, THE
MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and
ORMOC CITY, defendants-appellees.
FACTS: On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of 1964,
imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in
Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United States of
America and other foreign countries." 2
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for
P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service
of a copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer,
Municipal Board and Mayor, alleging that the afore-stated ordinance is unconstitutional for being violative
of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec.
22[1]), Art. VI, Constitution), aside from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax which Ormoc
City under Section 15-kk of its charter and under Section 2 of Republic Act 2264, otherwise known as the
Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs duty, fee or charge in
violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is on both the sale and export of
sugar.
ISSUE:
HELD: The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal
protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause
applies only to persons or things identically situated and does not bar a reasonable classification of the
subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions
which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies
not only to present conditions but also to future conditions which are substantially identical to those of the
present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes
only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the
time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar
central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to
future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is
now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance
expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily
collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a
sufficient basis to preclude arbitrariness, the same being then presumed constitutional until declared
otherwise.
AMERICAN BIBLE SOCIETY, plaintiff-appellant, vs. CITY OF MANILA, defendant-appellee.
Facts: Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered
and doing business in the Philippines through its Philippine agency established in Manila in November,
1898. The defendant appellee is a municipal corporation with powers that are to be exercised in conformity
with the provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila.
During the course of its ministry, plaintiff sold bibles and other religious materials at a very minimal profit.

On May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the
business of general merchandise since November, 1945, without providing itself with the necessary
Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances
Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the corresponding permit
and license fees, together with compromise covering the period from the 4th quarter of 1945 to the 2nd
quarter of 1953, in the total sum of P5,821.45 (Annex A).
Plaintiff now questions the imposition of such fees.
Issue: Whether or not the said ordinances are constitutional and valid (contention: it restrains the free
exercise and enjoyment of the religious profession and worship of appellant).
Held: Section 1, subsection (7) of Article III of the Constitution, provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and
the free exercise and enjoyment of religious profession and worship, without discrimination or preference,
shall forever be allowed. No religion test shall be required for the exercise of civil or political rights.
The provision aforequoted is a constitutional guaranty of the free exercise and enjoyment of religious
profession and worship, which carries with it the right to disseminate religious information.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some
instances a little bit higher than the actual cost of the same but this cannot mean that appellant was
engaged in the business or occupation of selling said "merchandise" for profit. For this reason. The Court
believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to
appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and
worship as well as its rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, the Court do not find that it imposes any charge upon the
enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices.
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, however
inapplicable to said business, trade or occupation of the plaintiff. As to Ordinance No. 2529 of the City of
Manila, as amended, is also not applicable, so defendant is powerless to license or tax the business of
plaintiff Society.
PAL v. Sec of Finance _ GR No. 115852; 30 October 1995_NOTE: Joint resolution Tolentino case
F A C T S: The Value-Added Tax [VAT] is levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value
in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or
exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the National Internal Revenue Code.
These are various suits for certiorari and prohibition challenging the constitutionality of RA 7716:
In the case at bar, PAL attacks the formal validity of Republic Act No. 7716. PAL contends that it violates
Art. VI, Section 26[1] which provides that "Every bill passed by Congress shall embrace only one subject
which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630
provided for removal of exemption of PAL transactions from the payment of the VAT and that this was
made only in the Conference Committee bill which became Republic Act No. 7716 without reflecting this
fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM, WIDENING ITS TAX BASE AND ENHANCING
ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.
Furthermore, section 103 of RA 7716 states the following:

Section 103. Exempt Transactions.- The following shall be exempt from the value-added tax:
[q] Transactions which are exempt under special laws, except those granted under Presidential Decree Nos.
66, 529, 972, 1491, 1590.
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.
Philippine Airlines [PAL] claims that its franchise under P.D. No. 1590 which makes it liable for a franchise
tax of only 2% of gross revenues "in lieu of all the 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," cannot be amended by Rep. Act No. 7716
as to make it [PAL] liable for a 10% value-added tax on revenues, because Sec. 24 of P.D. No. 1590
provides that PAL's franchise can only be amended, modified or repealed by a special law specifically for
that purpose.

I S S U E: Whether or not this amendment of Section 103 of the NIRC is fairly embraced in the title of
Republic Act No. 7716, although no mention is made therein of P. D. No. 1590

H E L D: The court ruled in in the affirmative. The title states that the purpose of the statute is to expand
the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions
granted before. To insist that P. D. No. 1590 be mentioned in the title of the law, in addition to Section 103
of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a
complete index of its content.
The constitutional requirement that every bill passed by Congress shall embrace only one subject which
shall be expressed in its title is intended to prevent surprise upon the members of Congress and to inform
the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at
bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect
in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some
event somehow calls attention to their existence.
Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by specifically excepting from the
grant of exemptions from the VAT PAL's exemption under P. D. No. 1590. This is within the power of
Congress to do under Art. XII, Section 11 of the Constitution, which provides that the grant of a franchise
for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the
common good so requires.

CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE and CA

FACTS: This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax
amounting to P75,149.73 for the more than seven-month period of the year 1969 in addition to franchise
tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its payment of
3% tax on its gross earnings from the sale of electric current is "in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and
insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted"
(Sec. 3).

On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for income
tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of said section and section 27
of the Tax Code notwithstanding the "provisions of existing special or general laws to the contrary". Thus,
franchise companies were subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August 4,
1969, by authorizing the petitioner to furnish electricity to the municipalities of Villanueva and Jasaan,
Misamis Oriental in addition to Cagayan de Oro City and the municipalities of Tagoloan and Opol. The
amendment reenacted the tax exemption in its original charter or neutralized the modification made by
Republic Act No. 5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue in a
demand letter dated February 15, 1973 required the petitioner to pay deficiency income taxes for 1968-to
1971. The petitioner contested the assessments. The Commissioner cancelled the assessments for 1970
and 1971 but insisted on those for 1968 and 1969.
ISSUE:
HELD: We hold that Congress could impair petitioner's legislative franchise by making it liable for income
tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its
franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress
when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV, 1973
Constitution),
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions of the
Constitution and to the terms and conditions established in Act No. 3636 whose section 12 provides that
the franchise is subject to amendment, alteration or repeal by Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate
taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing
petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on
August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is
liable only for the income tax for the period from January 1 to August 3, 1969 when its tax exemption was
modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company, have
been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The
Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to pay
income tax because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and
interest. (Advertising Associates, Inc. vs. Commissioner of Internal Revenue and Court of Tax Appeals, G. R.
No. 59758, December 26, 1984,133 SCRA 765; Imus Electric Co., Inc. vs. Commissioner of Internal
Revenue, 125 Phil. 1024; C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22,
1976, 71 SCRA 511.)
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M.

FACTS: Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents
Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the
"Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for nonpayment of real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the college
lot and building covered by Original Certificate of Title No. Q-83 duly registered in the name of petitioner,
plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants
below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be
served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of
said college lot and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal
Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certificate of
sale was correspondingly issued to him.
The trial court ruled for the government, holding that the second floor of the building is being used by the
director for residential purposes and that the ground floor used and rented by Northern Marketing
Corporation, a commercial establishment, and thus the property is not being used exclusively for
educational purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for review
on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition on 17
August 1974.
ISSUE: W/N the subject property is taxable
HELD: Interpretation of the phrase used exclusively for educational purposes
Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption
from realty taxes for Cemeteries, churches and parsonages or convents appurtenant thereto, and all
lands, buildings, and improvements used exclusively for religious, charitable or educational purposes. This
constitution is relative to Section 54, paragraph c, Commonwealth Act 470 as amended by RA 409
(Assessment Law). An institution used exclusively for religious, charitable and educational purposes, and
as such, it is entitled to be exempted from taxation; notwithstanding that it keeps a lodging and a boarding
house and maintains a restaurant for its members (YMCA case). A lot which is not used for commercial
purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes
incidental use in religious functions (Bishop of Nueva Segovia case).
Exemption in favour of property used exclusively for charitable or educational purposes is not
limited to property actually indispensable therefor but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes (Herrera v. Quezon City Board of
Assessment Appeals). While the Court allows a more liberal and non-restrictive interpretation of the phrase
exclusively used for educational purposes, reasonable emphasis has always been made that exemption
extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes. The use of the school building or lot for commercial purposes is neither contemplated by law,
nor by jurisprudence. In the case at bar, the lease of the first floor of the building to the Northern
Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of
education.
THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the Roman Catholic
Apostolic Church, plaintiff-appellant, vs. THE PROVINCIAL BOARD OF ILOCOS NORTE, ET
AL., defendants-appellants.
FACTS: The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia,
possesses and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides
of which face on public streets. On the south side is a part of the churchyard, the convent and an adjacent
lot used for a vegetable garden, containing an area off 1,624 square meters, in which there is a stable and
a well for the use of the convent. In the center is the remainder of the churchyard and the church. On the
north is an old cemetery with two of its walls still standing, and a portion where formerly stood a tower, the
base of which still be seen, containing a total area of 8,955 square meters.

As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land tax on the lot
adjoining the convent and the lot which formerly was the cemetery with the portion where the tower stood.
The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land tax,
alleging that the collection of this tax is illegal.

ISSUE: Whether or not the lots of petitioner are exempted from land tax

HELD: The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative
Code) refers to the home of the parties who presides over the church and who has to take care of himself
in order to discharge his duties. In therefore must, in the sense, include not only the land actually occupied
by the church, but also the adjacent ground destined to the ordinary incidental uses of man. Except in
large cities where the density of the population and the development of commerce require the use of
larger tracts of land for buildings, a vegetable garden belongs to a house and, in the case of a convent, it
use is limited to the necessities of the priest, which comes under the exemption.lawphi1.net
In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it used
for commercial purposes and, according to the evidence, is now being used as a lodging house by the
people who participate in religious festivities, which constitutes an incidental use in religious functions,
which also comes within the exemption.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BISHOP OF THE MISSIONARY DISTRICT
OF THE PHILIPPINE ISLANDS OF THE PROTESTANT EPISCOPAL CHURCH IN THE U.S.A. and THE
COURT OF TAX APPEALS, respondents.
FACTS: Respondent Bishop of the Missionary District of the Philippines Islands of the Protestant, Episcopal
Church in the U.S.A. is a corporation sole duly registered with the Securities and Exchange Commission. He
is in charge of the administration of the temporalities and the management of the estates and properties
in the Philippines of the Domestic and Foreign Missionary Society of the Protestant Episcopal Church in the
United States (hereinafter referred to as Missionary Society). On the other hand, the Missionary District of
the Philippine Islands of the Protestant Episcopal Church the U.S.A. (hereinafter referred to as Missionary
District) is a duly incorporated and established religious society. It owns and operates the St. Luke's
Hospital in Quezon City, the Brent Hospital in Zamboanga City and the St. Stephen's High School in Manila.
On different dates in 1957, 1958 and 1959, the Missionary District in the Philippines received from the
Missionary Society in the United States various shipments of materials, supplies, equipment and other
articles intended for use in the construction and operation of the new St. Luke's Hospital in Quezon City
and the Brent Hospital and St. Stephen's High School. The Missionary District also received from a certain
William Minnis of Canada a stove for the use of the Brent Hospital.
On these shipments, the Commissioner of Internal Revenue levied and collected the total amount of
P118,847 as compensating tax.
The Bishop of the Missionary District filed claims for refund of the amount he had paid on the ground that
under Republic Act No. 1916, the materials and articles received by him were exempt from the payment of
compensating tax. As the two-year period for recovery of tax was about to expire, the Bishop of the
Missionary District filed a petition for review in the Court of Tax Appeals, without awaiting action on his
claim for refund. Subsequently, he also filed two supplemental petitions for review covering other
shipments received by him and on which he had paid compensating taxes.
ISSUE: HELD: This Court has already held that the following requisites must concur in order that a
taxpayer may claim exemption under the law (1) the imported articles must have been donated; (2) the

donee must be a duly incorporated or established international civic organization, religious or charitable
society, or institution for civic religious or charitable purposes; and (3) the articles so imported must have
been donated for the use of the organization, society or institution or for free distribution and not for
barter, sale or hire. (Commissioner v. Church of Jesus Christ "New Jerusalem," G.R. No. L-15772, Oct. 31,
1961)
It should be enough to point out that by stipulation of the parties, the respondent Bishop is admitted to be
a corporation sole duly registered with the Securities and Exchange Commission and that the Missionary
District is a "duly incorporated and established religious society." They are, therefore, entities separate and
distinct from the Missionary Society whose address is at 281 Fourth South, New York 10, N.Y., U.S.A. The
fact that the Missionary District, of which respondent is the Bishop, is a branch of the Missionary Society is
of no moment. For that matter, so is the Roman Catholic Church in the Philippines a branch of the
Universal Roman Catholic Apostolic Church, but it is a branch only in religious matters, in matters of faith
and dogma. In other respects, it is independent. (Roman Catholic Apostolic Administrator v. Land
Registration Commissioner, G.R. No. L-8451, December 20, 1957)
The Tax Court's finding that the materials and supplies were purchased by the Missionary Society with
money obtained from contributions from other people who should be considered the real donors is also
assailed as being based on the uncorroborated testimony of Robert Meyer, Treasurer of the Missionary
District, who it is said, did not have personal knowledge of the matter testified to by him. This is not so. As
respondent points out, the various deeds of donation state in paragraph 3 that the "Missionary Society is a
non-profit organization and derives its support from voluntary contributions."
Again, it should be enough to point out that the admission of pay patients does not detract from the
charitable character of a hospital, if, as in the case of St. Luke's Hospital, its funds are devoted exclusively
to the Maintenance of the institution (Cf., e.g., Herrera v. Quezon City Board of Assessment Appeals, G.R.
No. 15270, September 30, 1961). The Secretary of Finance cannot limit or otherwise qualify the enjoyment
of this exemption granted under Republic Act No. 1916 in implementing the law.
CHURCH IN THE U.S.A. and THE COURT OF TAX APPEALS _ G.R. No. L-19445 August 31, 1965
FACTS: Respondent Bishop of the Missionary District of the Philippines Islands of the Protestant, Episcopal
Church in the U.S.A. is a corporation sole duly registered with the Securities and Exchange Commission. On
the other hand, the Missionary District of the Philippine Islands of the Protestant Episcopal Church the
U.S.A. (hereinafter referred to as Missionary District) is a duly incorporated and established religious
society and owns and operates the St. Luke's Hospital in Quezon City, the Brent Hospital in Zamboanga
City and the St. Stephen's High School in Manila.

In 1957 to 1959, the Missionary District received various shipments of materials, supplies, equipment and
other articles intended for use in the construction and operation of the new St. Lukes Hospital. On these
shipments, the Commissioner collected compensation tax. The Missionary District filed claims for refund,
but which was denied by the Commissioner on the ground that St. Lukes Hospital was not a charitable
institution and therefore was not exempt from taxes because it admits pay patients.
ISSUE: Whether or not the shipments for St. Lukes Hospital are tax-exempt.
RULING: The following requisites must concur in order that a taxpayer may claim exemption under the
law (1) the imported articles must have been donated; (2) the donee must be a duly incorporated or
established international civic organization, religious or charitable society, or institution for civic religious
or charitable purposes; and (3) the articles so imported must have been donated for the use of the
organization, society or institution or for free distribution and not for barter, sale or hire.
As the law does not distinguish or qualify the enjoyment or the exemption (as the Secretary of Finance did
in Department Order 18, series of 1958), the admission of pay patients does not detract from the

charitable character of a hospital, if its funds are devoted exclusively to the maintenance of the institution.
Thus, the shipments are tax exempt.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.
Doctrine:
Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is
not exempt from income taxation, even if such income is exclusively used for the accomplishment of its
objectives.
A claim of statutory exemption from taxation should be manifest and unmistakable from the language of
the law on which it is based. Thus, it must expressly be granted in a statute stated in a language too clear
to be mistaken. Verba legis non est recedendum where the law does not distinguish, neither should
we.
The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax. 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.
The Court 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. The Court, given its limited constitutional
authority, cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political
departments of government.
Facts:
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.
YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants and
canteen operators, and from parking fees collected from non-members. Petitioner issued an assessment to
private respondent for deficiency taxes. Private respondent formally protested the assessment. In reply,
the CIR denied the claims of YMCA.
Issue:
Whether or not the income derived from rentals of real property owned by YMCA subject to income tax
Held: Yes. Income of whatever kind and character of non-stock non-profit 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 the NIRC.
Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not
exempt from income taxation, even if such income is exclusively used for the accomplishment of its
objectives.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals, 271
SCRA 605, 613, April 18, 1997). 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 (Davao Gulf
Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 117359, p. 15 July
23, 1998).
Verba legis non est recedendum. 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.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it is a nonstock, 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. This is
without merit since the exemption provided lies on the payment of property tax, and not on the income tax
on the rentals of its property. The bare allegation alone that one is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.
For the YMCA to be granted the exemption it claims under the above 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. Unfortunately for respondent, the Court noted that not a scintilla of evidence was
submitted to prove that it met the said requisites.
The Court appreciates the nobility of respondents cause. However, the Courts 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. 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.
Smart vs The City of Davao
FACTS: On March 27, 1992, Smart obtained its legislative franchise under R.A. No. 7294. Sec. 9
of said law provides that The grantee, its successors or assigns shall be liable to pay the same taxes on
their real estate buildings and personal property, exclusive of' this franchise, as other persons or
corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its
successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the
business transacted under this franchise by the grantee, its successors or assigns and the said percentage
shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors
or assigns shall continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue
or his duly authorized representative in accordance with the National Internal Revenue Code and the return
shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)
On January 1, 1992, the Local Government Code (R.A. No. 7160) took effect. Section 137, in
relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local
government units.
R.A. No. 7716 or the VAT Law was enacted which specifically expressed under Section 20,
repealing provisions of all special laws (that includes the legislative franchise R.A. No. 7294, a
special law) relative to the rate of franchise taxes. It also repealed, amended, or modified all
other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent
with it. It is in effect, rendered ineffective the in lieu of all taxes clause in R.A. No. 7294.
Tax Code of the City of Davao, Section 1, Article 10 thereof, provides: Notwithstanding any
exemption granted by any law or other special law, there is hereby imposed a tax on
businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of
the gross annual receipts for the preceding calendar year based on the income or receipts
realized within the territorial jurisdiction of Davao City.
Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations
under the Tax Code of the City of Davao and contends that its telecenter in Davao City is exempt from
payment of franchise tax to the City, on the following grounds:

the issuance of its franchise under Republic Act (R.A.) No. 7294, subsequent to R.A. No. 7160 shows
the clear legislative intent to exempt it from the provisions of R.A. 7160

that the in lieu of all taxes clause in Section 9 of its franchise exempts it from all taxes, both local
and national, except the national franchise tax (now VAT), income tax, and real property tax

Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its
effectivity and not to future exemptions;

not covered bec. The franchise was granted after the effectivity of the LGC

the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as
the in lieu of all taxes clause found in Section 9 of R.A. No. 7294; and

only taxes it may be made to bear under its franchise are the national franchise tax (now VAT),
income tax, and real property tax

exempt from the local franchise tax because the in lieu of taxes clause in its franchise does not
distinguish between national and local taxes.

the imposition of franchise tax by the City of Davao would amount to a violation of the
constitutional provision against impairment of contracts.

franchise is in the nature of a contract between the government and Smart.

Respondent invoked its power granted by the Constitution to local government units to create their own
sources of revenue.
RTC denied the petition on the ground that petitioner failed to prove that it is exempt from tax applying
strictissimi juris against the taxpayer and liberally in favor of the taxing authority. On the issue of violation
of the non-impairment clause of the Constitution, it cited Mactan Cebu International Airport Authority v.
Marcos and declared that the citys power to tax is based not merely on a valid delegation of legislative
power but on the direct authority granted to it by the fundamental law. That while such power may be
subject to restrictions or conditions imposed by Congress, any such legislated limitation must be consistent
with the basic policy of local autonomy.
ISSUES:

Exemption from Franchise Tax under Section 9, RA 7294 which contains in lieu of taxes clause
In lieu of taxes clause applies to national taxes or local taxes or both?
Violation to the Constitutional prohibition against impairment of contracts

HELD: Petition is denied.

On In lieu of all taxes Clause in RA 7294:
R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of
R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross
receipts of the business transacted under the franchise and the said percentage shall be in
lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide
what kind of taxes Smart is exempted from. It is not clear whether the in lieu of all taxes provision
in the franchise of Smart would include exemption from local or national taxation. What is clear is that
Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business
transacted under its franchise. But whether the franchise tax exemption would include exemption from
exactions by both the local and the national government is not unequivocal.
In this case, the doubt must be resolved in favor of the City of Davao. The in lieu of all taxes
clause applies only to national internal revenue taxes and not to local taxes. It is clear that the
in lieu of all taxes clause apply only to taxes under the NIRC and not to local taxes . It is not
even applied to income tax, as shown in the provision itself, to wit:

proviso in the first paragraph of Section 9, Smart's franchise states that the grantee shall "continue
to be liable for income taxes payable under Title II of the National Internal Revenue Code."

second paragraph of Section 9, speaks of tax returns filed and taxes paid to the "Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue
Code."

same paragraph, declares that the tax returns "shall be subject to audit by the Bureau of Internal
Revenue."
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes.
It should be noted that the in lieu of all taxes clause in R.A. No. 7294 has become functus officio with the
abolition of the franchise tax on telecommunications companies. Currently, Smart along with other
telecommunications companies pays the uniform 10% value-added tax. The VAT on sale of services of
telephone franchise grantees is equivalent to 10% of gross receipts derived from the sale or exchange of
services, as provided in R.A. No. 7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241).
On the burden of grant to Tax exemptions: Tax exemptions are never presumed and are
strictly construed against the taxpayer and liberally in favor of the taxing authority. They can only be
given force when the grant is clear and categorical. If the intention of the legislature is open to doubt, then
the intention of the legislature must be resolved in favor of the State.
On impairment of contracts: There is no violation of Article III, Section 10 of the 1987 Philippine
Constitution. The franchise of Smart does not expressly provide for exemption from local
taxes. Absent the express provision on such exemption under the franchise, we are
constrained to rule against it. Due to this ambiguity in the law, the doubt must be resolved
against the grant of tax exemption.

Contract Clause has never been thought as a limitation on the exercise of the States power of
taxation save only where a tax exemption has been granted for a valid consideration.